UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
( X ) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 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)
169 Progress Drive, Manchester, CT 06040
(Address of principal executive offices) Zip Code
(860) 645-7878
(Registrant's telephone number, including area code)
22 Prestige Park Circle, East Hartford, CT 06108
(Former address of principal executive offices) Zip Code
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. ( X ) YES ( ) NO
The number of shares outstanding of each of the issuer's classes of common
stock, as of November 13, 1996.
Common Stock, $.02 par value 6,946,730
<PAGE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(thousands, except share data) September 30, 1996 December 31, 1995
(UNAUDITED)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 451 $ 281
Accounts receivable less allowance of
$531 at September 30, 1996 and
$413 at December 31, 1995 10,527 10,297
Inventories 13,159 13,746
Prepaid expenses and other 1,128 1,261
Total current assets 25,265 25,585
Plant and equipment:
Equipment 13,990 14,097
Leasehold improvements 3,433 2,837
Office furniture and fixtures 1,200 1,215
18,623 18,149
Less allowances for depreciation
and amortization 14,672 14,340
3,951 3,809
Other assets 121 120
Total Assets $ 29,337 $ 29,514
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
(UNAUDITED)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to bank $ 1,196 $ 305
Accounts payable 2,553 2,862
Salaries and wages 937 909
Taxes other than income taxes 394 338
Income taxes 221 185
Customer deposits 2,166 5,900
Deferred revenues, net of costs 1,406
Other 992 847
Total current liabilities 9,865 11,346
Other liabilities 409 417
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, 6,947,901 shares at
September 30, 1996
and 6,935,184 shares at
December 31, 1995 139 139
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 34,295 34,271
Retained-earnings deficit (12,243) (13,433)
Foreign currency translation adjustments (316) (315)
Unearned ESOP compensation (166) (265)
21,709 20,397
Less cost of common stock in treasury,
413,500 shares 2,646 2,646
Total stockholders' equity 19,063 17,751
Total Liabilities and Stockholders' Equity $ 29,337 $ 29,514
See accompanying notes.
</TABLE>
<PAGE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
(thousands, except share data) 1996 1995 1996 1995
________________________________________________________________________________
<S> <C> <C> <C> <C>
Revenues
Net sales $ 6,160 $ 6,275 $ 20,392 $ 20,286
Service revenues 3,995 3,532 11,219 10,421
Lease revenues 68 8 80 117
-------- ------- ------- -------
Total revenues 10,223 9,815 31,691 30,824
Costs and Expenses
Cost of sales 4,315 4,817 14,362 14,506
Marketing and service expenses 3,571 3,738 10,616 11,328
Research and development expenses 859 1,149 2,889 3,735
General and administrative expenses 830 845 2,578 2,348
Interest expense 36 134 75 367
-------- ------- ------- -------
Total costs and expenses 9,611 10,683 30,520 32,284
-------- ------- ------- -------
Operating income (loss) 612 (868) 1,171 (1,460)
Other income, net 20 5 61 37
-------- ------- ------- -------
Income (loss) before income taxes 632 (863) 1,232 (1,423)
Income taxes (benefit) 12 (12) 42 (32)
-------- ------- ------- -------
Net Income (Loss) $ 620 $ (851) $ 1,190 $ (1,391)
======== ======= ======= =======
Earnings (loss) per share $ 0.09 $ (0.13) $ 0.18 $ (0.21)
======== ======= ======= =======
Average common and common
equivalent shares 6,744,113 6,517,964 6,730,293 6,617,964
See accompanying notes.
<PAGE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30 September 30
(thousands) 1996 1995
<S> <C> <C>
Operating Activities
Net income (loss) $ 1,190 $ (1,391)
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating activities:
Depreciation 918 1,024
Amortization 682 495
Changes in operating assets and liabilities:
Accounts receivable (230) (1,043)
Inventories, prepaid expenses and other 38 (1,682)
Accounts payable (309) 535
Accrued expenses 229 228
Royalties payable 0 (814)
Income taxes 36 17
Deferred revenues, net of costs 1,406 330
Customer deposits (3,734) (951)
Other 89 319
Net cash provided (used) by operating activities 315 (2,933)
Investing Activities
Purchases of plant and equipment (1,060) (451)
Net cash used by investing activities (1,060) (451)
Financing Activities
Proceeds from issuance of common stock 24 65
Proceeds from borrowings 14,197 21,303
Principal payments on borrowings (13,306) (17,940)
Net cash provided by financing activities 915 3,428
Increase in cash and cash equivalents 170 44
Cash and cash equivalents at beginning of year 281 178
Cash and Cash Equivalents at End of Period $ 451 $ 222
See accompanying notes.
</TABLE>
<PAGE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For Quarter Ended September 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 nine month period
ended September 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>
September 30 December 31
1996 1995
<S> <C> <C>
Finished goods $ 2,237 $ 3,125
Work-in-process 3,932 3,984
Service parts 4,039 2,177
Materials and component parts 2,951 4,460
$ 13,159 $ 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 September 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 September 30,
1996). The weighted average interest rates on borrowings during the first
three quarters of 1996 and 1995 were 8.8% and 7.2% 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 $4,358,000
as of September 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.
NOTE 4 - Income Taxes
The Company has approximately $6,000,000 and $4,100,000 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>
September 30 December 31
(thousands) 1996 1995
<S> <C> <C>
Deferred tax assets:
Net operating losses $ 2,943 $ 3,422
Depreciation 99 99
Inventory valuation 242 831
Accounts receivable reserves 202 167
Revenue recognition 13
Vacation accrual 286 258
Other 279 279
======== ========
Total deferred tax assets 4,051 5,069
Deferred tax liabilities:
Depreciation and other (30) (82)
Valuation allowance (4,021) (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 increased $.2 million from December 31, 1995.
Total Company borrowings increased $.9 million from the end of 1995 to $1.2
million at September 30, 1996. The increase in borrowings is due to the timing
of sales transactions and related receipts as well as leasehold improvements
to the new corporate headquarters facility. 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 $2,700,000 as of November 12,
1996.
Operating activities provided $.3 million of cash in the first three quarters
of 1996.
Accounts receivable increased $.2 million during the first nine months of 1996
due to an increase in the number of systems shipped and currently undergoing
acceptance testing.
Total inventories decreased $.6 million in the first three quarters of 1996.
The decrease reflects a first quarter transfer of inventory between
Manufacturing and Customer service of $2.0 million. Total manufacturing
inventories after adding back the transfer, decreased $.4 million from
December 31, 1995. This decrease reflects positively on the emphasis placed
upon inventory management and purchasing controls. Customer service
inventories increased by $1.8 million as of the third quarter mainly due to
this transfer, net of depreciation expense and parts usage.
Prepaid expenses and other assets decreased $.1 million due to the
amortization of prepaid engineering costs.
Accounts payable decreased $.3 million from December 31, 1995 due to
improvements in the just-in-time inventory procurement process, and payment of
invoices from prior periods.
Customer deposits decreased $3.7 million reflective of a large international
contract recognized in revenue during the first three quarters of 1996 which
required substantial deposits at time of order in 1995.
Results of Operations for the Three and Nine Months Ended September 30, 1996
vs. 1995
Total revenues increased $.9 million from the first nine months of 1995 and
increased $.4 million from the third quarter of 1995 vs 1996. Compared to the
first nine months of last year, North American sales increased $.4 million, but
were offset by a decrease in international sales of $.3 million. Despite a $2
million decline in international sales in the first quarter of 1996, the second
and third quarter sales rebounded, bringing international sales within 3% of
1995 levels. This is mainly due to the timing of the sale of seventeen
enhanced Series 9000's for health insurance processing in Japan versus
sixteen in 1995.
Service revenues increased $.8 million from the first nine months of 1995 vs
1996 and increased $.5 million in the third quarter of 1995 vs 1996. Year to
date, software revenue increased $.6 million which is directly related to the
increase in domestic sales. R&D revenue increased $.4 million for the nine
months due to the completion of a specific development project which began in
the third quarter of 1995, and the start of another project expected to be
completed in the fourth quarter of 1996. 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 a surcharge
ranging from 10% to 65% based on the age of the equipment.
Cost of sales decreased $.1 million over the first nine months of 1995 vs. 1996
and decreased $.5 million from the third quarter of 1995. The year to date and
third quarter decreases are a reflection of improved manufacturing efficiencies
due to higher production and purchasing volumes. The gross margin percentage
on net sales realized for the first nine months of 1996 was 30% versus 28% for
the same period in 1995. The gross margin percentage realized for the third
quarter of 1996 was 30% compared to 23% for the same period last year. The
increase is mainly due to reduced manufacturing costs combined with 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 $.7 million from the first three
quarters of 1995 and decreased $.2 million for the third quarter. Year to
date, customer service expenses decreased $1.0 million mainly due to the result
of fourth quarter 1995 corporate rightsizing, coupled with a decrease in
depreciation expense related to customer service inventory. Sales expenses
increased $.3 million due to increases in commission expense reflective of the
increase in net sales.
Research and development expenses decreased $.8 million from the first nine
months of 1995 and $.3 million vs the third quarter of 1995. These decreases
are mainly due to a reduction in salary expense and fringe benefits resulting
from corporate rightsizing 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 $.3 million year to date due to the significant
decrease in the average outstanding loan balance for the first nine months of
1996 which was $1.0 million versus $5.9 million for the same period in 1995.
<PAGE>
<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 Nine Months Ended
September 30 September 30
1996 1995 1996 1995
PRIMARY AND FULLY DILUTED
<S> <C> <C> <C> <C>
Average common shares outstanding 6,532,362 6,517,964 6,529,248 6,509,590
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 211,751 201,045 107,883
Total 6,744,113 6,517,964 6,730,293 6,617,473
Net Income (Loss) $ 620 $ (851) $ 1,190 $ (1,391)
Earnings (Loss) Per Share $ 0.09 (0.13) 0.18 $ (0.21)
</TABLE>
<PAGE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6 (B) - REPORTS ON FORM 8-K
For the Three Months Ended September 30, 1996
No reports on Form 8-K were filed during the First Nine 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 November 13, 1996 /ss/
Richard I. Tanaka
Chairman, Chief Executive
Officer and Director
Date November 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 451,000
<SECURITIES> 0
<RECEIVABLES> 10,527,000
<ALLOWANCES> 531,000
<INVENTORY> 13,159,000
<CURRENT-ASSETS> 25,265,000
<PP&E> 18,623,000
<DEPRECIATION> 14,672,000
<TOTAL-ASSETS> 29,337,000
<CURRENT-LIABILITIES> 9,865,000
<BONDS> 0
<COMMON> 139,000
0
0
<OTHER-SE> 19,333,000
<TOTAL-LIABILITY-AND-EQUITY> 29,337,000
<SALES> 20,392,000
<TOTAL-REVENUES> 31,691,000
<CGS> 14,362,000
<TOTAL-COSTS> 30,520,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 75,000
<INCOME-PRETAX> 1,232,000
<INCOME-TAX> 42,000
<INCOME-CONTINUING> 1,190,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,190,000
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
