UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
( X ) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1997
( )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
incorporation or organization) Identification Number
169 Progress Drive, Manchester, CT 06040
(Address of principal executive offices) Zip Code
(860) 645-7878
(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 of common stock, $.02 par value, outstanding as of May 12,
1997 was 6,988,218.
<PAGE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(thousands, except share data) March 31, 1997 December 31, 1996
- ----------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 344 $ 1,279
Accounts receivable less allowance of $908 at
March 31, 1997 and $673 at December 31, 1996 8,817 9,262
Inventories 14,346 14,920
Prepaid expenses and other 1,417 1,274
--------- ----------
Total current assets 24,924 26,735
Plant and equipment:
Equipment 13,407 14,094
Leasehold improvements 4,153 3,980
Office furniture and fixtures 1,251 1,248
--------- ----------
18,811 19,322
Less allowances for depreciation and
amortization 14,694 15,147
--------- ----------
4,117 4,175
Other assets 210 211
--------- ----------
Total Assets $ 29,251 $ 31,121
========= ==========
</TABLE>
<TABLE>
<CAPTION>
(thousands, except share data) March 31, 1997 December 31, 1996
- ----------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,204 $ 2,470
Notes payable to bank 98
Salaries and wages 1,063 1,940
Taxes other than income taxes 451 682
Income taxes 165 207
Customer deposits 1,438 2,323
Other 1,489 1,697
--------- ----------
Total current liabilities 6,810 9,417
Other liabilities 497 497
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, 6,991,018 shares at March 31, 1997
and 6,945,701 shares at December 31, 1996 140 139
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 34,438 34,297
Retained-earnings deficit (9,541) (10,159)
Foreign currency translation adjustments (348) (292)
Unearned ESOP compensation (99) (132)
--------- ----------
24,590 23,853
Less cost of common stock in treasury,
413,500 shares 2,646 2,646
--------- ----------
Total stockholders' equity 21,944 21,207
--------- ----------
Total Liabilities and Stockholders' Equity $ 29,251 $ 31,121
========= ==========
</TABLE>
See accompanying notes.
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31
(thousands, except share data) 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Revenues
Net sales $ 9,068 $ 6,487
Service revenues 3,345 3,823
Lease revenues 17 8
--------- ---------
Total revenues 12,430 10,318
Costs and Expenses
Cost of sales 5,670 4,701
Marketing and service expenses 4,172 3,527
Research and development expenses 1,009 1,106
General and administrative expenses 907 837
Interest expense 22 15
--------- ---------
Total costs and expenses 11,780 10,186
--------- ---------
Operating income 650 132
Other income, net 25 5
--------- ---------
Income before income taxes 675 137
Income taxes 57 17
--------- ---------
Net Income $ 618 $ 120
========= =========
Earnings per share $ .09 $ .02
========= =========
Average common and common equivalent shares 6,969,646 6,687,234
</TABLE>
See accompanying notes.
<PAGE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31
(thousands) 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 618 $ 120
Adjustments to reconcile net income
to net cash used by operating activities:
Depreciation 300 306
Amortization 337 267
Provision for losses on accounts receivable 327
Provision for inventory obsolescence 350
Changes in operating assets and liabilities:
Accounts receivable 118 899
Inventories (113) (473)
Prepaid expenses and other (143) (134)
Accounts payable (266) (479)
Accrued salaries and wages (877) 179
Taxes other than income taxes (231) 17
Income taxes (42) 9
Customer deposits (885) (1,182)
Other (230) 39
--------- ---------
Net cash used by operating activities (737) (432)
Investing Activities
Purchases of plant and equipment (242) (355)
--------- ---------
Net cash used by investing activities (242) (355)
Financing Activities
Proceeds from issuance of common stock 142 12
Proceeds from borrowings 4,369 3,255
Principal payments on borrowings (4,467) (1,748)
--------- ---------
Net cash provided by financing activities 44 1,519
Increase (decrease) in cash and cash equivalents (935) 732
Cash and Cash Equivalents at Beginning of Year 1,279 281
--------- ---------
Cash and Cash Equivalents at End of Period $ 344 $ 1,013
========= =========
</TABLE>
See accompanying notes.
<PAGE>
<PAGE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For Quarter Ended March 31, 1997
NOTE 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month period
ended March 31, 1997, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997. 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, 1996.
Certain 1996 amounts have been reclassified to conform to current year
presentation.
NOTE 2 - Inventories
The components of inventories were as follows:
<TABLE>
<CAPTION>
March 31 December 31
(thousands) 1997 1996
<S> <C> <C>
Finished goods $ 2,737 $ 1,534
Work-in-process 4,666 6,084
Service parts 4,206 4,276
Materials and component parts 2,737 3,026
------- -------
$ 14,346 $ 14,920
======= =======
</TABLE>
NOTE 3 - Credit Arrangements
The Company has a line of credit agreement (Agreement) with a bank which
expires on 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 1/2% at March 31, 1997); and a $3 million line (domestic) which is
collateralized by domestic accounts receivable and inventory, and which bears
interest at prime plus 1/2% (9% at March 31, 1997). The weighted average
interest rates on borrowings during the first quarters of 1997 and 1996 were
8.7% and 8.1% 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 $5,852,789 as of March 31, 1997. 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 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 at the Company's request from $6 million to $4
million ($2 million each for international and domestic lines), which is
reflective of the Company's current cash availability and projected cash flow
requirements for the next twelve months. The commitment letter is subject to
the extension of the guarantee by the third party bank on the $2 million
international line. The Company expects that the guarantee will be extended.
NOTE 4 - Income Taxes
The Company has approximately $5,000,000, $4,100,000 and $2,600,000 of net
operating loss carryforwards for federal, state and foreign income tax
purposes, respectively, which are scheduled to expire periodically between 1997
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>
March 31 December 31
(thousands) 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating losses $ 2,880 $ 3,108
Depreciation 106 106
Inventory valuation 231 101
Accounts receivable reserves 344 231
Revenue recognition 13
Vacation accrual 224 245
Other 340 258
------- -------
Total deferred tax assets 4,125 4,062
Deferred tax liabilities:
Depreciation and other (337) (390)
Inventory (146) (156)
Sales type lease (63) (73)
Revenue recognition (4)
Valuation allowance (3,575) (3,443)
------- -------
Net deferred taxes $ 0 $ 0
======= =======
</TABLE>
NOTE 5 - Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share". The Statement
establishes standards for computing and presenting earnings per share ("EPS").
The Statement requires the presentation of basic and diluted EPS. Basic EPS
excludes common stock equivalents, such as stock options, and is computed by
dividing earnings by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur
if common stock equivalents, such as stock options, were exercised. The
Company will adopt this Statement in the fourth quarter of 1997 and expects
that there will not be a material dilution to the Company's earnings per share
as a result of the adoption based on the current number of outstanding common
stock equivalents. If the number of common stock equivalents were to increase,
the diluted EPS could be significantly impacted.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations for the Three Months Ended March 31, 1997 vs. 1996
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.
Net sales increased $2.6 million in the first quarter of 1997 compared with the
first quarter of 1996. International sales increased $2.3 million and North
American sales increased $.3 million. International sales, as a percentage of
total sales, increased due to a total of eight enhanced Series 9000's sold to a
Japanese health agency for health claim processing in the first quarter of 1997
compared to four in the same period of 1996.
Service revenues decreased $.5 million mainly due to a decrease in engineering
revenue of $.4 million due to funding for a specific development project which
ended in the first quarter of 1996. Customer service revenue decreased $.1
million mainly due to the cancellation of three service maintenance contracts
in Canada, which was partially offset by annual contract increases.
Cost of sales increased $1.0 million from the first quarter of 1996 which was a
reflection of the increase in net sales. Cost of sales as a percentage of net
sales was 63%, compared to 72% in the prior year. This decrease was mainly due
to a change in the overall sales mix.
Marketing and service expenses increased $.6 million from the first quarter of
1996 to 1997. Sales and marketing expenses increased $.5 million primarily due
to an increase in sales staffing levels and an increase in the accounts
receivable reserve. Software service expenses increased $.1 million mainly due
to increases in staffing levels. Customer service expenses remained consistent
with the first quarter of 1996.
Research and development expenses decreased $.1 million from the first quarter
of 1996 to the first quarter of 1997 mainly due to a decrease in outside
consulting fees.
General and administrative expenses increased $.1 million primarily due to an
increase in the incentive compensation expense and an increase in legal fees.
Liquidity and Capital Resources
Cash and cash equivalents decreased $.9 million from December 31, 1996, for the
reasons discussed below.
As of March 31, 1997, the Company had no borrowings outstanding against its $6
million line of credit. The balance decreased from $.1 million at December 31,
1996, due to improvements in cash flow realized from the increased sales volume
and decreases in operating expenses from the fourth quarter 1996 run rate. On
March 12, 1997, the Company received a commitment letter extending the maturity
date of the existing line of credit to May 28, 1998. (See Note 3 for further
details.)
Operating activities used $.7 million of cash in the first quarter of 1997.
Non-cash expenses recorded during the quarter were $1.3 million vs. $.6 million
for the same period in 1996. 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.
Net accounts receivable decreased $.4 million during the first quarter of the
year due to collections made on 1996 sales combined with a provision of $.3
million for a specific customer recorded during the quarter.
Inventories decreased $.6 million in the first quarter of 1997. Total
manufacturing inventories decreased $.5 million during the quarter mainly due
to a $.3 million decrease in the stockroom inventory which reflects the
Company's focus on reducing inventory levels. Customer service inventories
decreased by $.1 million in the first quarter mainly due to the amortization of
parts inventory.
Prepaid expenses increased $.1 million primarily due to increases in prepaid
inventory related to current engineering development projects.
Net plant and equipment decreased $.1 million during the first quarter of 1997
mainly due to $.3 million of depreciation expense recorded during the first
three months of the year. This decrease was offset by $.2 million of
capitalized leasehold improvements related to the consolidation and renovation
of the corporate offices in Manchester, Connecticut.
Accounts payable decreased $.3 million from December 31, 1996, due to
improvements in the just-in-time inventory procurement process.
Accrued salaries and wages decreased $.9 million reflecting the disbursement of
the 1996 incentive compensation.
Taxes other than income taxes decreased $.2 million due to the remittance of
sales tax incurred on fourth quarter 1996 sales.
Customer deposits decreased $.9 million reflective of certain large
international contracts accepted and recognized in revenue during the first
quarter of 1997 which included substantial deposits.
Other current liabilities decreased $.2 million due to the payment of legal and
accounting fees accrued in 1996.
<PAGE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6 (A) - EXHIBIT COMPUTATION OF EARNINGS PER SHARE
(thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------
March 31
1997 1996
--------- ----------
<S> <C> <C>
PRIMARY AND FULLY DILUTED
Average common shares outstanding 6,560,754 6,525,838
Net effect of dilutive stock options and
warrants - based on the treasury stock
method using average market price during
the quarter 408,892 161,396
--------- ----------
Total 6,969,646 6,687,234
========= ==========
Net Income $ 618 $ 120
========= ==========
Earnings Per Share $ .09 $ .02
========= ==========
</TABLE>
<PAGE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6 (B) - REPORTS ON FORM 8-K
For the Three Months Ended March 31, 1997
No reports on Form 8-K were filed during the first three months of 1997.
<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 May 13, 1997 /ss/
James C. Mavel
President, Chief Executive
Officer and Director
Date May 13, 1997 /ss/
Michael J. Villano
Chief Financial Officer and
Vice President
<TABLE> <S> <C>
<ARTICLE> 5
EXHIBIT 27.
SCAN-OPTICS, INC.
FINANCIAL DATA SCHEDULE
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 344,000
<SECURITIES> 0
<RECEIVABLES> 8,817,000
<ALLOWANCES> 908,000
<INVENTORY> 14,346,000
<CURRENT-ASSETS> 24,924,000
<PP&E> 18,811,000
<DEPRECIATION> 14,694,000
<TOTAL-ASSETS> 29,251,000
<CURRENT-LIABILITIES> 6,810,000
<BONDS> 0
<COMMON> 140,000
0
0
<OTHER-SE> 21,944,000
<TOTAL-LIABILITY-AND-EQUITY> 29,251,000
<SALES> 9,068,000
<TOTAL-REVENUES> 12,430,000
<CGS> 5,670,000
<TOTAL-COSTS> 11,780,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,000
<INCOME-PRETAX> 675,000
<INCOME-TAX> 57,000
<INCOME-CONTINUING> 618,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 618,000
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
