UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
( Amendment No. 1 )
(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, 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
incorporation or organization) Number)
169 Progress Drive, Manchester, CT 06040
(Address of principal executive offices) Zip Code
(860) 645-7878
(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. [X]
The aggregate market value of the voting stock (common) held by non-affiliates
of the registrant: $40,950,031 as of March 26, 1997.
The number of shares of common stock, $.02 par value, outstanding as of March
26, 1997 was 6,970,218.
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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/
James C. Mavel
President, Chief Executive Officer,
and Director
Date: April 1, 1997
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/
James C. Mavel President, Chief Executive Officer,
and Director
(Principal Executive Officer)
Date: April 1, 1997
/ss/
Michael J. Villano Chief Financial Officer and Vice
President
(Principal Financial and
Accounting Officer)
Date: April 1, 1997
/ss/
Richard I. Tanaka Chairman of the Board of Directors
Date: April 1, 1997
/ss/
Richard J. Coburn Director
Date: April 1, 1997
/ss/
E. Bulkeley Griswold Director
Date: April 1, 1997
A majority of the Directors
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS -- 1996 VS. 1995
OUTLOOK
The forward-looking statements contained in this Outlook and elsewhere in this
document are based on current expectations. As such, actual results may
differ materially.
In 1996, Scan-Optics derived 38% of its total revenue from one customer. The
Company expects this customer to continue to represent over 30% of its total
revenue in each of the next two fiscal years. It is expected that by 1999, the
majority of the program will be complete. Additional orders with this customer
are anticipated, but at a greatly reduced sales level.
Four major initiatives currently underway are expected to compensate for this
anticipated decline in revenues. The first initiative is in the health care
industry, combining our ImageEMC system with our high performance image capture
transports, to process HCFA Medicare claim forms as well as other types of
medical claim forms. The Company has focused on and has experienced success
with this vertical line of business and believes it provides an opportunity for
growth.
The second initiative consists of the Company's development of target market
data capture applications that, combined with its other high speed transports
and archival systems, will provide cost effective solutions. The current focus
is on the transportation, order entry, tax, health care and exam scoring
markets. The Company expects to continue to emphasize its "Solutions that
Work" focus on these targeted markets for the foreseeable future. As other
market opportunities emerge, the Company will evaluate the potential of using
its products and services to provide "Solutions that Work" in these new
markets.
The third initiative is further expansion into the international marketplace.
The Company has successfully penetrated the Japanese market and has experienced
strong sales activity through relationships with highly qualified and
productive distributors. Over the next two years, the Company will focus on
developing comparably strong relationships in Europe, South America and other
Pacific Rim countries.
The fourth initiative relates to the expansion of some of the Company's core
competencies in an effort to add revenues and profits. The Company believes
that the hardware service, manufacturing and custom engineering organizations
have potential to leverage their individual expertise, experience and cost
effectiveness to other entities.
The Company believes that success in achieving these initiatives will help
offset the foreseen reduction in sales for the customer described above. The
ability for the Company to achieve the above expectations could be impacted by
increased competition or a slowdown in the growth within the scanning and
imaging market, alternate forms of processing and changes in the economic
climates of foreign markets as well as that of the United States.
Total revenues increased $4.0 million from 1995.
Net sales increased $2.6 million or 9.5% from the prior year. North American
sales were relatively flat and international sales increased $2.8 million or
17.8% from 1995. International sales in the Pacific Rim showed another year
of growth from 1995 to 1996. Sales to Japanese distributors increased sales
volume in this marketplace by 27% or $4.1 million mainly due to the increase in
orders from 1995 levels with the Japanese government. Sales to Latin and South
America decreased $.3 million and sales to Europe decreased $1.0 million from
1995 to 1996, due to the absence of a focused sales program.
Service revenues increased $1.4 million from 1995 to 1996. Customer hardware
service revenue decreased $.2 million due to the replacement of older product
lines with current product which requires less maintenance than earlier product
lines. Software service revenue increased $.9 million due to software becoming
a larger component of the customer solution. Engineering revenue increased $.7
million from 1995 to 1996 due to a new product development agreement completed
in the third quarter of 1996. (See Note G of the Consolidated Financial
Statements.)
Cost of sales were approximately the same as the 1995 level. However, the
gross margin percentage increased 5.7% from 29.5% in 1995 to 35.2% in 1996.
The increase in gross margin is mainly due to a $1.9 million decrease in
manufacturing costs, reflecting the manufacturing efficiencies achieved from
increased production and purchasing volumes. Additionally, the Company's
required sales discounts decreased due to the completion of two major research
and development agreements. (See Note G of the Consolidated Financial
Statements.)
Marketing and service expenses decreased by $.7 million in 1996 principally due
to a decrease in salaries and fringe benefits resulting from a reduction in the
work force in late 1995.
Research and development expenses decreased $.4 million from 1995 mainly due to
the decrease in engineering staff resulting from a reduction in the work force
in late 1995.
General and administrative expenses increased $.8 million compared to the prior
year mainly due to a $.3 million expense related to the incentive compensation
plan, which was based upon the achievement of predetermined net income targets.
Legal fees increased $.2 million from 1995. Also, salaries and related
benefits increased $.3 million due to the addition of James Mavel, the
Company's new President in January 1996.
Interest expense decreased $.4 million due to the significant decrease in the
average outstanding loan balance for 1996, which was $1.1 million compared to
$5.3 million in 1995.
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RESULTS OF OPERATIONS -- 1995 VS. 1994
Total revenues decreased $1.8 million from 1994.
Net sales increased $.7 million from the prior year. North American sales
decreased $4.8 million and international sales increased $5.5 million from
1994. The North American sales decreased due to the completion of the primary
implementation of the IRS SCRIPS award in 1994. International sales in the
Pacific Rim showed significant growth from 1994 to 1995. Sales to a Japanese
health agency increased sales volume in this marketplace by 110% or $7.4
million. Sales to Latin America and South America decreased 76% or $1.2
million. Sales to Europe decreased 33% or $.7 million over the prior year.
These decreases are reflective of large non-recurring sales which occurred in
the prior year.
Service revenues decreased $2.3 million from 1994 to 1995. Customer service
revenue decreased $1.5 million due to the replacement of older product lines
with current product which requires less maintenance than earlier product
lines. Software service revenue decreased $.3 million due to the decrease in
North American sales during the year. Engineering revenue decreased $.5
million from 1994 to 1995 due to the completion of a significant product
development agreement.
Cost of sales increased $1.9 million from 1994 to 1995. The gross margin
percentage decreased 5.3% from 34.8% in 1994 to 29.5% in 1995. The decrease in
gross margin is due to the shift in revenue mix from domestic sales to
international sales, particularly to the Pacific Rim. Sales to a Japanese
health agency, due to the volume of orders, carried a lower margin percentage.
Additionally, unabsorbed manufacturing expenses increased in 1995 due to the
fluctuations in production volume throughout the year.
Marketing and service expenses decreased by $.7 million in 1995 principally due
to staffing reductions related to changes in the installed base of serviced
equipment.
Research and development expenses decreased $1.1 million from 1994 mainly due
to the decrease in engineering staff resulting from the corporate
reorganization as well as a decrease in the utilization of outside consultants.
General and administrative expenses increased $.5 million compared to the prior
year mainly due to a $.2 million increase in legal expenses, and a $.1 million
increase in the Company's contribution to the 401(k) plan. Additionally,
outside recruiting firms were utilized in 1995 to fill open positions in upper
management.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $1.0 million from 1995 to 1996 for the
reasons discussed below.
Total Company borrowings decreased $.2 million to $.1 million at December 31,
1996. The average borrowing level for 1996 was $1.1 million compared to $5.3
million for 1995. The change in borrowing level is due in part to the increase
in sales realized in 1996 as well as the benefit of a reduction in operating
expenses that occurred in late 1995. On March 12, 1997, the Company received a
commitment letter from the bank extending the maturity date of the outstanding
line of credit to May 28, 1998. The line of credit was reduced from $6 million
to $4 million ($2 million each for the international and domestic lines) which
is reflective of the Company's current cash availability and projected cash
flow requirements for the next twelve months. Management believes that the
line of credit provides the Company with sufficient financial resources to meet
its working capital requirements. (See Note C of the Consolidated Financial
Statements.)
Operating activities provided $3.1 million of cash in 1996 compared to $2.4
million in 1995. The increase of $.7 million is mainly attributable to the
$3.3 million of net income realized in 1996 compared to the net loss of $1.3
million in 1995. The effect of the net income increase was offset by
fluctuations in other balance sheet items as discussed below.
Non-cash expenses recorded in 1996 were $3.5 million vs. $2.5 million in 1995.
These expenses relate to depreciation of fixed assets which is discussed in net
plant and equipment below, amortization of customer service spare parts
inventory, provisions for losses on accounts receivable and provisions for
inventory obsolescence.
Accounts receivable decreased $1.0 million from 1995 mainly due to a $.9
million decrease in systems currently undergoing acceptance testing. The
Company's revenue recognition policy relating to sales of certain equipment
records revenue upon acceptance of the related application software.
Total inventories increased $1.2 million from 1995 levels. Manufacturing
inventories increased $2.0 million during the year mainly due to increases in
work-in-process of $3.3 million reflecting increased production volumes.
Finished goods inventory decreased $1.3 million due to the Company's focused
effort to reduce inventory levels. Customer service inventory decreased $.8
million from 1995, mainly due to increased amortization of parts inventory
compared to the prior year, as well as a transfer to the Manufacturing
department for use in the Manufacturing process.
Net plant and equipment increased $.4 million in 1996. The major components of
this increase include $1.2 million of capitalized leasehold improvements
related to the consolidation of facilities in Manchester, Connecticut. Other
additions of $1.4 million include the capitalization of customer support
equipment and engineering test equipment. Offsetting the plant and equipment
increases were $.7 million of asset disposals in 1996 and depreciation recorded
of $1.5 million which was $.3 million higher than 1995 expense levels.
Other assets increased $.1 million due to an increase in the cash surrender
value of the Company's officers' life insurance policies.
Accounts payable and accrued expenses increased $1.8 million from 1995 levels.
Although accounts payable decreased $.4 million due to improvements in the
just-in-time inventory procurement process and improvements in cash flow,
accrued expenses increased $2.2 million mainly due to increases in accrued
wages of $1.0 million, reflecting a $.8 million incentive compensation accrual
and a $.2 million increase in accrued commissions. Other increases included
additional sales and use tax accruals, royalties payable and other
miscellaneous reserves.
Customer deposits decreased $3.6 million reflective of a change in the
negotiated payment terms with the customer which decreased the deposit
percentage and shortened the payment terms.
