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, 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
August 11, 1997 was 7,012,718.
<PAGE>
<TABLE>
<CAPTION>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(thousands, except share data) June 30, 1997 December 31, 1996
(UNAUDITED)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 511 $ 1,279
Accounts receivable less allowance of $891 at
June 30, 1997 and $673 at December 31, 1996 11,735 9,262
Inventories 13,056 14,920
Prepaid expenses and other 1,506 1,274
--------- --------
Total current assets 26,808 26,735
Plant and equipment:
Equipment 13,600 14,094
Leasehold improvements 4,400 3,980
Office furniture and fixtures 1,251 1,248
--------- --------
19,251 19,322
Less allowances for depreciation and
amortization 15,016 15,147
--------- --------
4,235 4,175
Other assets 210 211
--------- --------
Total Assets $ 31,253 $ 31,121
========= ========
<PAGE>
(thousands, except share data) June 30, 1997 December 31, 1996
(UNAUDITED)
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,331 $ 2,470
Notes payable to bank 98
Salaries and wages 1,394 1,940
Taxes other than income taxes 488 682
Income taxes 209 207
Customer deposits 1,332 2,323
Other 1,654 1,697
--------- --------
Total current liabilities 7,408 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, 6,988,218 shares at June 30, 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 34,437 34,297
Retained-earnings deficit (8,200) (10,159)
Foreign currency translation adjustments (317) (292)
Unearned ESOP compensation (66) (132)
--------- --------
25,994 23,853
Less cost of common stock in treasury,
413,500 shares 2,646 2,646
--------- --------
Total stockholders' equity 23,348 21,207
--------- --------
Total Liabilities and Stockholders' Equity $ 31,253 $ 31,121
========= ========
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) 1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues
Net sales $10,385 $ 7,747 $19,453 $14,232
Service revenues 3,540 3,401 6,885 7,224
Lease revenues 136 4 153 12
------ ------ ------ ------
Total revenues 14,061 11,152 26,491 21,468
Costs and Expenses
Cost of sales 6,417 5,348 12,087 10,047
Marketing and service expenses 4,206 3,518 8,378 7,045
Research and development expenses 1,089 924 2,098 2,030
General and administrative
expenses 967 911 1,874 1,748
Interest expense 2 24 24 39
------ ------ ------ ------
Total costs and expenses 12,681 10,725 24,461 20,909
------ ------ ------ ------
Operating income 1,380 427 2,030 559
Other income, net 22 36 47 41
------ ------ ------ ------
Income before income taxes 1,402 463 2,077 600
Income taxes 61 13 118 30
------ ------ ------ ------
Net Income $ 1,341 $ 450 $ 1,959 $ 570
====== ====== ====== ======
Earnings per share .19 .07 .28 .08
====== ====== ====== ======
Average common and common
equivalent shares 6,939,633 6,759,533 6,954,640 6,723,384
</TABLE>
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<TABLE>
<CAPTION>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
June 30
(thousands) 1997 1996
<S> <C> <C>
Operating Activities
Net income $ 1,959 $ 570
Adjustments to reconcile net income
to net cash used by operating activities:
Depreciation 622 612
Amortization 672 469
Provision for losses on accounts receivable 324 150
Provision for inventory obsolescence 350 250
Changes in operating assets and liabilities:
Accounts receivable (2,797) 309
Inventories 842 (184)
Prepaid expenses and other (232) 74
Accounts payable (139) (675)
Accrued salaries and wages (546) 82
Taxes other than income taxes (194) (26)
Income taxes 2 17
Deferred revenues, net of costs 85
Customer deposits (991) (2,857)
Other (1) 49
------ -------
Net cash used by operating activities (129) (1,075)
Investing Activities
Purchases of plant and equipment (682) (297)
------ -------
Net cash used by investing activities (682) (297)
Financing Activities
Proceeds from issuance of common stock 141 20
Proceeds from borrowings 6,652 8,620
Principal payments on borrowings (6,750) (7,456)
------ -------
Net cash provided by financing activities 43 1,184
Decrease in cash and cash equivalents (768) (188)
Cash and Cash Equivalents at Beginning of Year 1,279 281
------ -------
Cash and Cash Equivalents at End of Period $ 511 $ 93
====== =======
See accompanying notes.
</TABLE>
<PAGE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For Quarter Ended June 30, 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 six month period
ended June 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
The components of inventories were as follows:
<TABLE>
<CAPTION>
June 30 December 31
(thousands) 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
Finished goods $ 2,080 $ 1,534
Work-in-process 4,849 6,084
Service parts 4,125 4,276
Materials and component parts 2,002 3,026
------- -------
$ 13,056 $ 14,920
======= =======
</TABLE>
NOTE 3 - Credit Arrangements
On May 28, 1997, the Company amended its credit agreement (Agreement) with a
bank to extend the maturity date to May 28, 1998. The Agreement has two
components, a $2 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 June 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 June 30, 1997).
The weighted average interest rates on borrowings during the first half of 1997
and 1996 were 8.0% and 7.5% 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. The available balance on
the total line of credit was $4,000,000 as of June 30, 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.
NOTE 4 - Income Taxes
The Company has approximately $3,600,000, $3,200,000 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>
June 30 December 31
(thousands) 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating losses $ 2,383 $ 3,108
Depreciation 106 106
Inventory valuation 226 101
Accounts receivable reserves 338 231
Revenue recognition 13
Vacation accrual 254 245
Other 329 258
------- -------
Total deferred tax assets 3,636 4,062
Deferred tax liabilities:
Depreciation and other (285) (390)
Inventory (136) (156)
Sales type lease (54) (73)
Revenue recognition (168)
Valuation allowance (2,993) (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 Six Months Ended June 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 for 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 of foreign markets as well as that of the United States.
In 1996, Scan-Optics derived 38% of its total revenue from one customer. The
Company expects this customer to continue to represent a significant portion 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. The
Company believes that success in achieving the initiatives described below will
help offset the foreseen reduction in sales for 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 the expansion 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.
<PAGE>
Net sales in the first six months of 1997 increased $5.2 million compared with
the first six months of 1996. Net sales in the second quarter of 1997
increased $2.6 million compared with the second quarter of 1996. Compared to
the first six months of 1996, international sales in the first six months of
1997 increased $5.2 million while North American sales remained at consistent
levels. International sales in the second quarter increased $2.9 million as
compared to the prior year due to an increase in the number of systems sold to
the Japanese health agency and an increase in sales to Latin and South America.
North American sales for the quarter decreased $.3 million.
Service revenues decreased $.3 million in the first six months of 1997 compared
with the first six months of 1996. Service revenues in the second quarter of
1997 increased $.1 million from the second quarter of 1996. Engineering
development revenue in the first half of 1997 decreased $.3 million from the
first half of 1996 due to funding for a specific development project which
ended in the first quarter of 1996. Customer service revenue in the first six
months of 1997 decreased $.4 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 $.4 million due
to the increase in sales, specifically to end-user customers.
Cost of sales increased $2.0 million from the first half of 1996 and increased
$1.1 million from the second quarter of 1996. The year-to-date and second
quarter increases are a reflection of the increase in net sales in 1997. Cost
of sales as a percentage of net sales was 62% for the first six months of 1997,
compared to 71% in the prior year. This percentage for the second quarter of
1997 was also 62%, compared to 69% for the same period in 1996. The decreases
are due to a change in the overall sales mix and increases in absorbed
manufacturing expenses resulting from production efficiencies.
Marketing and service expenses increased $1.3 million in the first half of 1997
and increased $.7 million in the second quarter of 1997 compared with 1996.
Sales and marketing expenses increased $1.0 million in the first half of 1997
primarily due to an increase in sales staffing levels and the associated fringe
benefits and travel expense. Customer service expenses increased $.2 million
in the first half of 1997 due to an increase in outside services expense.
Software expenses increased $.1 million in the first half 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 our marketing
and service organizations.
Research and development expenses in 1997 increased $.1 million from the first
half of 1996 and increased $.2 million in the second quarter. The increase in
the first half of 1997 is mainly due to increases in salary and incentive
compensation expenses.
General and administrative expenses increased $.1 million in the first half of
1997 primarily due to an increase in incentive compensation expense and
increases in legal fees and investor relations expenses. Expenses remained
consistent for the second quarter of 1997 compared with the second quarter of
1996.
<PAGE>
Liquidity and Capital Resources
Cash and cash equivalents at June 30, 1997 decreased $.8 million from December
31, 1996, for the reasons discussed below.
As of June 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 used $.1 million of cash in the first half of 1997.
Non-cash expenses recorded during the first six months of 1997 were $2.0
million vs. $1.5 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 $2.5 million during the first half of the
year due to increases in sales volume, primarily in the month of June.
Inventories decreased $1.9 million in the first half of 1997. Total
manufacturing inventories decreased $1.7 million from the beginning of the year
mainly due to a $1.0 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 half of the year, work-in-process
inventory decreased $1.2 million and finished goods inventory increased $.5
million due to the completion of several system orders. Customer service
inventories decreased by $.2 million in the first half of the year mainly due
to the amortization of parts inventory.
Prepaid expenses increased $.2 million primarily due to increases in prepaid
costs related to current engineering development projects, annual report costs
and a municipal bid bond.
Net plant and equipment increased $.1 million during the first half of 1997
mainly due to $.4 million of capitalized leasehold improvements related to the
consolidation and renovation of the corporate offices in Manchester,
Connecticut. Other additions of $.3 million include the capitalization of
improvements to the customer demonstration facility as well as additions of
engineering and test equipment. These increases were partially offset by $.6
million of depreciation expense recorded during the first half of the year.
Accounts payable decreased $.1 million from December 31, 1996, due to the
timing of payments.
Accrued salaries and wages decreased $.5 million reflecting the disbursement of
the 1996 incentive compensation of $.8 million, offset by the current year's
accrual of $.3 million.
Taxes other than income taxes decreased $.2 million due to the remittance of
sales tax incurred on prior period sales.
Customer deposits decreased $1.0 million resulting from certain large
international contracts accepted and recognized in revenue during the first
half of 1997 that included substantial deposits.
<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
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
PRIMARY AND FULLY DILUTED
Average common shares outstandi 6,576,347 6,529,545 6,568,551 6,527,692
Net effect of dilutive stock options and
warrants - based on the treasury stock
method using average market price
during the quarter 363,286 229,988 386,089 195,692
--------- --------- --------- ---------
Total 6,939,633 6,759,533 6,954,640 6,723,384
========= ========= ========= =========
Net Income $ 1,341 $ 450 $ 1,959 $ 570
========= ========= ========= =========
Earnings Per Share $ .19 $ .07 $ .28 $ .08
========= ========= ========= =========
</TABLE>
<PAGE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6 (B) - REPORTS ON FORM 8-K
For the Six Months Ended June 30, 1997
No reports on Form 8-K were filed during the first six 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 August 14, 1997 /ss/
James C. Mavel
Chairman, President, Chief Executive
Officer and Director
Date August 14, 1997 /ss/
Michael J. Villano
Chief Financial Officer and
Vice President
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CAPTION>
EXHIBIT 27.
SCAN-OPTICS, INC.
FINANCIAL DATA SCHEDULE
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 511,000
<SECURITIES> 0
<RECEIVABLES> 11,735,000
<ALLOWANCES> 891,000
<INVENTORY> 13,056,000
<CURRENT-ASSETS> 26,808,000
<PP&E> 19,251,000
<DEPRECIATION> 15,016,000
<TOTAL-ASSETS> 31,253,000
<CURRENT-LIABILITIES> 7,408,000
<BONDS> 0
<COMMON> 140,000
0
0
<OTHER-SE> 23,208,000
<TOTAL-LIABILITY-AND-EQUITY> 31,253,000
<SALES> 19,453,000
<TOTAL-REVENUES> 26,491,000
<CGS> 12,087,000
<TOTAL-COSTS> 24,461,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,000
<INCOME-PRETAX> 2,077,000
<INCOME-TAX> 118,000
<INCOME-CONTINUING> 1,959,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,959,000
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
</TABLE>
