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, 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
November 4, 1997 was 7,162,038.
<PAGE>
<TABLE>
<CAPTION>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(thousands, except share data) September 30, 1997 December 31, 1996
(UNAUDITED)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 2,252 $ 1,279
Accounts receivable less allowance of $891
at September 30, 1997 and $673 at
December 31, 1966 14,651 9,262
Inventories 13,592 14,920
Prepaid expenses and other 1,061 1,274
--------- --------
Total current assets 31,556 26,735
Plant and equipment:
Equipment 13,670 14,094
Leasehold improvements 4,450 3,980
Office furniture and fixtures 1,246 1,248
--------- --------
19,366 19,322
Less allowances for depreciation and
amortization 15,322 15,147
--------- --------
4,044 4,175
Other assets 211 211
--------- --------
Total Assets $ 35,811 $ 31,121
========= ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(thousands, except share data) September 30, 1997 December 31, 1996
<S> <C> <C>
(UNAUDITED)
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 3,608 $ 2,470
Notes payable to bank 98
Salaries and wages 1,614 1,940
Taxes other than income taxes 693 682
Income taxes 225 207
Customer deposits 1,168 2,323
Deferred revenues, net of costs 928
Other 2,122 1,697
--------- --------
Total current liabilities 10,358 9,417
Other liabilities 496 497
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,
7,040,901 shares at September 30, 1997
and 6,945,701 shares at December 31, 1996 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 34,615 34,297
Retained-earnings deficit (6,764) (10,159)
Foreign currency translation adjustments (356) (292)
Unearned ESOP compensation (33) (132)
--------- --------
27,603 23,853
Less cost of common stock in treasury,
413,500 shares 2,646 2,646
--------- --------
Total stockholders' equity 24,957 21,207
--------- --------
Total Liabilities and Stockholders' Equity $ 35,811 $ 31,121
========= ========
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
(thousands, except share data) 1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues
Net sales $ 11,139 $ 6,160 $ 30,592 $ 20,392
Service revenues 3,619 3,995 10,504 11,219
Lease revenues 70 68 223 80
------ ------ ------ ------
Total revenues 14,828 10,223 41,319 31,691
Costs and Expenses
Cost of sales 6,962 4,315 19,049 14,362
Marketing and service expenses 4,284 3,571 12,662 10,616
Research and development expenses 1,242 859 3,340 2,889
General and administrative expenses 943 830 2,817 2,578
Interest expense 1 36 25 75
------ ------ ------ ------
Total costs and expenses 13,432 9,611 37,893 30,520
------ ------ ------ ------
Operating income 1,396 612 3,426 1,171
Other income, net 69 20 116 61
------ ------ ------ ------
Income before income taxes 1,465 632 3,542 1,232
Income taxes 29 12 147 42
------ ------ ------ ------
Net Income $ 1,436 $ 620 $ 3,395 $ 1,190
====== ====== ====== ======
Earnings per share $ .20 $ .09 $ .48 $ .18
====== ====== ====== ======
Average common and common
equivalent shares 7,129,814 6,744,113 7,013,031 6,730,293
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30
(thousands) 1997 1996
<S> <C> <C>
Operating Activities
Net income $ 3,395 $ 1,190
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 912 918
Amortization 1,028 682
Provision for losses on accounts receivable 324 200
Provision for inventory obsolescence 600 425
Changes in operating assets and liabilities:
Accounts receivable (5,713) 713
Inventories (300) (521)
Prepaid expenses and other 213 133
Accounts payable 1,138 (308)
Accrued salaries and wages (326) 28
Taxes other than income taxes 11 56
Income taxes 18 36
Deferred revenues, net of costs 928 263
Customer deposits (1,155) (3,734)
Other 459 232
------ -------
Net cash provided by operating activities 1,532 313
Investing Activities
Purchases of plant and equipment (781) (1,060)
------ -------
Net cash used by investing activities (781) (1,060)
Financing Activities
Proceeds from issuance of common stock 320 26
Proceeds from borrowings 6,652 14,197
Principal payments on borrowings (6,750) (13,306)
------ -------
Net cash provided by financing activities 222 917
Increase in cash and cash equivalents 973 170
Cash and Cash Equivalents at Beginning of Year 1,279 281
------ -------
Cash and Cash Equivalents at End of Period $ 2,252 $ 451
====== =======
See accompanying notes.
</TABLE>
<PAGE>
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, 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
<TABLE>
<CAPTION>
The components of inventories were as follows:
September 30 December 31
(THOUSANDS) 1997 1996
- ----------------------------- ----------- ---------
<S> <C> <C>
Finished goods $ 2,787 $ 1,534
Work-in-process 4,755 6,084
Service parts 3,950 4,276
Materials and component parts 2,100 3,026
------- -------
$ 13,592 $ 14,920
======= =======
</TABLE>
NOTE 3 - Credit Arrangements
On May 28, 1997, the Company amended its credit agreement (Agreement) with its
bank to extend the maturity date to May 28, 1998. The Agreement has two
components, a $2 million line (international) guaranteed by the Export-Import
Bank of the United States, which is collateralized by international accounts
receivable and inventory, and which bears interest at prime (8 1/2% at September
30, 1997); and a $2 million line (domestic) which is collateralized by
domestic accounts receivable and inventory, and which also bears interest at
prime (8 1/2% at September 30, 1997). The weighted average interest rates on
borrowings during the first three quarters of 1997 and 1996 were 8.6% and
8.8%, respectively. The unused portion of the $2 million domestic line is
subject to a commitment fee of 1/2% per annum. Borrowings under the
Agreement are subject to various limitations based upon percentages of
eligible receivables and inventories of the Company. 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. The available balance on the total line of credit was $4
million as of September 30, 1997.
NOTE 4 - Income Taxes
The Company has approximately $2,200,000, $2,300,000 and $2,600,000 of net
operating loss carryforwards for federal, state and foreign income tax
purposes, respectively, which are scheduled to expire 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>
September 30 December 31
(THOUSANDS) 1997 1996
<S> <C> <C>
Deferred tax assets:
Net operating losses $ 1,850 $ 3,108
Depreciation 106 106
Inventory valuation 318 101
Accounts receivable reserves 338 231
Revenue recognition 51 13
Vacation accrual 246 245
Other 329 258
------- --------
Total deferred tax assets 3,238 4,062
Deferred tax liabilities:
Depreciation and other (232) (390)
Inventory (127) (156)
Sales type lease (44) (73)
Valuation allowance (2,835) (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 AND NINE MONTHS ENDED SEPTEMBER 30,
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. The ability of the Company to achieve the following 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 and currency exchange retes of foreign markets as well as
that of the United States.
In 1996, Scan-Optics (the "Company") derived 38% of its total revenue from one
customer in Japan. The Company expects that approximately 35% of its 1997
revenue will be in sales to this customer. The Company has received orders from
this customer for ten image scanning and OCR systems, valued at approximately $6
million, to be delivered in the first quarter of 1998. These orders bring the
total systems ordered on this contract to ninety-five. This customer is
currently evaluating its system requirements going forward because, the Company
believes, there are continued pressures on the Yen and the objective to reduce
the cost of medical fee processing in Japan. The Company expects to receive the
results from this internal study in the second quarter of 1998. The Company
believes that success in achieving the initiatives described below will
help offset the foreseen reduction in sales from this customer.
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 health care and insurance, government and tax, transportation, and
order entry 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 supplied product to 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 leveraging 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 sell their individual expertise, experience and cost
effectiveness to other entities.
NET SALES in the first nine months of 1997 increased $10.2 million compared
with the first nine months of 1996. Net sales in the third quarter of 1997
increased $5.0 million compared with the third quarter of 1996. Compared to
the first nine months of 1996, international sales increased $8.6 million due
to an increase in the number of systems sold to the Japanese health agency.
North American sales increased $1.6 million for the same period.
SERVICE REVENUES decreased $.7 million in the first nine months of 1997
compared with 1996. Service revenues in the third quarter of 1997 decreased
$.4 million from 1996 levels. Engineering development revenue in the first
three quarters of 1997 decreased $.6 million from the same period in 1996 due
to funding for a specific development project during 1996. Customer service
revenue in the first nine months of 1997 decreased $.3 million mainly due to
the replacement of older product lines with current products that require less
maintenance than the earlier product lines. Year-to-date software revenue
increased $.2 million due to the increase in solution sales.
COST OF SALES increased $4.7 million from the first nine months of 1996 and
increased $2.6 million from the third quarter of 1996. The year-to-date
increase is a reflection of the increase in net sales in 1997. Cost of sales
as a percentage of net sales was 62% for the first nine months of 1997,
compared to 70% in the prior year. This percentage for the third quarter of
1997 was 63%, compared to 70% for the same period in 1996. The decreases are
due to a change in the overall sales mix and improved absorption which
is the result of increases in production volume and quality improvement
initiatives.
MARKETING AND SERVICE EXPENSES increased $2.0 million in the first three
quarters of 1997 and increased $.7 million in the third quarter of 1997
compared with the respective periods of 1996. Sales and marketing expenses
increased $1.5 million in the first nine months of 1997 primarily due to an
increase in sales staffing levels and the associated fringe benefits,
commissions, and travel expenses. Customer service expenses increased
$.3 million in the first nine months of 1997 due to an increase in outside
service expenses. Software expenses increased $.2 million in the first
three quarters of 1997 mainly due to increases in staffing levels. As
indicated by these increases, the Company's continued focus on revenue
growth has required an investment in the marketing, service and software
development organizations.
RESEARCH AND DEVELOPMENT expenses in 1997 increased $.5 million from the first
nine months of 1996 and increased $.4 million in the third quarter of 1997
compared to the third quarter of 1996. These increases are mainly due to
increases in salary, incentive compensation and outside service expenses.
GENERAL AND ADMINISTRATIVE EXPENSES increased $.2 million in the first three
quarters of 1997 and increased $.1 million in the third quarter. These
increases are primarily due to increases in incentive compensation and investor
relations expenses.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at September 30, 1997 increased $1.0 million from
December 31, 1996.
As of September 30, 1997, the Company had no borrowings outstanding against its
$4 million line of credit. On May 28, 1997, the Company amended its credit
agreement with a bank to extend the maturity date to May 28, 1998. (See Note 3
for further details.)
Operating activities provided $1.5 million of cash in the first nine months of
1997.
Non-cash expenses recorded during the first nine months of 1997 were $2.9
million vs. $2.2 million for the same period in 1996. These expenses relate to
depreciation of fixed assets (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 increased $5.4 million during the first three quarters
of the year due to increases in sales volume and scheduled payment terms with
certain customers.
Inventories decreased $1.3 million in the first nine months of 1997. Total
manufacturing inventories decreased $1.0 million from the beginning of the year
mainly due to a $.9 million decrease in the stockroom inventory, which reflects
the Company's focus on reducing inventory levels and improving just-in-time
purchases. During the first nine months of the year, work-in-process inventory
decreased $1.3 million and finished goods inventory increased $1.2 million due
to the completion of several system orders. Customer service inventories
decreased by $.3 million in the first nine months of the year mainly due to the
amortization of parts inventory.
Net plant and equipment decreased $.1 million during the first nine months of
1997 mainly due to $.9 million of depreciation expense recorded during the
first nine months of the year. The depreciation expense was partially
offset by $.4 million of capitalized leasehold improvements related to the
consolidation and renovation of the corporate offices in Manchester,
Connecticut. Other additions of $.4 million which partially offset the
depreciation expense, include the capitalization of improvements to the customer
demonstration facility as well as additions of engineering and test equipment.
Accounts payable increased $1.1 million from December 31, 1996, reflective of
the increased production schedule and timing of vendor payments.
Accrued salaries and wages decreased $.3 million during the first nine months of
1997 reflecting the disbursement of the 1996 incentive compensation of $.8
million and disbursement of commissions on prior period sales of $.1 million,
offset by the current year's accrual of $.6 million.
Deferred revenues, net of costs increased by $.9 million from December
31, 1996, due to systems awaiting customer acceptance and deferred development
funding.
Customer deposits decreased $1.1 million from December 31, 1996, because
certain large international contracts accepted and recognized in revenue during
the first nine months of 1997 had included substantial deposits.
Other accrued expenses increased by $.4 million during the first nine months of
1997 due to accruals for group insurance and royalties.
<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 Nine Months Ended
September 30 September 30
1997 1996 1997 1996
PRIMARY AND FULLY DILUTED
<S> <C> <C> <C> <C>
Average common shares outstandiing 6,605,816 6,532,362 6,580,972 6,529,248
Net effect of dilutive stock options and
warrants - based on the treasury stock
method using average market price
during the quarter 523,998 211,751 432,059 201,045
--------- --------- --------- ---------
Total 7,129,814 6,744,113 7,013,031 6,730,293
========= ========= ========= =========
Net Income $ 1,436 $ 620 $ 3,395 $ 1,190
========= ========= ========= =========
Earnings Per Share $ .20 $ .09 $ .48 $ .18
========= ========= ========= =========
</TABLE>
<PAGE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6 (B) - REPORTS ON FORM 8-K
For the Nine Months Ended September 30, 1997
No reports on Form 8-K were filed during the first nine 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 NOVEMBER 13, 1997 /ss/
James C. Mavel
Chairman, President, Chief Executive
Officer and Director
Date NOVEMBER 13, 1997 /ss/
Michael J. Villano
Chief Financial Officer and
Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<CAPTION>
EXHIBIT 27.
SCAN-OPTICS, INC.
FINANCIAL DATA SCHEDULE
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,252,000
<SECURITIES> 0
<RECEIVABLES> 14,651,000
<ALLOWANCES> 891,000
<INVENTORY> 13,592,000
<CURRENT-ASSETS> 31,556,000
<PP&E> 19,366,000
<DEPRECIATION> 15,322,000
<TOTAL-ASSETS> 35,811,000
<CURRENT-LIABILITIES> 10,358,000
<BONDS> 0
<COMMON> 141,000
0
0
<OTHER-SE> 24,816,000
<TOTAL-LIABILITY-AND-EQUITY> 35,811,000
<SALES> 30,592,000
<TOTAL-REVENUES> 41,319,000
<CGS> 19,049,000
<TOTAL-COSTS> 37,893,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,000
<INCOME-PRETAX> 3,542,000
<INCOME-TAX> 147,000
<INCOME-CONTINUING> 3,395,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,395,000
<EPS-PRIMARY> .48
<EPS-DILUTED> .48
</TABLE>
