UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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, 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)
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: $53,687,259 as of February 20, 1997.
The number of shares of common stock, $.02 par value, outstanding as of
February 20, 1997 was 7,218,455.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement, relating to the 1998 Annual Meeting
of Stockholders, which will be filed pursuant to Regulation 14A with the
Securities and Exchange Commission not later than 120 days after the end of the
fiscal year, are incorporated by reference and included in the following:
Part III-Item 10 - Directors and Executive Officers of the Registrant
Part III-Item 11 - Executive Compensation
Part III-Item 12 - Security Ownership of Certain Beneficial Owners
and Management
Part III-Item 13 - Certain Relationships and Related Transactions
<PAGE>
PART I
ITEM 1 - BUSINESS
Scan-Optics, Inc. (the "Company") was incorporated in Delaware in 1968 and has
its principal office at 169 Progress Drive, Manchester, Connecticut 06040.
Scan-Optics, Inc. has been a leader in applying technology to high-speed
recognition, data entry and imaging solutions for the past 30 years. The
Company was among the first to develop Optical Character Recognition (OCR)
technology for data capture and is a leading provider of image scanning systems
worldwide. Leveraging the core competencies of character recognition, image
processing and paper handling, the Company has transitioned to become a
provider of solutions that focus on the needs of its customers.
The Company combines technology, experience and expertise to develop cost-
effective solutions for applications that include government, healthcare,
transportation and order entry. The Company's ability to offer customized and
integrated system solutions has helped companies all over the world to meet
their productivity and profitability objectives.
PRODUCTS
The Company designs, manufactures, markets and services information processing
systems which use "state of art" technology for imaging, automated data
capture, document processing and the management of information. These systems
employ high speed paper movement, OCR/ICR, high speed image capture, image
storage and retrieval systems, image information processing, key-entry,
microfilming, ink jet printing, high-speed paper handling with multi-pocket
page and/or document sorting, local area networking, client/server PC
processing, communications software, software/hardware integration, application
software technologies, and the professional services required to assure a
complete approach to engineering solutions for data and image capture.
These key product disciplines translate integration skills that leverage the
core competencies of the Company to provide broader solution alternatives.
These core competencies include:
Line of Business Domain Knowledge
Professional Services
High Speed Paper Handling
Document Scanning
Image Enhancement Algorithms and Image Quality
Character Recognition (OCR, ICR, Barcode, Marksense, etc.)
Key-From-Image and Data Entry
Image Storage and Retrieval
Customer Relations with Post Installation Support
Value Added Engineering Services and Solutions
<PAGE>
CORE COMPETENCIES
Line of Business Domain Knowledge
The Company provides solutions that are proven and are in production. The
Company has domain knowledge to provide total solutions in the following
industries: healthcare, order entry, government and transportation. That
domain knowledge is utilized in the product suite of applications: ImageEMC++,
TAXexpress{TM}, ORDERexpress{TM} and PROOFexpress{TM}.
Professional Services
In order to provide a total solution to the customer, the Company has provided
a consultative approach to integrate solutions with proven core competencies in
the following areas:
Paper Handling Application Expertise Project Management
Installation Training Archival / Retrieval
Custom Engineering Development Tools Forms Design
Open Systems Neural Technology System Integration
Microfilming OCR Technology Industry Standards
Imaging Networking
High Speed Paper Handling
The Company is a leader in patented high speed paper handling systems. The
Series 9000 scanner has over 225 systems installed worldwide. The Company has
over 400 scanning systems installed worldwide processing 20 million pieces of
paper on a daily basis.
Document Scanning
The Company has been addressing the high-speed, high-volume, page/document
processing marketplace since its inception in 1968. During 1992, the Company
introduced the generation of scanners called the Series 9000 system. This
system launched the Company into the full page image and recognition (ICR)
market. Full page document processing includes front and back imaging, OCR
reading, serialization and microfilming of a document in a single pass. During
1994, the Company introduced the Model 7800 scanner which captures images that
can be utilized to improve Customer Service, Order Processing, and Data
Capture.
Image Enhancement Algorithms and Image Quality
Image enhancement algorithms and image quality are priority enhancement
activities for the Company. The program to continually enhance the data
processing attributes is driven by the Company's large and prestigious customer
base. The need for continuous improvement helps customers reduce their bottom
line expenses for processing a growing amount of data. Image enhancement
starts at the scanner capture system. The Company provides the fastest page
capture and image system on the market today. This processing is carried
forward into the Company's Key-From-Image and Image Storage and Retrieval
Systems. Management believes that the Company's image quality is among the
best in the industry. Electronic image processing and storage are rapidly
overtaking the use of microfilm and the Company is on the leading edge of this
technology with its hardware and application software solutions.
<PAGE>
Character Recognition
As with the scanners, the Company has been developing and providing
character recognition since 1968. This recognition has always included the
basic in-line recognition of machine printed, handprinted, and mark sense
forms. With the introduction of the Series 9000 system, the Company has
expanded this recognition to include barcode, patch code, special educational
score testing analysis, and special stamp recognition. In addition to these
recognition processes, the Company has integrated and developed neural
recognition technologies that support both in-line and post capture
recognition.
Key-From-Image and Data Entry
The Company has been providing complete hardware and software solutions using
Key-From-Image (KFI) and Data Entry since 1976. This KFI and Data Entry
solution remains important today, using the latest open network and platform
designs with Windows, UNIX, Novell, TCP/IP, NT, and other industry standard
components. By combining the high-speed scanning systems with the flexibility
of KFI and Data Entry, customers are able to lower their overall data capture
and document processing costs while improving the level of data accuracy and
availability.
Image Storage and Retrieval
The Company's Image Storage and Retrieval solution is based on industry
standards and powerful "best in class" components backed by 30 years of
experience in high-volume, mission-critical production systems. The solution
is an imaging application development environment that is modular and scaleable
in design. Due to an open architecture environment, all data, rules, indexes
and workflow processes are maintained in an ODBC-compliant or SQL database
product. This allows future migration to more powerful and cost-effective
operating systems and hardware platforms as dictated by changing organizational
and operational requirements.
Customer Relations with Post Installation Support
30 Years of Customized Software Solutions
The Company has provided customized software support to its customers since
1968. The Company's scanners and assorted network system products provide the
hardware platforms for delivering advanced high-volume forms processing,
imaging, and document management system solutions, especially in healthcare,
order entry, government, and transportation. This customized software support
enables the Company to provide full production-ready application systems
tailored to the customer's specific needs.
This support is provided through professional services offered by the Company.
These services offer a total package of Application Services including:
specifications, design, development, installation, training, support and
project management. The Company also provides individual, custom software
services as requested by the customer. In this way, the Company can either
provide the entire package of software support or simply provide those services
that the customer desires.
30 Years of Hardware Support
The Company has been offering service and maintenance support to its broad
customer base since 1968. This support is available with either leased or
purchased systems in both domestic and international markets. Service is
provided through a network of over 100 service centers in North America, the
United Kingdom and Germany. The Company provides on-site and on-call service
with response times of two hours or less. The Company focuses on comprehensive
diagnostic routines, modular designs and preventative maintenance procedures to
assure its users of high system availability to perform mission critical
applications.
Service revenue accounted for 25%, 32% and 33% of the Company's total revenue
for 1997, 1996 and 1995, respectively.
Value Added Engineering Services and Solutions
The Company has been supplying engineering services and solutions to meet
customer needs since introducing its first fully integrated solution in 1976.
The solutions include scanning, recognition, Key-From-Image, data entry, and
communications. During 1993, the Company was selected to develop a prototype
system to process medical claims for a healthcare agency in Japan. This system
was designed with 36 stacker pockets for sorting forms; expanded paper handling
capabilities for light-weight, flimsy forms; high resolution image cameras to
permit recognition of complex Japanese kanji characters; and software forms
recognition for up to 20,000 different form formats.
The Company has been involved in special recognition techniques to process
order forms that contain stamps. These stamps are used as an entry into a
sweepstakes contest or to select ordered items for a record or book club. The
stamps are of a multitude of colors and are successfully processed through the
Company's special recognition features. In addition to stamp processing, the
Company has been engaged in recognition analysis for educational test scoring.
This process is accomplished in full duplex mode at a transport speed of 50
inches per second.
SIGNIFICANT CUSTOMERS
In 1997, the Company derived 39% of its total revenue from one customer, Toyo
Officemation, Inc., one of the Company's distributors in Japan. In 1996 and
1995, this same customer accounted for 38% and 31% of consolidated revenues.
For more information about this customer, see the Outlook section of
Management's Discussion and Analysis.
CHANNELS OF DISTRIBUTION
The Company is augmenting its practice of selling directly to end-users and
distributors to respond to new opportunities in the marketplace. The focus on
providing more complete solutions to customers has stimulated the pooling of
resources with selected system integration firms and specialized niche
suppliers. The cooperative effort with system integrators and other vendors
has introduced the Scan-Optics logo to new markets both domestically and
internationally.
BACKLOG
The backlog for the Company's products and services as of December 31, 1997 was
approximately $23,139,000, of which $17,399,000 was backlog for core business.
As of December 31, 1996, the backlog was approximately $31,058,000, of which
$10,968,000 was for core business. Core business includes all domestic and
international orders except those for health claims processing to the Japanese
government. The backlog consists of equipment, software and services to be
sold and noncancelable rentals and maintenance due on existing rental and
maintenance contracts. The Company normally delivers a system within 30 to 180
days after receiving an order, depending upon the degree of software
customization required.
MANUFACTURING
Manufacture of the Company's products requires the fabrication of sheet metal
and mechanical parts, the subassembly of electronic and mechanical parts and
components, and operational and quality control testing of components,
assemblies and completed systems. The Company's products consist of both
standard and Company-specified mechanical and electronic parts, sub-assemblies
and major components, including microcomputers. Most parts are purchased,
including many complex electronic and mechanical sub-assemblies. The Company
also purchases major standard components, including low speed scanners,
jukeboxes, PCs, printers and servers. An important aspect of the Company's
manufacturing activities is its quality control program which uses
computer-controlled testing equipment.
The Company has not experienced significant shortages of any components or
subassemblies; however, alternate sources for such components and subassemblies
have been developed.
COMPETITION
The Company competes with service providers utilizing multiple vendor
architectures. The Company differentiates its solutions by offering a total
system, including post installation support of hardware and software services.
The Company focuses on industry specific "application" areas with solutions
utilizing image and data entry/data capture systems provided by the Company.
PATENTS
The Company currently has five United States patents in force which expire
between 2003 and 2013. The patents are on mechanical systems, electronic
circuits, electronic systems and software algorithms which are used throughout
the product lines. In May 1996, the Company submitted a patent application on
a software algorithm to improve recognition results through the use of
contextual editing. The Company expects to continue to apply for patents on
its new technological developments when it believes they are significant. In
November 1997, the Company licensed a patent to IBML for their use in an
image transport designed for processing airline tickets.
EMPLOYEES
As of December 31, 1997 the Company employed 324 persons, including 24 with
administrative and support responsibilities, 39 in marketing and sales, 113 in
software and service activities, 38 in engineering and 110 in production
capacities. The Company considers its employee relations to be good. The
Company has not experienced any work stoppages.
<PAGE>
PRODUCT DEVELOPMENT
In June 1992, the Company introduced the Series 9000 Scanner. The Series 9000
integrates the latest in character recognition, image capture, and paper
handling technology into a high speed scanner. During 1993, the Company
introduced several options for this scanner. These options permit character
recognition and image processing on the "reverse side" of documents; a special
small document stacker module; and the ability to recognize several industry
standard bar-codes.
The Series 9000 interfaces with other company products to provide multi-media
data entry and image storage and retrieval. During 1994, the Company developed
and delivered a network-based scanning, recognition and data entry product -
the Series 7000 - which addresses requirements for a distributed solution.
In April 1995, the Company introduced the Model 7800 Scanner. The Model 7800
is the world's fastest full-page image scanner, capable of capturing up to 200
full size pages per minute. It is based on Scan-Optics' high-end, industry
proven Series 9000. In April 1996, the model 7800 was recognized at an
industry trade show with the "Showstopper Award" for outstanding product.
In August 1995, the Company signed a license agreement to sell and support the
ImageEMC product. As part of the agreement, the Company took over support
requirements of the currently installed customer base and hired development and
support personnel from TCSI Corporation. The product was enhanced to accept
images and data from Scan-Optics' scanners. Any enhancements made to the
product are owned by the Company. This product provides a total solution for
processing healthcare claim forms (HCFA 1500's). The product is a
client/server architecture and operates on industry standard hardware and
software platforms.
In July 1996, the Company introduced a high-speed neural network based
handprint recognition system for use in the Series 9000 scanner. The In-Line
Neural Classifier operates at speeds of up to 7500 characters per second while
achieving a 50% reject rate reduction and 10% substitution rate reduction over
the current handprint recognition engine. The classifier is based on a special
neural network algorithm which is resistant to overtraining making it an ideal
candidate for character recognition systems.
The Company is focusing its R & D Development on total solutions. In 1997,
ImageEMC++ was released. Developed as a result of the Company's experience
with many of the nation's leading health insurance and other claim payment
companies, ImageEMC++ is a comprehensive business solution designed to
efficiently process all the paper forms and other documents these organizations
receive. It minimizes the time and labor involved with processing single and
multi-part paper health claims, enrollments and other forms as well as
correspondence, re-pricing sheets and other general documents.
In 1998, releases of solutions in the government, order entry and
transportation markets are expected to be made:
Scan-Optics' TAXexpress{TM}, an automated image-based tax
processing and data capture solution, consists of processing modules to
handle income tax, sales tax and other tax returns. It applies the
technologies of character recognition, data and image capture, data
correction, verification and transfer to a host system, including image
workflow and archive capabilities. As a result, TAXexpress{TM} can
achieve the principal goal of most tax and revenue departments in
implementing an image-based tax processing system.
Scan-Optics' ORDERexpress{TM} is an automated image-based data
capture solution for "club" style order solicitation and order processing.
ORDERexpress{TM} provides mark sense, machineprint and handprint
recognition, which are integral parts of most reply cards. It also offers
processing modules to handle order reply cards, return non-orders, and
process payments. This solution eliminates the need to manually sort and
separately process orders from non-orders, and name and address changes.
Also available are hardware and application software to process mail-out
announcements and return order documents and payments.
Scan-Optics' PROOFexpress{TM} is an automated image-based solution
for delivery, data capture and storage and retrieval. It provides
processing modules to handle waybills, delivery tickets and other billing
documents. It applies the technologies of character recognition, data and
image capture, data correction and verification and transfer to a host
system. As a result, PROOFexpress{TM} can achieve the principal
goal of most billing departments in implementing an image-based storage
and retrieval system.
The Company considers product development to be a significant element in
maintaining market share. During the years ended December 31, 1997, 1996, and
1995, the Company's research and development expenses were $4,552,000,
$4,142,000, and $4,574,000, respectively. Some portion of these amounts were
funded under the development agreements described below.
The Company intends to continue its program of development of additional
options and capabilities for its existing products as well as the development
of new products which exploit the Company's core competencies: line of business
domain knowledge, professional services, high speed paper handling, document
scanning, image enhancement, character recognition, key-from-image and data
entry, image storage and retrieval, customer relations and value added
engineering services and solutions.
FUNDED DEVELOPMENT AGREEMENTS
During 1990, the Company entered into two separate agreements for the
development of new product technology, which provided a total funding of
$3,645,000 over an eighteen month period. Revenues related to these
development projects were recorded through 1992, which offset related costs
incurred to successfully develop the products. The agreements provide the
respective third party with exclusive rights to market the developed product in
its geographic market area while the Company will manufacture the product and
retain ownership and all other distribution rights. Royalties and other
considerations, up to a maximum of 130% of the amount advanced to the Company,
were required to be paid based on sales of the new product technology through
the termination dates of the agreements, June 30, 1995 and December 31, 1996.
As of December 31, 1996, the Company had repaid $4,738,500, or 100% of the
maximum potential obligation.
During 1995, the Company entered into $700,000 of product development
agreements with a specific customer, which required various modifications and
enhancements to the Company's Series 9000 product. The Company recorded
revenue related to these development agreements of $336,000 in 1995, and
$364,000 in 1996. These revenues offset related costs incurred to develop the
modifications and enhancements. The ownership of the technologies created as a
result of this development agreement remains with the Company. No royalties or
other considerations are required as a part of this agreement.
During 1997, the Company entered into a $636,000 product development agreement
with a specific customer, which required various modifications and enhancements
to the Company's Series 9000 product. The Company recorded all revenue related
to this development agreement in 1997. These revenues offset related costs
incurred to develop the modifications and enhancements. The ownership of the
technologies created as a result of this development agreement remains with the
Company. No royalties or other considerations are required as a part of this
agreement.
EFFECTS OF ENVIRONMENTAL LAWS
The effect of federal and state environmental regulations on the Company's
operations is insignificant.
GEOGRAPHICAL SEGMENTS
Sales of equipment to customers in the international market represent an
important source of the Company's revenues. The Company has international
distributors located in 46 countries and covering six continents. Changes in
the economic climates of foreign markets could have an unfavorable impact on
future international sales.
The following table sets forth certain information relating to export sales for
the three most recent fiscal years ended December 31:
<TABLE>
<CAPTION>
Export sales
(thousands) 1997 1996 1995
________________________________________________________________________________
(S) <C> <C> <C>
Latin America and
South America $ 2,207 8% $ 113 1% $ 375 2%
Europe 37 433 2% 1,468 9%
Pacific Rim 24,894 92% 18,281 97% 14,143 89%
_______________________________________________________
$ 27,138 $ 18,827 $ 15,986
=======================================================
</TABLE>
Export sales represented 66%, 62% and 58% of net sales for the three years
ended December 31, 1997, 1996 and 1995, respectively.
ITEM 2 - PROPERTIES
The Company's world headquarters and manufacturing facility is located in a
newly renovated eighty-four thousand square foot, one-story building in
Manchester, Connecticut, leased for a term expiring in December 2006. The
Company also leases a three thousand square foot sales, support, and research
and development facility in Berkeley, California that expires in December 2000.
The Company leases office space throughout the United States for sales, service
and administrative functions. Office space for administration and equipment
demonstration is also leased by Scan-Optics, Ltd., in the United Kingdom and
Scan-Optics (Canada), Ltd., both wholly-owned subsidiaries.
ITEM 3 - LEGAL PROCEEDINGS
There are certain claims pending against the Company which arose in the normal
course of business. In the opinion of management, the ultimate outcome of
these matters will not have a material impact on the Company's financial
position, results of operations or liquidity.
<PAGE>
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters during the fourth quarter of 1997 to a
vote of the stockholders.
<TABLE>
<CAPTION>
EXECUTIVE AND OTHER OFFICERS OF THE REGISTRANT
Officers of the Company are set forth in the schedule below.
Officer
Name Age Principal Occupation: Since
________________________________________________________________________________
<S> <C> <C> <C>
James C. Mavel 52 Chairman, Chief Executive Officer,
President and Director 1996
William H. Cuddy 62 Corporate Secretary 1984
Marianna C. Emanuelson 36 Vice President -
Human Resources 1997
Richard C. Goyette 46 Vice President -
Sales and Marketing 1996
Clarence W. Rife 58 Vice President -
Customer Relations 1975
John B. Sayre 62 Vice President -
Manufacturing 1988
Michael J. Villano 38 Chief Financial Officer, Vice
President and Treasurer 1992
</TABLE>
<PAGE>
Mr. Mavel joined the Company in January 1996 as President and Chief Operating
Officer. In June, 1996, Mr. Mavel became a director of the Company. On
December 31, 1996, Mr. Mavel was promoted to President and Chief Executive
Officer. In May 1997, Mr. Mavel became the Chairman of the Board of Directors.
Prior to joining the Company, from 1992 through 1995, Mr. Mavel was Vice
President and General Manager of the Imaging Systems Division of Unisys. From
1991 to 1992, he was Group Vice President of the Financial Information Systems
Division of National Data Corporation.
Mr. Cuddy has been a partner in the law firm of Day, Berry and Howard since
1968. He was elected to the position of Corporate Secretary in September 1984.
Mrs. Emanuelson joined the Company in August of 1994, and was elected to the
position of Vice President in 1997. She is currently Vice President - Human
Resources.
Mr. Goyette joined the Company in March 1996 as Vice President - Sales and
Marketing. Prior to joining the Company, from 1993 through 1995, Mr. Goyette
was Vice President of the Imaging Systems Group of Unisys. From 1992 to 1993,
he was Vice President of the Software Products Group of Unisys. From 1990 to
1992 he was Vice President of Corporate Information Productivity Systems of
Unisys.
Mr. Rife has been employed by the Company since 1969 and was elected to the
position of Vice President in 1975. He is currently Vice President - Customer
Relations.
Mr. Sayre joined the Company in December 1988 as Vice President -
Manufacturing. Prior to this date he held various management positions with
Pratt and Whitney, Division of United Technologies Corporation, from 1985 to
1988 and previously with LTV/Republic Steel from 1980 to 1985.
Mr. Villano joined the Company in 1986 and in 1988 was named Assistant
Controller. In 1989 he was promoted to the position of Controller, in February
1992 was named Vice President and Controller and in March 1994 was named Chief
Financial Officer and Vice President. Mr. Villano was appointed Treasurer in
May 1997.
The executive officers are elected for a one year term at the Directors'
meeting following the Annual Meeting of Stockholders each year. There are no
family relationships between any of the listed officers and directors.
<PAGE>
PART II
ITEM 5 - MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK MARKET PRICES AND DIVIDENDS
The following is a two year history of Common Stock prices for each quarter.
The table sets forth the high and low closing quotations per share for the
periods indicated of the Common Stock in the over-the-counter market based upon
information provided by the National Association of Securities Dealers, Inc.
The closing quotations represent prices between dealers and do not include
retail markups, markdowns or commissions and may not represent actual
transactions. There were 1,208 Common stockholders of record at December 31,
1997.
The Company has not paid dividends on its Common Stock and the Board of
Directors of the Company has no intention of declaring dividends in the
foreseeable future. The declaration and payment of dividends in the future
will be determined by the Board of Directors in light of conditions then
existing, including the Company's earnings, financial condition, capital
requirements and other factors.
<TABLE>
<CAPTION>
Quarter Ended March 31 June 30 September 30 December 31
High Low High Low High Low High Low
________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997 8 3 1/4 7 3/8 4 11/16 12 3/8 5 1/8 13 1/4 7 1/16
1996 4 5/8 3 5 1/4 3 3/8 4 3/8 3 1/4 4 1/4 3
</TABLE>
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
SCAN-OPTICS, INC. AND SUBSIDIARIES
FIVE YEAR SUMMARY OF OPERATIONS
SELECTED FINANCIAL DATA
(thousands, except share data) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Revenues $ 56,608 $ 46,034 $ 42,084 $ 43,889 $ 36,381
===================================================================
Income (loss) before income taxes $ 5,691 $ 3,265 $ (1,327) $ 1,244 $ (932)
Income taxes (benefit) (99) (9) (72) (40) 49
-------------------------------------------------------------------
Net Income (Loss) $ 5,790 $ 3,274 $ (1,255) $ 1,284 $ (981)
===================================================================
Basic earnings (loss) per share $ .87 $ .50 $ (.19) $ .20 $ (.15)
===================================================================
Basic weighted-average shares 6,632,248 6,530,244 6,512,475 6,457,701 6,345,137
Diluted earnings (loss) per share $ .82 $ .49 $ (.18) $ .19 $ (.15)
===================================================================
Diluted weighted-average shares $7,070,013 6,715,942 6,620,099 6,872,417 6,511,192
</TABLE>
<TABLE>
<CAPTION>
SELECTED BALANCE SHEET DATA
<S> <C> <C> <C> <C> <C>
Total assets $ 38,707 $ 31,121 $ 29,514 $ 29,619 $ 27,878
Working capital $ 24,643 $ 17,318 $ 14,239 $ 14,015 $ 13,135
Total stockholders' equity $ 27,733 $ 21,207 $ 17,751 $ 18,731 $ 17,097
</TABLE>
The Company has not paid any dividends for the five year period ended December
31, 1997.
The above financial data should be read in conjunction with the related
consolidated financial statements and notes thereto.
The earnings per share amounts prior to 1997 have been restated as required to
comply with Statement of Finanical Accounting Standards No. 128, Earnings Per
Share. For further discussion of earnings per share and the inpact of Statement
No. 128, see notes to the consolidated financial statements beginning on
page 29.
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS -- 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 Scan-Optics, (the "Company") to achieve the
following expectations could be impacted by increased competition or a slowdown
in growth within the scanning and imaging market, alternate forms of
processing, inability to consummate accretive acquisitions and changes in the
economic climates of foreign markets as well as that of the United States. The
foregoing factors should not be construed as exhaustive.
In 1997, the Company derived 39% of its total revenue from one customer, Toyo
Officemation, Inc., one of the Company's distributors in Japan. Health claims
processing systems represent 90% of this revenue. The Company has received
orders from this customer for ten image scanning and OCR transports, valued at
approximately $6 million, to be delivered in the first quarter of 1998. These
orders bring the total health claim processing systems ordered on this contract
to ninety-five. The Company's original expectation was for one hundred and
fifty systems to be delivered over the contract life. The efficiencies created
by the application of the Company's technology will reduce the overall
requirements for this contract. This customer is currently evaluating its
system requirements going forward. The Company believes that with the
continued pressures on the Yen and the objective to reduce the cost of medical
fee processing in Japan, the customer is faced with a challenge to continue to
improve their efficiency. 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 a
foreseen reduction in sales from this customer. The inability of the Company
to meet these initiatives may have a materially adverse effect on earnings.
Five major initiatives currently underway are expected to compensate for this
anticipated decline in revenues. The first initiative is in the healthcare
industry, combining the Company's ImageEMC++ system with its 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 Company experienced 115% growth in this area in
1997.
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 healthcare, government, transportation, and order entry markets. The
Company expects to continue to emphasize its "Solutions at 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 at Work" in these new markets. Growth of 71%
was achieved with this initiative in 1997.
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 Company experienced early results of this
activity with $2.2 million in business in South America during 1997.
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.
The last initiative is growth through an accretive acquisition or acquisitions.
In the fourth quarter of 1997, the Company engaged the services of an investment
banking firm to assist in a corporate growth strategy that is focused on the
consolidation occurring in the imaging and data capture market. The imaging
industry is made up of many smaller companies and management believes achieving
greater critical mass will increase the likelihood of growth in the adoption of
this technology. With that in mind, the Company is pursuing acquisitions that
will utilize its core competencies and will provide immediately accretive
earnings. It is the Company's policy not to discuss or comment on negotiations
regarding such transactions until a definitive agreement is signed or after
circumstances indicate a high degree of probability that a transaction will be
consumated, unless the law otherwise requires.
Total revenues increased $10.6 million or 23% from 1996 to 1997.
Net sales increased $11.1 million or 37% from the prior year. The Company's
core business sales increased $4.4 million or 26% from 1996 to 1997. The core
business includes all domestic and international sales except those for health
claims processing to the Japanese government. North American sales increased
$2.8 million or 24% and international sales increased $8.3 million or 44% from
1996. International sales in the Pacific Rim showed another year of growth
with a sales volume increase of 36% or $6.6 million mainly due to the increase
in orders with the Japanese government. Sales to Europe decreased $.4 million
as new channels were being established and sales to Latin America increased
$2.1 million from 1996 to 1997.
Service revenues decreased $.4 million from 1996 to 1997. Hardware maintenance
and support revenue decreased $.3 million due to the replacement of older
product lines with current products which require less maintenance than earlier
product lines. Professional service revenue decreased $.1 million due to an
increase in distributor sales which do not carry a professional service
component and also due to the process of transitioning to become a solution
provider in the marketplace.
Engineering revenues decreased $.3 million from 1996 to 1997 due to a decline
in the funded development contracts from 1996 levels. (See Note G of the
Consolidated Financial Statements.)
Cost of sales increased $5.4 million from 1996 to 1997. The increase is
directly related to the increase in net sales in 1997. The cost of sales
percentage of net sales decreased 4% from 65% in 1996 to 61% in 1997. The
decrease is mainly due to continued manufacturing efficiencies achieved from
increased production volume, favorable material pricing due to purchasing
volumes and quality improvement processes.
Service expenses increased by $.9 million in 1997. Customer service expenses
increased $.4 million principally due to an increase in outside services
expense and an increase in amortization of customer service parts inventory.
Professional service expenses increased $.5 million in 1997 from 1996 mainly
due to increases in staffing levels and related fringe benefits and travel
expenses.
Sales and marketing expenses increased by $1.8 million in 1997 principally due
to an increase in sales staffing levels and associated fringe benefits and
travel expenses. Commission expense also increased which is reflective of the
increase in North American sales. The Company has expanded its sales and
marketing organization to increase the coverage in the worldwide marketplace
and focus on North American selling efforts in the four targeted lines of
business.
Research and development expenses increased $.4 million from 1996 due to
increases in outside services and consulting expenses. During 1997 the Company
invested in its core technologies of imaging, recognition and paper handling,
as well as new "Total Solution" application software.
General and administrative expenses decreased $.2 million in 1997 compared to
the prior year. The decrease is mainly due to one time 1996 expenses for
legal fees, offset by an increase in expenses due to the Company's focus on
investor relations and the establishment of a relationship with an investment
banking firm to meet the Company's strategic planning requirements.
Interest expense decreased $.1 million due to the continued decrease in the
average outstanding loan balance for 1997, which was $.2 million compared to
$1.1 million in 1996.
Year 2000 Compliance
The Company has addressed the compliance issues with its products. All current
standard operating systems are in the process of modification to ensure Year
2000 compliance. Application software will be changed at the request of the
individual customer on a chargeable basis. Customers of non-current products
will be notified that the Company does not plan to modify the operating systems
to achieve Year 2000 compliance.
The Company recently put in place a team of individuals to analyze the internal
issues associated with the Year 2000 compliance. The costs and effects on
financial results of year 2000 compliance are unknown by the Company at this
time and are not expected to be material.
<PAGE>
RESULTS OF OPERATIONS -- 1996 VS. 1995
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 from 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 $.7 million from 1995 to 1996. Customer hardware
service revenue decreased $.2 million due to the replacement of older product
lines with current products which require less maintenance than earlier product
lines. Software service revenue increased $.9 million due to software becoming
a larger component of the customer solution.
Engineering revenues 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 cost
of sales percentage of net sales decreased 5% from 70% in 1995 to 65% in 1996.
This decrease 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.)
Service expenses decreased by $1.1 million in 1996 principally due to a
decrease in salaries and fringe benefits resulting from a reduction in the work
force in late 1995.
Sales and marketing expenses increased $.3 million in 1996 primarily due to an
increase in the accounts receivable reserve.
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.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $3.1 million from 1996 to 1997 for the
reasons discussed below.
At December 31, 1997, the Company had no borrowings outstanding against its $4
million line of credit. The average borrowing level for 1997 was $.2 million
compared to $1.1 million for 1996. The change in borrowing level is due in
part to the increase in revenue realized in 1997 as well as the benefit of
management's focus on expense controls. The Company expects to receive a
commitment letter from the bank extending the maturity date of the bank line of
credit to May 27, 1999. The line of credit of $4 million ($2 million each for
the international and domestic lines) 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 $3.4 million of cash in 1997 compared to $3.1
million in 1996. The increase of $.3 million is mainly attributable to the
$5.8 million of net income realized in 1997 compared to the net income of $3.3
million in 1996. The effect of the net income increase was offset by
fluctuations in other balance sheet items as discussed below.
Non-cash expenses in 1997 were $3.2 million vs. $3.5 million 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, provisions for inventory
obsolescence and deferred taxes.
Net accounts receivable increased $6.4 million from 1996 reflective of the
increase in sales volume and scheduled payment terms with certain customers.
The increase is also due to a $1.7 million increase in systems currently
undergoing acceptance testing. The Company's revenue recognition policy,
relating to sales of certain equipment, records revenue upon acceptance of the
hardware and related application software.
Total inventories decreased $2.4 million from 1996 levels. Manufacturing
inventories decreased $1.9 million during the year mainly due to decreases in
work-in-process inventories of $2.3 million and decreases in stockroom
inventory of $.7 million due to the Company's focused effort to reduce
inventory levels. These decreases were offset by an increase in finished goods
inventory of $1.1 million due to the completion of several system orders for
delivery in the first quarter of 1998. Customer service inventory decreased
$.5 million from 1996, due to focused efforts to manage inventory levels and
increased amortization of parts inventory.
A deferred tax asset of $1.0 million and a deferred tax liability of $.5
million were recorded during 1997. (See Note I of the Consolidated Financial
Statements.)
Prepaid expenses and other decreased by $.3 million mainly due to the
amortization of prepaid engineering costs.
Net plant and equipment decreased $.3 million in 1997. This decrease is mainly
due to recorded depreciation of $1.3 million and asset disposals of $.2
million. Offsetting the depreciation were additions of $1.2 million compared
to 1996 additions of $2.6 million. A major component of the additions includes
$.5 million of capitalized leasehold improvements related to the renovation of
facilities in Manchester, Connecticut. Other 1997 additions of $.6 million
include the capitalization of engineering and manufacturing test equipment and
upgrades of internal network computers. During 1996, $1.2 million of additions
was related to the consolidation of facilities in Manchester, Connecticut.
Accounts payable and accrued expenses increased $.1 million from 1996 levels.
Although accounts payable decreased $.4 million due to improvements in the
just-in-time inventory procurement process, accrued expenses increased $.5
million compared to 1996 levels. The increase in accrued expenses was mainly
due to increases in current federal and state taxes.
Customer deposits increased $.2 million reflective of orders which required
deposits.
Deferred revenues, net of costs, increased $.7 million from 1996 levels, for
systems awaiting acceptance.
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<PAGE>
Report of Independent Auditors
Stockholders and Board of Directors
Scan-Optics, Inc.
We have audited the accompanying consolidated balance sheets of Scan-Optics,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Scan-
Optics, Inc. and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Ernst & Young LLP
Hartford, Connecticut
January 30, 1998
<PAGE>
<TABLE>
<CAPTION>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31
(thousands, except share data) 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 4,386 $ 1,279
Accounts receivable less allowance of $104 in
1997 and $673 in 1996 15,695 9,262
Inventories 12,547 14,920
Deferred tax asset 1,038
Prepaid expenses and other 969 1,274
------------------------------
Total current assets 34,635 26,735
Plant and equipment:
Equipment 13,355 14,094
Leasehold improvements 4,585 3,980
Office furniture and fixtures 1,275 1,248
------------------------------
19,215 19,322
Less allowances for depreciation and
amortization 15,355 15,147
------------------------------
3,860 4,175
Other assets 212 211
------------------------------
Total Assets $ 38,707 $ 31,121
==============================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31
(thousands, except share data) 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,071 $ 2,470
Notes payable to bank 98
Salaries and wages 1,984 1,940
Taxes other than income taxes 744 682
Income taxes 533 207
Customer deposits 2,565 2,323
Deferred revenues, net of costs 734
Other 1,361 1,697
------------------------------
Total current liabilities 9,992 9,417
Deferred tax liability 486
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, 7,218,455 shares in 1997
and 6,945,701 shares in 1996 144 139
Common stock Class A Convertible, par
value $.02 per share, authorized 3,000,000
shares; available for issuance 2,145,536
none issued or outstanding
Capital in excess of par value 35,025 34,297
Retained-earnings deficit (4,369) (10,159)
Foreign currency translation adjustments (421) (292)
Unearned ESOP compensation (132)
------------------------------
30,379 23,853
Less cost of common stock in treasury,
413,500 shares 2,646 2,646
------------------------------
Total stockholders' equity 27,733 21,207
------------------------------
Total Liabilities and Stockholders' Equity $ 38,707 $ 31,121
==============================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
SCAN-OPTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31
(thousands, except share data) 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Net sales $ 41,361 $ 30,275 $ 27,642
Service revenues 14,124 14,515 13,846
Engineering revenues 876 1,156 463
Other operating revenues 247 88 133
------------------------------------
Total revenues 56,608 46,034 42,084
Costs and Expenses
Cost of sales 25,066 19,622 19,487
Service expenses 10,400 9,544 10,613
Sales and marketing expenses 7,297 5,502 5,156
Research and development expenses 4,552 4,142 4,574
General and administrative expenses 3,737 3,939 3,142
Interest expense 14 102 488
-------------------------------------
Total costs and expenses 51,066 42,851 43,460
=====================================
Operating income (loss) 5,542 3,183 (1,376)
Other income, net 149 82 49
-------------------------------------
Income (loss) before income taxes 5,691 3,265 (1,327)
Income tax benefit (99) (9) (72)
-------------------------------------
Net Income (Loss) $ 5,790 $ 3,274 $ (1,255)
=====================================
Basic earnings (loss) per share $ .87 $ .50 $ (.19)
=====================================
Basic weighted-average shares 6,632,248 6,530,244 6,512,475
Diluted earnings (loss) per share $ .82 $ .49 $ (.18)
=====================================
Diluted weighted-average shares 7,070,013 6,715,942 6,620,099
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCAN-OPTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
Foreign
Capital in Retained- Currency Unearned
Common Stock Excess of Earnings Translation ESOP Treasury
(thousands, except share data) Shares Amount Par Value Deficit Adjustments Compensation Stock Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1995 6,905,480 $ 138 $ 34,202 $ (12,178) $ (388) $ (397) $ (2,646) $ 18,731
Issuance of common stock upon
exercise of stock options 29,104 1 69 70
Unearned ESOP compensation
amortization 132 132
Net loss (1,255) (1,255)
Foreign currency translation
adjustments 73 73
- --------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1995 6,934,584 139 34,271 (13,433) (315) (265) (2,646) 17,751
Issuance of common stock upon
exercise of stock options 10,517 26 26
Unearned ESOP compensation
amortization 133 133
Net income 3,274 3,274
Foreign currency translation
adjustments 23 23
- --------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1996 6,945,101 139 34,297 (10,159) (292) (132) (2,646) 21,207
Issuance of common stock upon
exercise of stock options and 273,354 5 728 733
Unearned ESOP compensation
amortization 132 132
Net income 5,790 5,790
Foreign currency translation
adjustments (129) (129)
- --------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1997 7,218,455 $ 144 $ 35,025 $ (4,369) $ (421) $ 0 $ (2,646) $ 27,733
==========================================================================================================================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
(thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ 5,790 $ 3,274 $ (1,255)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation 1,269 1,524 1,214
Amortization 1,396 1,123 1,034
Provision for losses on accounts receiva 424 711 236
Provision for inventory obsolescence 700 127
Deferred taxes (552)
Changes in operating assets and liabilities:
Accounts receivable (6,857) 324 (1,409)
Inventories 277 (2,424) (557)
Prepaid expenses and other 305 (13) (178)
Accounts payable (399) (392) 88
Accrued salaries and wages 44 1,031 (210)
Taxes other than income taxes 62 344 (10)
Income taxes 326 22 10
Deferred revenues, net of costs 734 (30)
Customer deposits 242 (3,577) 3,735
Other (335) 995 (274)
--------------------------------
Net cash provided by operating activities 3,426 3,069 2,394
Investing Activities
Purchases of plant and equipment (954) (1,890) (401)
--------------------------------
Net cash used by investing activities (954) (1,890) (401)
Financing Activities
Proceeds from issuance of common stock 733 26 70
Proceeds from borrowings 7,741 22,631 31,777
Principal payments on borrowings (7,839) (22,838) (33,737)
--------------------------------
Net cash provided (used) by financing
activities 635 (181) (1,890)
Increase in cash and cash equivalents 3,107 998 103
Cash and Cash Equivalents at Beginning of Year 1,279 281 178
--------------------------------
Cash and Cash Equivalents at End of Year $ 4,386 $ 1,279 $ 281
================================
Supplemental Cash Flow Information
Interest paid $ 18 $ 129 $ 502
================================
Income taxes paid $ 159 $ 26 $ 59
================================
</TABLE>
See accompanying notes.
<PAGE>
SCAN-OPTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- Accounting Policies
Organization: The Company combines technology, experience and expertise to
develop cost-effective solutions for applications that include government,
healthcare, insurance, transportation and order entry. The Company's systems,
software and services are marketed world-wide to commercial and government
organizations either directly by the Company sales organization or through
distributors. The Company's business is vulnerable to a number of factors
beyond its control. These include (1) the effect of a weakening in the
domestic and international economies which potentially impacts capital
investments by customers, (2) the cyclical nature of funding within federal and
state government agencies, (3) competition from similar products, (4) the
implementation of other technologies which may provide alternative solutions,
and (5) the stability of sole source suppliers.
Basis of Presentation: The consolidated financial statements include the
accounts of Scan-Optics, Inc. and its subsidiaries, all wholly-owned. All
intercompany accounts and transactions are eliminated in the consolidated
financial statements. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. While management believes that the
estimates and related assumptions used in the preparation of these financial
statements are appropriate, actual results could differ from those estimates.
Cash Equivalents: Highly liquid investments purchased with maturities of three
months or less are considered cash equivalents.
Inventories: Inventories are valued at the lower of cost (first-in, first-out
method) or market.
Plant and Equipment: Plant and equipment is stated on the basis of cost.
Depreciation is computed principally using the straight-line method over
periods of 3 to 10 years. Leasehold improvements are amortized over the useful
life of the improvements or the life of the lease, whichever is shorter.
Revenue Recognition: Revenues from maintenance and certain professional
services are recognized as earned. Revenues relating to sales of certain
equipment (principally optical character recognition equipment) are recognized
upon acceptance of the hardware and related application software.
Income Taxes: Deferred income taxes are provided for differences between the
income tax and the financial reporting bases of assets and liabilities at the
statutory tax rates that will be in effect when the differences are expected to
reverse.
<PAGE>
Stock Based Compensation: The Company generally grants stock options to key
employees and members of the board of directors with an exercise price equal to
the fair value of the shares on the date of grant. The Company accounts for
stock option grants in accordance with APB Opinion No. 25, Accounting for Stock
Issued to Employees, and, accordingly, recognizes no compensation expense for
the stock option grants. Therefore, the Company has elected the disclosure
provisions only of FASB Statement No. 123.
Earnings (Loss) Per Share: In 1997, the Financial Accounting Standards Board
issued Statement No. 128, Earnings per Share. Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where appropriate, restated to conform to
the Statement 128 requirements.
Foreign Currency Translation: The financial statements of foreign subsidiaries
have been translated into U.S. dollars in accordance with FASB Statement No.
52, Foreign Currency Translation. All balance sheet accounts have been
translated using the exchange rates in effect at the balance sheet date.
Statement of operations amounts have been translated using the average exchange
rate for the year. The gains and losses resulting from the changes in exchange
rates from year to year have been reported separately as a component of
stockholders' equity.
Year 2000 Compliance: The Company has addressed the compliance issues with its
products. All current standard operating systems are in the process of
modification to ensure Year 2000 compliance. Application software will be
changed at the request of the individual customer on a chargeable basis.
Customers of non-current products will be notified that the Company does not
plan to modify the operating systems to achieve Year 2000 compliance.
The Company recently put in place a team of individuals to analyze the internal
issues associated with the Year 2000 compliance. The costs and effects on
financial results of year 2000 compliance are unknown by the Company at this
time and are not expected to be material.
Reclassifications: Certain 1996 and 1995 amounts have been reclassified to
conform to current year presentation.
<TABLE>
<CAPTION>
NOTE B -- INVENTORIES
The components of inventories were as follows:
December 31
(thousands) 1997 1996
- ----------------------------------------------------------------------
(S) <C> <C>
Finished goods $ 2,586 $ 1,534
Work-in-process 3,823 6,084
Service parts 3,807 4,276
Materials and component parts 2,331 3,026
----------------------
$12,547 $14,920
======================
</TABLE>
<PAGE>
NOTE C -- CREDIT ARRANGEMENTS
The Company has a line of credit agreement (the "Agreement") with a bank which
expires on 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 December 31, 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 December 31,
1997). The weighted average interest rate on borrowings during 1997 and 1996
was 8.8% and 8.6% 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 $4,000,000 at December 31, 1997.
The Company expects to receive a commitment letter from the bank extending the
maturity date of the outstanding line of credit to May 27, 1999 based on the
same limitations and covenants in the current Agreement. The commitment letter
is subject to the extension of the guarantee by the third party bank on the
international line. The Company expects that the guarantee will be extended.
The carrying value of the notes payable to bank approximates its fair value.
NOTE D -- CAPITAL STOCK
The Board of Directors is authorized to issue shares of the Company's preferred
stock in series, to establish from time to time the number of shares to be
included in each series and to fix the designation, powers, preferences and
other terms and conditions with respect to such stock. No shares have been
issued to date.
Class A stock has the same rights as common stock, except that its holders may
not vote for the election of directors, and it is convertible into common stock
on a share for share basis. On September 2, 1994, all outstanding shares of
Class A stock were converted to common stock.
At December 31, 1997, the Company had reserved 1,078,886 shares of common stock
for the issuance or exercise of stock options. There are no shares reserved for
the exercise of warrants.
<TABLE>
<CAPTION>
NOTE E -- COMMON STOCK WARRANTS
At December 31, 1997, there were no warrants outstanding.
Price Per Share Shares
- ---------------------------------------------------------------------------
(S) <C> <C>
Warrants outstanding December 31, 1994, 1995 $ 3.63 - $ 5.38 43,000
===========================
Expired in 1996 $ 5.38 25,000
---------------------------
Warrants outstanding December 31, 1996 $ 3.63 18,000
===========================
Exercised in 1997 $ 3.63 18,000
---------------------------
Warrants outstanding December 31, 1997 $ .00 0
===========================
</TABLE>
NOTE F -- STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB No. 25) and related
interpretations in accounting for its stock options. Under APB No. 25, because
the exercise price of the Company's stock options equals market price of the
underlying stock on the date of grant, no compensation expense is recognized.
The Company has five stock option plans for key employees and board members.
Options granted under the plans are for a period of ten years and at prices not
less than the fair market value of the shares at date of grant except that the
price for non-qualified options may not be less than the par value of the
stock. Options for employees are not exercisable for one year following the
date of grant and then are exercisable in such installments during the period
prior to expiration as the Stock Option Committee shall determine. Options for
Directors are not exercisable until six months after the grant thereof.
Options may be exercised from time to time, in part or as a whole, on a
cumulative basis as determined by the Stock Option Committee under all stock
option plans.
<PAGE>
<TABLE>
<CAPTION>
The following schedule summarizes the changes in stock options for each of the
three years in the period ended December 31, 1997:
Number of Option Price
Shares Per share
- ------------------------------------------------------------------------------------
(S) <C> <C>
Outstanding January 1, 1995 (531,273 exercisable) 774,517 $ 1.50 to $ 9.63
Granted 91,000 2.13 to 6.00
Exercised (29,104) 2.00 to 3.25
Canceled (49,698) 2.00 to 9.25
-------------------------------
Outstanding December 31, 1995 (587,260 exercisable) 786,715 1.50 to 9.63
1996 Activity
- -------------
Granted 124,000 3.25 to 4.75
Exercised (10,517) 1.50 to 3.25
Canceled (41,484) 2.13 to 9.63
-------------------------------
Outstanding December 31, 1996 (567,991 exercisable) 858,714 1.50 to 9.63
1997 Activity
- -------------
Granted 217,500 4.68 to 9.19
Exercised (255,354) 1.50 to 6.00
Canceled (3,467) 3.38 to 9.63
--------------------------------
Outstanding December 31, 1997 (679,688 exercisable) 817,393 $ 1.50 to $ 9.19
================================
</TABLE>
At December 31, 1997 there were 261,493 options available for grant.
Pro forma information regarding net income and earnings per share is required
by FASB Statement No. 123, and has been determined as if the Company had
accounted for its stock options under the fair value method of that Statement.
The fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model.
Option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. The assumptions used in the
valuation model were: risk free interest rate - 7%, expected life - 10 years
and expected volatility range of .449 to .786.
Because the Company's stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
<PAGE>
For the purpose of pro forma disclosures, the estimated fair value of the stock
options is expensed ratably over the vesting period which is 36 months for key
employees and 6 months for the Board of Directors. The Company's pro forma
information follows:
<TABLE>
<CAPTION>
DECEMBER 31
(thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
(S) <C> <C> <C>
Net income, as previously reported $ 5,790 $ 3,274 $(1,255)
Stock option expense 351 211 119
---------------------------
Pro forma net income $ 5,439 $ 3,063 $(1,374)
===========================
Basic earnings per share, as previously reported $ .87 $ .50 $ (.19)
Stock option expense .05 .03 .02
---------------------------
Pro forma basic earnings per share $ .82 $ .47 $ (.21)
===========================
Diluted earnings per share, as previously reported $ .82 $ .49 $ (.18)
Stock option expense .05 .03 .02
---------------------------
Pro forma diluted earnings per share $ .77 $ .46 $ (.20)
===========================
</TABLE>
NOTE G -- RESEARCH AND DEVELOPMENT AGREEMENTS
During 1990, the Company entered into two separate agreements for the
development of new product technology, which provided a total funding of
$3,645,000 over an eighteen month period. Revenues related to these
development projects were recorded through 1992, which offset related costs
incurred to successfully develop the products. The agreements provide the
respective third party with exclusive rights to market the developed product in
its geographic market area while the Company will manufacture the product and
retain ownership and all other distribution rights. Royalties and sales
discounts, up to a maximum of 130% of the amount advanced to the Company, were
required based on sales of the new product technology through the termination
dates of the agreements, June 30, 1995 and December 31, 1996. As of December
31, 1996, the Company had repaid $4,738,000 or 100% of the maximum potential
obligation.
During 1995, the Company entered into $700,000 of product development
agreements with a specific customer, which required various modifications and
enhancements to the Company's Series 9000 product. The Company recorded
revenue related to this development agreement of $336,000 in 1995 and $364,000
in 1996. These revenues offset related costs incurred to develop the
modifications and enhancements. The ownership of the technologies created as a
result of this development agreement remains with the Company. No royalties or
other considerations are required as a part of this agreement.
During 1997, the Company entered into a $636,000 product development agreement
with a specific customer, which required various modifications and enhancements
to the Company's Series 9000 product. The Company recorded all revenue related
to this development agreement in 1997. These revenues offset related costs
incurred to develop the modifications and enhancements. The ownership of the
technologies created as a result of this development agreement remains with the
Company. No royalties or other considerations are required as a part of this
agreement.
NOTE H -- EMPLOYEE BENEFITS
The Company maintains a Retirement Savings Plan for United States employees.
Under this plan, all employees may contribute up to 15% of their salary to a
retirement account up to the maximum amount allowed by law. The Company
contributed an amount equal to 50% of the first 4% contributed by the
participant in 1997, 1996 and 1995. The Company's contributions to this plan
were $215,000, $189,000, and $205,000 for 1997, 1996, and 1995, respectively.
The Company sponsors an Employee Stock Ownership Plan (the "Plan") covering
substantially all full-time employees. The Plan, which is a tax qualified
employee benefit plan, was adopted by the Board of Directors of the Company on
January 29, 1988 to provide retirement benefits for employees. The Plan
borrowed $1,325,000 to purchase 260,000 shares of the Company's stock to be
allocated to participants ratably over a ten year period. The ESOP loan was
guaranteed by the Company and the outstanding balance of the loan was repaid in
1991. At December 31, 1997, all shares had been allocated. In 1997, 1996, and
1995 the expenses related to the Plan were $132,481 each year. The Company, at
its discretion may make annual allocations to the Plan in the future.
NOTE I -- INCOME TAXES
At December 31, 1997, the Company has approximately $3,800,000 of net operating
loss carryforwards for foreign income tax purposes which are scheduled to
expire periodically between 1998 and 2005. At December 31, 1996, the Company
had approximately $5,300,000, $4,300,000 and $2,900,000 of net operating loss
carryforwards for federal, state and foreign income tax purposes, respectively.
The net operating loss carryforwards for federal and state purposes were
utilized during 1997. For financial reporting purposes a valuation allowance
has been recorded for 1997 to offset a significant portion of the deferred tax
assets related to the foreign net operating loss carryforwards and other
temporary differences. In 1996, the valuation allowance was recorded to offset
all of the deferred tax assets related to the carryforwards and other temporary
differences.
<PAGE>
<TABLE>
<CAPTION>
Significant components of the Company's deferred tax liabilities and assets
were as follows:
December 31
(thousands) 1997 1996
- -------------------------------------------------------------------------
(S) <C> <C>
Deferred tax assets:
Net operating losses $ 1,479 $ 3,108
Depreciation 92 106
Inventory valuation 275 101
Deferred revenue 130
Accounts receivable reserves 36 231
Revenue recognition 347 13
Vacation accrual 193 245
Other 287 258
---------------------
Total deferred tax assets 2,839 4,062
Deferred tax liabilities:
Depreciation and other (486) (390)
Sales type lease (73)
Inventory (80) (156)
----------------------
Total deferred tax liabilities (566) (619)
Valuation allowance (1,721) (3,443)
----------------------
Net deferred taxes $ 552 $ 0
======================
</TABLE>
<TABLE>
<CAPTION>
For financial reporting purposes, income (loss) before income taxes is set
forth in the following tabulation:
Year Ended December 31
(thousands) 1997 1996 1995
- --------------------------------------------------------------------------
(S) <C> <C> <C>
Domestic $ 6,649 $ 4,523 $ (407)
Foreign (958) (1,258) (920)
------------------------------------
Income (loss) before income taxes $ 5,691 $ 3,265 $(1,327)
====================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Income taxes (benefit) are summarized as follows:
Year Ended December 31
(thousands) 1997 1996 1995
- --------------------------------------------------------------------------
(S) <C> <C> <C>
Currently payable (refundable):
Federal $ 418
State 68 $ 60 $ 60
Foreign (33) (69) (132)
-------------------------------
Total current payable (refundable) $ 453 $ (9) $ (72)
===============================
Deferred payable (refundable):
Federal $ (491)
State (61)
Foreign
-------------------------------
Total deferred payable (refundable) $ (552)
===============================
Total income taxes (benefit) $ (99) $ (9) $ (72)
===============================
</TABLE>
<TABLE>
<CAPTION>
A reconciliation of the statutory tax rate to the effective rate is as follows:
Year Ended December 31
1997 1996 1995
- ------------------------------------------------------------------------------
(S) <C> <C> <C>
Statutory federal income tax rate 34% 34% (34%)
State income taxes, net of federal benefit 2 5
Foreign sales corporation benefit (5)
Foreign income taxes (benefit) (1) (2) (10)
Net operating loss carryforward
(benefit) limitation (30) (34) 34
-----------------------------
Effective tax rate (2)% 0% (5%)
=============================
<PAGE>
NOTE J -- LEASE COMMITMENTS
The Company's principal lease commitments are for its corporate office and
manufacturing facility in Manchester, Connecticut and its research and
development facility in Berkeley, California. The Manchester lease expires on
December 31, 2006 and the Berkeley lease expires on December 31, 2000. Minimum
rental payments for all noncancelable leases which are operating leases with
terms equal to or in excess of one year as of December 31, 1997 are as follows:
</TABLE>
<TABLE>
<CAPTION>
Operating
(thousands) Leases
- ------------------------------------------------------------------
<S> <C>
1998 $ 531
1999 481
2000 385
2001 334
2002 332
Thereafter 1,417
--------
Total minimum lease payments $ 3,480
========
</TABLE>
Rental expense for the years ended December 31, 1997, 1996, and 1995 was
$580,000, $678,000, and $887,000, respectively.
NOTE K -- CONTINGENCIES
There are certain claims pending against the Company which arose in the normal
course of business. In the opinion of management, the ultimate outcome of
these matters will not have a material impact on the Company's financial
position, results of operations or liquidity.
NOTE L -- SEGMENT INFORMATION
Export sales by geographic area were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
(thousands) 1997 1996 1995
- ---------------------------------------------------------------------------
(S) <C> <C> <C>
Latin America and South America $ 2,207 $ 113 $ 375
Europe 37 433 1,468
Pacific Rim 24,894 18,281 14,143
------------------------------------
$ 27,138 $ 18,827 $ 15,986
====================================
</TABLE>
In 1997, 1996 and 1995, one customer accounted for approximately 39%, 38% and
31% of consolidated revenues, respectively.
<PAGE>
NOTE M -- BILL AND HOLD TRANSACTIONS
Revenue relating to sales of certain equipment (principally optical character
recognition equipment) are recognized upon acceptance of the related
application software. When customers, under the terms of specific orders or
contracts, request that the Company manufacture and invoice the equipment on a
bill and hold basis, the Company recognizes revenue based upon an in-house
acceptance test that is certified by the customer. Revenues recorded during
1997 and 1996 included bill and hold transactions of $12.1 million and $10.8
million, respectively. Accounts receivable included bill and hold receivables
of $4.7 million and $4.9 million at December 31, 1997 and 1996, respectively.
NOTE N -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
December 31
1997 1996 1995
--------------------------------------
(S) <C> <C> <C>
Numerator:
Net Income (loss) $ 5,790 $ 3,274 $ (1,255)
======================================
Denominator:
Denominator for basic earnings
per share (weighted-average shares) 6,632,248 6,530,244 6,512,475
Effect of dilutive securities:
Employee stock options 437,765 185,698 107,624
Denominator for diluted earnings
per share (adjusted weighted-
average shares and assumed
conversions) 7,070,013 6,715,942 6,620,099
======================================
Basic earnings (loss) per share $ .87 $ .50 $ (.19)
======================================
Diluted earnings (loss) per share $ .82 $ .49 $ (.18)
======================================
</TABLE>
<PAGE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information pertaining to Directors and additional information pertaining to
Executive Officers is included, under the caption "Governance of the Company",
and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in
the Company's definitive proxy statement for the Annual Meeting of Stockholders
to be held on May 21, 1998 and is incorporated herein by reference and made a
part hereof.
ITEM 11 - EXECUTIVE COMPENSATION
This information is included in the Company's definitive proxy statement for
the Annual Meeting of Stockholders to be held on May 21, 1998 and is
incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is included, under the caption "Share Ownership of
Management", in the Company's definitive proxy statement for the Annual Meeting
of Stockholders to be held on May 21, 1998 and is incorporated herein by
reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is included, under the caption "Certain Transactions", in the
Company's definitive proxy statement for the Annual Meeting of Stockholders to
be held on May 21, 1998 and is incorporated herein by reference.
<PAGE>
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) The following consolidated financial statements and report of independent
auditors of the Company and its subsidiaries are included in Item 8:
(1) Report of Independent Auditors:
Consolidated Balance Sheets at December 31, 1997 and 1996
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements - December 31, 1997
(2) The following consolidated financial statement schedule is
included in Item 14(a):
Schedule II -- Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
(3) LISTING OF EXHIBITS
*3.1(a) Certificate of Incorporation, including amendments thereto
(filed as Exhibit 3.1 to the Company's Registration Statement
on Form S-1, File No. 2-70277).
*3.1(b) Amendments to Certificate of Incorporation adopted May 17,
1984, included in Exhibits A, B, C and D in the Company's
proxy statement dated April 17, 1984 for the Annual Meeting of
Stockholders held May 17, 1984.
*3.1(c) Amendment to Article Tenth of the Certificate of
Incorporation included as Exhibit A in the Company's proxy
statement dated April 16, 1987 for the Annual Meeting of
Stockholders held May 19, 1987
<PAGE>
*3.2(a) By-laws of the Company (filed as Exhibit 3.2 to the
Company's Registration Statement on Form S-1, File No.
2-70277).
*3.2(b) Amendments to By-laws of the Company adopted May 17, 1984,
included in Exhibits A and B in the Company's proxy statement
dated April 17, 1984 for the Annual Meeting of Stockholders
held May 17, 1984.
*3.2(c) Amendment to By-laws of the Company adopted at the meeting of
the Board of Directors on January 28, 1991, included as
Exhibit 3.2(c) in the Company's Annual Report on Form 10K
filed for the year ended December 31, 1991.
*+10.1 The Scan-Optics, Inc. 1979 Incentive and Non-Qualified Stock
Option Plan included in Exhibit B in the Company's Proxy
statement dated June 8, 1979 for the Annual Meeting of
Stockholders held on June 27, 1979.
* +10.2 The Scan-Optics, Inc. 1984 Incentive and Non-Qualified Stock
Option Plan included in Exhibit E in the Company's Proxy
statement dated April 19, 1984 for the Annual Meeting of
Stockholders held on May 17, 1984.
<PAGE>
* +10.3 The Scan-Optics, Inc. 1987 Incentive and Non-
Qualified Stock Option Plan included in Exhibit B in the
Company's Proxy statement dated April 16, 1987 for the Annual
Meeting of Stockholders held on May 19, 1987.
* +10.4 The Scan-Optics, Inc. 1990 Incentive and Non-Qualified Stock
Option Plan included in Exhibit A in the Company's Proxy
statement dated April 30, 1990 for the Annual Meeting of
Stockholders held on June 12, 1990.
* +10.5 The Scan-Optics, Inc. 1990 Stock Option Plan for Outside
Directors included in Exhibit B in the Company's Proxy
statement dated April 30, 1990 for the Annual Meeting of
Stockholders held on June 12, 1990.
* +10.6 Employment agreement between Richard I. Tanaka and Scan-
Optics, Inc. effective September 5, 1989, included as Exhibit
10.7 in the Company's Annual Report on Form 10-K filed for the
year ended December 31, 1991.
* +10.7 Severance agreement between Clarence W. Rife and Scan-Optics,
Inc. dated December 17, 1986, included as Exhibit 10.8 in the
Company's Annual Report on Form 10-K filed for the year ended
December 31, 1991.
* +10.8 Executive severance agreement between certain officers and
Scan-Optics, Inc. dated July 28, 1992, included as Exhibit
10.8 in the Company's Annual Report on Form 10-K filed for the
year ended December 31, 1992.
+10.9 Amendment No. 1 to Employment Agreement, dated as of December
31, 1996, between Scan-Optics, Inc. and Richard I. Tanaka.
+10.10 Employment agreement, effective as of December 31, 1996,
between Scan-Optics, Inc. and James C. Mavel.
* 22. List of subsidiaries of the Company, included as Exhibit 10.8
in the Company's Annual Report on Form 10-K filed for the year
ended December 31, 1993.
23. Consent of Independent Auditors.
27. Financial Data Schedule.
* Exhibits so marked have heretofore been filed by the Company with the
Securities and Exchange Commission and are incorporated herein by reference.
+ Management contract for compensatory plan or arrangement required to
be filed as an exhibit to this form pursuant to Item 14(c) of this report.
(b) Reports on Form 8-K
No report on Form 8-K was filed for the quarter ended December
31, 1997.
(c) Exhibits
The exhibits required by this item are included herein.
(d) Financial Statement Schedule
The response to this portion of Item 14 is submitted as a
separate section of this report.
<PAGE>
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: /s/ James C. Mavel
James C. Mavel
Chairman, Chief Executive Officer,
President and Director
Date: February 23, 1998
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.
/s/ James C. Mavel
James C. Mavel Chairman, Chief Executive Officer,
President and Director
(Principal Executive Officer)
Date: February 23, 1998
/s/ Michael J. Villano
Michael J. Villano Chief Financial Officer and Vice President
(Principal Financial and Accounting Officer)
Date: February 23, 1998
/s/ Logan Clarke, Jr.
Logan Clarke, Jr. Director February 23, 1998
/s/ Richard J. Coburn
Richard J. Coburn Director February 23, 1998
/s/ E. Bulkeley Griswold
E. Bulkeley Griswold Director February 23, 1998
/s/ Lyman C. Hamilton, Jr.
Lyman C. Hamilton, Jr. Director February 23, 1998
/s/ Robert H. Steele
Robert H. Steele Director February 23, 1998
A majority of the Directors
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
SCAN-OPTICS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
----------------------
Additions
----------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions(1) Period
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended
December 31, 1997: $ 673 $ 424 $ 993 $ 104
Reserve for doubtful
accounts
Year ended
December 31, 1996: $ 413 $ 711 $ 451 $ 673
Reserve for doubtful
accounts
Year ended
December 31, 1995: $ 279 $ 236 $ 102 $ 413
Reserve for doubtful
accounts
(1) Uncollectible accounts written off, net of recoveries
</TABLE>
<PAGE>
EXHIBIT 23 -- CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-37253, Form S-8 No. 33-37829, Form S-8 No. 33-16362, Form S-8
No. 2-93268 and Form S-8 No. 2-65503) of Scan-Optics, Inc. of our report dated
January 30, 1998, with respect to the consolidated financial statements and
schedule of Scan-Optics, Inc. and subsidiaries included in the Annual Report
(Form 10-K) for the year ended December 31, 1997.
Ernst & Young LLP
Hartford, Connecticut
February 20, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CAPTION>
EXHIBIT 27.
SCAN-OPTICS, INC.
FINANCIAL DATA SCHEDULE
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 4,386,000 1,279,000 281,000
<SECURITIES> 0 0 0
<RECEIVABLES> 15,695,000 9,262,000 10,297,000
<ALLOWANCES> 104,000 673,000 413,000
<INVENTORY> 12,547,000 14,920,000 13,746,000
<CURRENT-ASSETS> 34,635,000 26,735,000 25,585,000
<PP&E> 19,215,000 19,322,000 18,149,000
<DEPRECIATION> 15,355,000 15,147,000 14,340,000
<TOTAL-ASSETS> 38,707,000 31,121,000 29,514,000
<CURRENT-LIABILITIES> 9,992,000 9,417,000 11,346,000
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 144,000 139,000 139,000
<OTHER-SE> 27,589,000 21,068,000 17,612,000
<TOTAL-LIABILITY-AND-EQUITY> 38,707,000 31,121,000 29,514,000
<SALES> 41,361,000 30,275,000 27,642,000
<TOTAL-REVENUES> 56,608,000 46,034,000 42,084,000
<CGS> 25,066,000 19,622,000 19,487,000
<TOTAL-COSTS> 51,066,000 42,851,000 43,460,000
<OTHER-EXPENSES> 149,000 82,000 49,000
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> 5,691,000 3,265,000 (1,327,000)
<INCOME-TAX> (99,000) (9,000) (72,000)
<INCOME-CONTINUING> 5,790,000 3,274,000 (1,255,000)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 5,790,000 3,274,000 (1,255,000)
<EPS-PRIMARY> .87 .49 (.19)
<EPS-DILUTED> .82 .49 (.19)
</TABLE>
