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Previous: SB PARTNERS, 10-Q, 1996-08-14 |
Next: SCANFORMS INC, 10-Q, 1996-08-14 |
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, 1996
( )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
(860) 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 13, 1996.
Common Stock, $.02 par value 6,531,601
<PAGE>
<TABLE>
<CAPTION>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(thousands, except share data) June 30, 1996 December 31, 1995
(UNAUDITED)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 93 $ 281
Accounts receivable less allowance of $447 at
June 30, 1996 and $413 at December 31, 1995 9,838 10,297
Inventories 13,211 13,746
Prepaid expenses and other 1,187 1,261
Total current assets 24,329 25,585
Plant and equipment:
Equipment 13,998 14,097
Leasehold improvements 2,638 2,837
Office furniture and fixtures 1,191 1,215
17,827 18,149
Less allowances for depreciation and amortization 14,333 14,340
3,494 3,809
Other assets 121 120
Total Assets $ 27,944 $ 29,514
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
(UNAUDITED)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to bank $ 1,469 $ 305
Accounts payable 2,187 2,862
Salaries and wages 992 909
Taxes other than income taxes 312 338
Income taxes 202 185
Customer deposits 3,043 5,900
Deferred revenues, net of costs 85
Other 846 847
Total current liabilities 9,136 11,346
Other liabilities 416 417
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, 6,942,501 shares at June 30, 1996
and 6,935,184 shares at December 31, 1995 141 139
Common stock Class A Convertible, par
value $.02 per share, authorized
3,000,000 shares; available for issuance
2,145,536 shares; none issued or outstanding
Capital in excess of par value 34,288 34,271
Retained-earnings deficit (12,862) (13,433)
Foreign currency translation adjustments (330) (315)
Unearned ESOP compensation (199) (265)
21,038 20,397
Less cost of common stock in treasury,
413,500 shares 2,646 2,646
Total stockholders' equity 18,392 17,751
Total Liabilities and Stockholders' Equity $ 27,944 $ 29,514
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
(thousands, except share data) 1996 1995 1996 1995
Revenues
<S> <C> <C> <C> <C>
Net sales $ 7,747 $ 6,052 $ 14,232 $ 13,940
Service revenues 3,401 3,400 7,224 6,889
Lease revenues 4 70 12 180
Total revenues 11,152 9,522 21,468 21,009
Costs and Expenses
Cost of sales 5,348 4,273 10,047 9,689
Marketing and service expenses 3,518 3,950 7,045 7,590
Research and development expenses 924 1,086 2,030 2,586
General and administrative expenses 911 763 1,748 1,503
Interest expense 24 122 39 233
Total costs and expenses 10,725 10,194 20,909 21,601
Operating income (loss) 427 (672) 559 (592)
Other income, net 36 17 41 32
Income (loss) before income taxes 463 (655) 600 (560)
Income taxes (benefit) 13 (8) 30 (20)
Net Income (Loss) $ 450 $ (647) $ 570 $ (540)
Earnings (loss) per share $ 0.07 $ (0.10) $ 0.08 $ (0.08)
Average common and common equivalent shares 6,759,533 6,513,696 6,723,384 6,667,228
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six
Months Ended
June June
30 30
(thousands) 1996 1995
<S> <C> <C>
Operating Activities
Net income(loss) $ 570 $ (540)
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Depreciation 612 698
Amortization 469 330
Changes in operating assets and liabilities:
Accounts receivable 459 (506)
Inventories, prepaid expenses and other 140 (3,179)
Accounts payable (675) 1,858
Accrued expenses 56 (36)
Royalties payable (791)
Income taxes 17 5
Deferred revenues, net of costs 85 (30)
Customer deposits (2,857) (1,938)
Other 49 220
Net cash used by operating activities (1,075) (3,909)
Investing Activities
Purchases of plant and equipment (297) (325)
Net cash used by investing activities (297) (325)
Financing Activities
Proceeds from issuance of common stock 20 56
Proceeds from borrowings 8,620 14,572
Principal payments on borrowings (7,456) (10,385)
Net cash provided by financing activities 1,184 4,243
Increase (decrease) in cash and cash equivalents (188) 9
Cash and cash equivalents at beginning of year 281 178
Cash and Cash Equivalents at End of Period $ 93 $ 187
See accompanying notes.
</TABLE>
<PAGE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For Quarter Ended June 30, 1996
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, 1996 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1996. 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, 1995.
NOTE 2 - INVENTORIES
The components of inventories were as follows (thousands):
<TABLE>
<CAPTION>
June 30 December 31
1996 1995
<S> <C> <C>
Finished goods $ 2,173 $ 2,823
Work-in-process 3,003 2,820
Service parts 4,098 5,043
Materials and component parts 3,937 3,060
$ 13,211 $ 13,746
******* *******
</TABLE>
NOTE 3 - CREDIT ARRANGEMENTS
On May 28, 1996, the Company amended its credit agreement (Agreement) with a
bank to extend the maturity date to May 29, 1997. The Agreement has two
components, a $3 million line (international) guaranteed by a third party bank
which is collateralized by international accounts receivable and inventory, and
which bears interest at prime (8-1/4% at June 30, 1996); and a $3 million line
(domestic) which is collateralized by domestic accounts receivable and
inventory, and which bears interest at prime plus 1/2 (8-3/4% at
June 30, 1996). The weighted average interest rates on borrowings during the
first half of 1996 and 1995 were 7.5% and 8.6% respectively. The unused
portion of the $3 million domestic line is subject to a commitment fee
of 3/4% per annum. Borrowings under the Agreement are subject to various
limitations based upon percentages of eligible receivables and inventories of
the Company. The available balance on the total line of credit was $4,278,000
as of June 30, 1996. 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.
SCAN-OPTICS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For Quarter Ended June 30, 1996
NOTE 4 - INCOME TAXES
The Company has approximately $6,600,000 and $4,700,000 of net operating loss
carryforwards for federal and state income tax purposes, respectively, which
are scheduled to expire periodically between 1996 and 2010. 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) 1996 1995
<S> <C> <C>
Deferred tax assets:
Net operating losses $ 3,193 $ 3,422
Depreciation 99 99
Inventory valuation 273 831
Accounts receivable reserves 179 167
Revenue recognition 13
Vacation accrual 308 258
Other 279 279
Total deferred tax assets 4,331 5,069
Deferred tax liabilities:
Depreciation and other (51) (82)
Valuation allowance (4,280) (4,987)
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 decreased $.2 million from December 31, 1995.
Total Company borrowings increased $1.2 million from the end of 1995 to $1.5
million at June 30, 1996. The increase in borrowings is due to the timing of
sales transactions and related receipts. On May 28, 1996 the Company amended
the original loan agreement extending the maturity date of the existing line of
credit to May 29, 1997. (See Note 3 for further details). The available
balance on the total line of credit was $3,321,000 as of August 12, 1996.
Operating activities used $1.1 million of cash in the first half of 1996.
Accounts receivable decreased $.5 million during the first half of the year due
to a decrease in the number of systems shipped and currently undergoing
acceptance testing.
Inventories decreased $.5 million in the first half of 1996. Total
manufacturing inventories increased $.4 million from the beginning of the year
mainly due to increases required for the third quarter build schedule
including six enhanced Series 9000 systems for the Japanese health ministry.
Customer service inventories increased by $.9 million in the first half of the
year mainly due to depreciation expense and parts usage.
Prepaid expenses and other assets decreased $.1 million due to the
amortization of prepaid engineering costs.
Accounts payable decreased $.7 million from December 31, 1995 due to the timing
of receipts of purchased parts offset by the payment of invoices for parts
received in prior periods.
Customer deposits decreased $2.9 million reflective of certain large
international contracts recognized in revenue during the first half of 1996
which included substantial deposits.
RESULTS OF OPERATIONS FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996
VS. 1995
Net sales increased $.3 million from the first six months of 1995 and increased
1.7 million from the second quarter of 1995 to 1996. Compared to the first
six months last year, North American sales increased $.5 million but were
offset by a decrease in international sales of $.2 million. Despite a
$2 million decline in international sales in the first quarter of 1996, the
second quarter sales in this market rebounded, increasing $1.8 million
compared to 1995. This is mainly due to the sale of seven enhanced
Series 9000's to the Japanese health ministry versus six in 1995 which were
discounted under the terms of a research and development agreement.
Service revenues increased $.3 million from the first six months of 1995 to
1996 and remained consistent for the second quarter of 1995 to 1996. Year to
date, software revenue increased $.3 million which was directly related to the
increase in domestic sales. R&D revenue increased $.2 million due to funding
for a specific development project which began in the third quarter of 1995.
Customer service revenue decreased $.2 million mostly due to the continued
replacement of older ReliaReader equipment with the Company's Series 9000
system. Monthly maintenance on the ReliaReader equipment, predecessor of the
Series 9000, contains surcharges ranging from 10% to 65% based on the age of
the equipment.
Cost of sales increased $.4 million over the first six months of 1996 vs. 1995
and increased $1.1 million from the second quarter of 1995. The year to date
and second quarter increases are a reflection of the increase in sales in 1996.
The gross margin percentage realized for the first six months of 1996
was 29% versus 30% for the same period in 1995. The gross margin percentage
realized for the second quarter of 1996 was 31% compared to 29% for the same
period last year. The increase in percentage is mainly due to a decrease in
the required sales discounts agreed to under research and development
contracts, one of which was completed in the second quarter of 1995.
Marketing and service expenses decreased $.5 million from the first half of
1995 and decreased $.4 million for the second quarter. Year to date, customer
service expenses decreased $.6 million mainly due to staffing decreases,
coupled with a decrease in depreciation expense related to customer service
inventory. Sales and marketing expenses increased $.1 million due to increases
in commission expense reflective of the increase in net sales.
Research and development expenses decreased $.6 million from the first half of
1995 and decreased $.2 million compared to the second quarter of 1995 mainly
due to a decrease in salary expense and fringe benefits resulting from the
corporate downsizing in 1995.
General and administrative expenses increased $.2 million year to date due to
the hiring of the new Chief Operating Officer as well as increases in outside
services.
Interest expense decreased $.2 million year to date due to the significant
decrease in the average outstanding balance for the first half of 1996 which
was $.8 million versus $5.4 million for the same period in 1995.
<PAGE>
<TABLE>
<CAPTION>
SCAN-OPTICS, INC., AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6 (A) - EXHIBIT COMPUTATION OF EARNINGS PER SHARE
(thousands except share data)
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
PRIMARY AND FULLY DILUTED
<S> <C> <C> <C> <C>
Average common shares outstanding 6,529,545 6,513,696 6,527,692 6,505,404
Average Class A common shares outstanding
Net effect of dilutive stock options and
warrants - based on the treasury stock
method using average market price during
the quarter 229,988 195,692 161,825
Total 6,759,533 6,513,696 6,723,384 6,667,229
Net Income (Loss) $ 450 $ (647) $ 570 $ (540)
Earnings (Loss) Per Share $ 0.07 $ (0.10) $ 0.08 $ (0.08)
</TABLE>
<PAGE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6 (B) - REPORTS ON FORM 8-K
For the Three Months Ended June 30, 1996
No reports on Form 8-K were filed during the First Six Months of 1996.
<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 13, 1996 /ss/
Richard I. Tanaka
Chairman, Chief Executive
Officer and Director
Date August 13, 1996 /ss/
Michael J. Villano
Vice President and
Chief Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27.
SCAN-OPTICS, INC.
FINANCIAL DATA SCHEDULE
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 93,000
<SECURITIES> 0
<RECEIVABLES> 9,838,000
<ALLOWANCES> 447,000
<INVENTORY> 13,211,000
<CURRENT-ASSETS> 24,329,000
<PP&E> 17,827,000
<DEPRECIATION> 14,333,000
<TOTAL-ASSETS> 27,944,000
<CURRENT-LIABILITIES> 9,136,000
<BONDS> 0
<COMMON> 141,000
0
0
<OTHER-SE> 18,251,000
<TOTAL-LIABILITY-AND-EQUITY> 27,944,000
<SALES> 14,232,000
<TOTAL-REVENUES> 21,468,000
<CGS> 10,047,000
<TOTAL-COSTS> 20,909,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,000
<INCOME-PRETAX> 600,000
<INCOME-TAX> 30,000
<INCOME-CONTINUING> 570,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 570,000
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
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