UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
( X ) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended MARCH 31, 1999
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( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File No. 0-5265
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SCAN-OPTICS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 06-0851857
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
169 PROGRESS DRIVE, MANCHESTER, CT 06040
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(Address of principal executive offices) Zip Code
(860) 645-7878
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. ( X ) YES ( ) NO
The number of shares of common stock, $.02 par value, outstanding as of May 12,
1999 was 7,396,232.
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<TABLE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(thousands, except share data) March 31, 1999 December 31, 1998
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(UNAUDITED)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 234 $ 216
Accounts receivable less allowance of $192
at March 31, 1999 and $206
at December 31,1998 21,630 22,725
Inventories 10,694 11,478
Deferred taxes 930 960
Deferred costs, net of revenues 419 502
Prepaid expenses and other 919 1,012
---------------------------------
Total current assets 34,826 36,893
Plant and equipment:
Equipment 13,861 13,601
Leasehold improvements 4,830 4,815
Office furniture and fixtures 1,311 1,307
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20,002 19,723
Less allowances for depreciation and 16,612 16,367
---------------------------------
ammortization 3,390 3,356
Goodwill, net 11,820 12,110
Other assets 1,483 633
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Total Assets $ 51,519 $ 52,992
=================================
(thousands, except share data) March 31, 1999 December 31, 1998
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(UNAUDITED)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 3,936 $ 5,487
Notes payable to bank 11,545 11,524
Salaries and wages 1,023 2,007
Taxes other than income taxes 867 691
Income taxes 35
Customer deposits 1,132 99
Other 1,827 1,943
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Total current liabilities 20,330 21,786
Deferred taxes 171 263
Other liabilities 697 697
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, 7,391,232 shares at March 31, 1999
and 7,370,482 shares at December 31, 1998 148 147
Common stock Class A Convertible, par
value $.02 per share, authorized 3,000,000
shares; available for issuance 2,145,536
shares; none issued or outstanding
Capital in excess of par value 35,555 35,501
Retained-earnings deficit (2,160) (2,240)
Foreign currency translation adjustments (576) (516)
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32,967 32,892
Less cost of common stock in treasury,
413,500 shares 2,646 2,646
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Total stockholders' equity 30,321 30,246
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Total Liabilities and Stockholders'
Equity $ 51,519 $ 52,992
==================================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
SCAN-OPTICS, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
March 31
(thousands, except share data) 1999 1998
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<S> <C> <C>
Revenues
Product sales $ 6,579 $ 8,538
Service revenues 6,571 4,256
Engineering revenues 73 67
Other operating revenues 9 31
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Total revenues 13,232 12,892
Costs and Expenses
Cost of product sales 4,481 5,739
Service expenses 4,538 2,930
Sales and marketing expenses 1,359 1,353
Research and development expenses 1,484 1,284
General and administrative expenses 1,081 943
Interest expense 222
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Total costs and expenses 13,165 12,249
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Operating income 67 643
Other income, net 52 61
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Income before income taxes 119 704
Income taxes 39 276
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Net Income $ 80 $ 428
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Basic earnings per share $ .01 $ .06
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Basic weighted-average shares 6,965,521 6,812,689
Diluted earnings per share $ .01 $ .06
===============================
Diluted weighted-average shares 7,068,944 7,149,461
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
March 31
(thousands) 1999 1998
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<S> <C> <C>
Operating Activities
Net income $ 80 $ 428
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation 237 298
Amortization 411 402
Amortization of goodwill 290
Provision for losses on accounts receivable 10
Deferred taxes (62) 242
Changes in operating assets and liabilities:
Accounts receivable 1,085 1,893
Inventories 373 2,376
Prepaid expenses and other 93 318
Accounts payable (1,551) (778)
Accrued salaries and wages (984) (1,046)
Taxes other than income taxes 176 (374)
Income taxes (35) (708)
Deferred costs, net of revenues 83 (87)
Customer deposits 1,033 (2,274)
Other (1,026) (36)
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Net cash provided by operating activities 213 654
Investing Activities
Purchases of plant and equipment (271) (157)
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Net cash used by investing activities (271) (157)
Financing Activities
Proceeds from issuance of common stock 55 64
Proceeds from borrowings 11,385
Principal payments on borrowings (11,364)
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Net cash provided by financing activities 76 64
Increase in cash and cash equivalents 18 561
Cash and Cash Equivalents at Beginning of Year 216 4,386
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Cash and Cash Equivalents at End of Period $ 234 $ 4,947
=============================
See accompanying notes.
</TABLE>
<PAGE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Quarter Ended March 31, 1999
NOTE 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month period
ended March 31, 1999, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1998.
Certain 1998 amounts have been reclassified to conform to current year
presentation.
NOTE 2 - Inventories
The components of inventories were as follows:
<TABLE>
March 31 December 31
(THOUSANDS) 1999 1998
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<S> <C> <C>
Finished goods $ 1,863 $ 1,885
Work-in-process 1,298 2,129
Service parts 3,816 3,808
Materials and component parts 3,717 3,656
---------------------------------
$ 10,694 $ 11,478
=================================
</TABLE>
NOTE 3 - Acquisition Activities
The Company recently announced the signing of a memorandum of agreement to
acquire the Photomatrix Scanner and Maintenance Division of Photomatrix Imaging
Corporation of Carlsbad, California, including certain product and technology
rights. The acquisition is subject to the negotiation and execution of a
definitive asset purchase agreement, a related agreement for Photomatrix to
manufacture certain products for the Company, and the approval of the Boards of
Directors of both corporations.
<PAGE>
NOTE 4 - Credit Arrangements
On May 28, 1998, the Company amended its credit agreement (the "Agreement")
with a bank to extend the maturity date to May 27, 1999 and to increase the
line from $4 million to $10 million. Subsequently, the line of credit was
increased from $10 million to $13 million through May 27, 1999. 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 line bears interest at prime and the unused
portion of the line is subject to a commitment fee of 3/8% per annum. The
available balance on the line of credit was $1,455,000 at March 31, 1999.
There were no borrowings during the first quarter of 1998. The weighted
average interest rate on borrowings during the first quarter of 1999 was 7.84%.
The Company negotiated changes to the line of credit effective May 10, 1999.
The $13 million line of credit has been reduced to $10 million with a three
year term. The unused portion of the line continues to be subject to a
commitment fee of 3/8% per annum. Additionally, a five year term loan in the
amount of $10 million has been established to better match the cash
expenditures for acquisitions with the cash flow that results from the acquired
businesses. The term loan contains covenants which, among other things,
require the maintenance of specified working capital, debt to equity ratios,
net income levels, tangible net worth levels and backlog levels. Both the line
of credit and the term loan bear interest at prime.
NOTE 5 - Income Taxes
At March 31, 1999, the Company has approximately $350,000, $2,600,000 and
$800,000 of net operating loss carryforwards for Canada, the United Kingdom and
Germany respectively, which are scheduled to expire periodically between 1999
and 2005. At March 31, 1998, the Company had approximately $450,000,
$2,600,000 and $700,000 of net operating loss carryforwards for Canada, the
United Kingdom and Germany, respectively. For financial reporting purposes, a
valuation allowance has been recorded for the first quarter of 1999 to offset a
significant portion of the deferred tax assets related to the foreign net
operating loss carryforwards and other temporary differences.
Significant components of the Company's deferred tax liabilities and assets
were as follows:
<TABLE>
March 31 December 31
(THOUSANDS) 1999 1998
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<S> <C> <C>
Deferred tax assets:
Net operating losses $ 1,444 $ 1,475
Depreciation 92 92
Inventory valuation 174 174
Inventory 153 115
Deferred maintenance revenue 133 178
Accounts receivable reserves 26 26
Goodwill 89 59
Revenue recognition - systems undergoing
acceptance testing 6 29
Vacation accrual 187 188
Other 162 162
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Total deferred tax assets 2,466 2,498
Deferred tax liabilities:
Depreciation and other (21) (84)
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Total deferred tax liabilities (21) (84)
Valuation allowance (1,686) (1,717)
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Net deferred taxes $ 759 $ 697
===========================
</TABLE>
NOTE 6 - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
March 31 March 31
1999 1998
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<S> <C> <C>
Numerator:
Net income $ 80 $ 428
=============================
Denominator:
Denominator for basic earnings
per share (weighted-average shares) 6,965,521 6,812,689
Effect of dilutive securities:
Employee stock options 103,423 336,772
Denominator for diluted earnings
per share (adjusted weighted-average -----------------------------
shares and assumed conversions) 7,068,944 7,149,461
=============================
Basic earnings per share $ .01 $ .06
=============================
Diluted earnings per share $ .01 $ .06
=============================
</TABLE>
NOTE 7 - Year 2000 Compliance
The Company is continuing to devote significant resources to minimize the risk
of potential disruption from the Year 2000 problem. In general terms, the
problem arises from the fact that many existing computer systems and other
equipment containing date-sensitive embedded technology (including non-
information technology equipment and systems) use only two digits to identify a
year in the date field, with the assumption that the first two digits of the
year are always "19". As a result of this and other common date-related
programming errors (collectively, the "Year 2000 problem"), such systems may
misinterpret dates after December 31, 1999, which may result in
miscalculations, other malfunctions or the total failure of such systems.
Because the Company is dependent upon the proper functioning of computer
systems and other equipment containing date-sensitive technology, a failure of
such systems and equipment to be Year 2000 compliant could have a material
adverse effect on the Company. If not remedied, potential risks include
business interruption or shutdown, financial loss, regulatory actions and legal
liability.
The Company has established a Year 2000 task force comprised of senior
management and operating personnel to coordinate its Year 2000 efforts. This
task force has been evaluating the Company's exposure to the Year 2000 problem
and has prepared a preliminary written plan for managing the risks and costs
associated with the Year 2000 problem.
The Company's process of addressing the Year 2000 problem consists of the
following steps: (a) inventorying products and services, systems, equipment and
other items (including those of third parties) that potentially present a Year
2000 problem, (b) determining the materiality of such items to the Company, (c)
assessing the Year 2000 compliance of the material items through internal
testing and outside certification, (d) repairing, replacing or preparing for
the failure of material items that are determined to be non-compliant, (e)
testing repaired or replaced items, and (f) to the extent advisable, designing
and implementing contingency plans.
The Company is aware and has informed each of its customers for whom it has
current information that certain of its products, systems and applications
developed, produced or sold, to the extent they are date sensitive at all, may
not be Year 2000 compliant. Since the Company sells systems that are designed
and integrated to order, the Company also reminded its customers that it is the
customers' responsibility to test the products, systems and applications
purchased by them to determine whether such items are Year 2000 compliant. The
Company has offered to its customers, where applicable, upgrades or consulting
assistance at the customer's cost. The Company has also posted information
regarding the Year 2000 compliance of its products, systems and applications on
its web site at www.scanoptics.com.
In order to improve access to business information through common, integrated
computing systems worldwide, the Company recently completed the replacement of
its internal corporate information system and several other systems with
systems that use programs primarily from SAP America, Inc. The implementation
of the new systems, which are expected to make substantially all of the
Company's internal corporate computer systems Year 2000 compliant, was
completed March 1, 1999. The vendors of all new systems have certified them as
being Year 2000 compliant. The Company intends to perform independent Year
2000 testing of these systems, and the testing is expected to be completed
during the second quarter of 1999.
The Company has completed its inventory of other systems, equipment and items
that potentially present a Year 2000 problem. The Company in the process of
performing internal testing, and seeking outside certification, of material
inventoried items, and expects to complete such assessment by the end of the
second quarter of 1999. While the Company will not know the nature and extent
of required repairs and replacements of non-compliant systems and equipment
until such assessment is completed, it currently anticipates completing and
testing such repairs and replacements by June 1999.
In addition to its own systems and equipment, the Company depends upon the
proper function of computer systems and other date-sensitive equipment of
outside parties. These parties include banks, telecommunications service
providers, electric and other utilities and significant suppliers. The Company
has contacted most of such parties to determine the extent to which they are
vulnerable to the Year 2000 problem, and expects to complete this process
during the second quarter of 1999. The Company does not currently have
sufficient information about the Year 2000 exposure or remediation plans of
such parties to predict the risk they pose to the Company. If the third
parties with which the Company interacts have Year 2000 problems that are not
remedied, resulting problems could include the loss of telecommunications and
electrical service, the receipt of inaccurate financial and billing-related
information, and the disruption of capital flow potentially resulting in
liquidity stress.
Due to the uncertainties presented by such third party Year 2000 problems, and
the possibility that, despite its efforts, the Company may be unsuccessful in
preparing its internal systems and equipment for the Year 2000, the Company is
developing contingency plans for dealing with the most reasonably likely worst
case scenarios. The exact nature and scope of the Company's contingency plans
will be based upon an analysis of information gathered during the inventory,
assessment and remediation phases of its Year 2000 program. The Company expects
to complete its contingency planning during the second quarter of 1999, and to
have all contingency systems in place and fully tested by the fourth quarter of
1999.
The Company estimates that, as of March 31, 1999, its costs of addressing the
Year 2000 problem have been less than $100,000. The Company's best estimate at
this time of the future costs of addressing the Year 2000 problem is that the
costs will not exceed an additional $200,000. The Company has funded, and
expects to continue to fund, the costs of its Year 2000 efforts through
operating cash flow, and to expense such costs as incurred.
This description of matters relating to the Year 2000 problem contains a number
of forward-looking statements. (See the Outlook section in Management's
Discussion and Analysis of Consolidated Financial Condition and Results of
Operations.) The Company's assessment of the costs of its Year 2000 program
and the timetable for completing its Year 2000 preparations are based on
current estimates, which reflect numerous assumptions about future events,
including the continued availability of certain resources, the timing and
effectiveness of third-party remediation plans and other factors. The Company
can give no assurance that these estimates will be achieved, and actual results
could differ materially from those currently anticipated. In addition, there
can be no assurance that the Company's Year 2000 program will be effective or
that its contingency plans will be sufficient. Specific factors that might
cause material differences include, but are not limited to, the availability
and cost of personnel trained in this area, the ability to locate and correct
relevant computer software codes and embedded technology, the results of
internal and external testing and the timeliness and effectiveness of
remediation efforts of third parties.
NOTE 8 - Comprehensive Income
The components of comprehensive income, net of related tax, for the three-
months ended March 31, 1999 and 1998 are as follows:
<TABLE>
March 31 March 31
(THOUSANDS) 1999 1998
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<S> <C> <C>
Net income $ 80 $ 428
Foreign currency translation adjustments (40) 22
----------------------------
Comprehensive income $ 40 $ 450
============================
</TABLE>
The components of accumulated comprehensive income, net of related tax, at
March 31, 1999 and December 31, 1998 are as follows:
<TABLE>
March 31 December 31
(THOUSANDS) 1999 1998
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<S> <C> <C>
Foreign currency translation adjustments $ (513) $ (473)
----------------------------
Accumulated comprehensive income $ (513) $ (473)
============================
</TABLE>
<PAGE>
NOTE 9 - Segment Information
The Company views its business in three distinct revenue categories: Product
and solution sales, Maintenance revenue, and Contract manufacturing. Revenues
are used by management as a guide to determine the effectiveness of the
individual segment. The Company manages its operating expenses through a
traditional functional perspective and accordingly does not report operating
expenses on a segment basis.
<TABLE>
Three Months Ended
March 31
(THOUSANDS) 1999 1998
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<S> <C> <C>
Revenues
Product and solution sales $ 9,081 $ 10,250
Maintenance revenue 3,731 2,642
Contract manufacturing 420
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Total revenues 13,232 12,892
Cost of product sales 4,481 5,739
Service expenses 4,538 2,930
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Gross profit margin 4,213 4,223
Operating expenses, net 4,094 3,519
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Income before income taxes $ 119 $ 704
===========================
Total expenditures for additions to
long-lived assets $ 279 $ 307
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Outlook
The forward-looking statements contained in this Outlook and elsewhere in this
document are based on current expectations and are made under safe harbor
provisions of Section 27A of the Securities Act of 1933, Section 21E of the
Securities Exchange Act of 1934 and the Private Securities Litigation Reform
Act of 1995. These forward looking statements involve a number of risks and
uncertainties that could materially affect future results. Among these risk
factors are changes in general economic and business conditions in the United
States and foreign markets, increased competition or a slowdown in growth
within the scanning and imaging market, alternate forms of processing,
inability to consummate accretive acquisitions, and other risk factors and
cautionary statements listed from time to time in the Company's periodic
reports filed with the Securities and Exchange Commission, including but not
limited to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998. (See also Year 2000 Compliance in Note 7.) The foregoing
factors should not be construed as exhaustive.
The Company has four major growth initiatives currently underway to improve
shareholder value. The first 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 government, healthcare, transportation, financial
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. The Company reported revenue of $5.8 million from four of the target
markets in the first quarter of 1999, compared to $2.3 million in target market
revenue during the first quarter of 1998.
The second 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. The Company will continue to focus on developing
comparably strong relationships in Europe, Latin America and other Pacific Rim
countries. During 1998, the Company had minimal achievements with this
initiative. The Asian marketplace, due to its economic challenge, most notably
Japan, was a significant disappointment to the Company during 1998. The
economic environment in Latin America has also been an impediment to growth in
these markets. The Company has been strengthening its relationships in Europe,
demonstrated by $1 million in sales during the first quarter of 1999,
compared to $.4 million in sales during the first quarter of 1998.
The third initiative relates to leveraging the Company's core competencies in
an effort to add revenues and profits. The Company believes that the hardware
service and manufacturing organizations have potential to sell their individual
expertise, experience and cost effectiveness to other entities. In 1998, the
Company was successful in attaining a $2 million contract manufacturing order
from Rapor, Inc., a security door provider, for delivery in 1999. In the first
quarter of 1999, the Company received an initial order from another customer for
manufacture of its product. The Company expects follow on orders to be
received after the completion of the initial order.
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 includes 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. During 1998, the Company completed two
acquisitions, Southern Computer Systems (SCS), a software and solutions
provider, and the hardware maintenance division of Access Corporation. (For
more information, refer to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.) The Company announced on April 13, 1999,
that it had signed a memorandum of agreement to acquire the Photomatrix Scanner
and Maintenance Division of Photomatrix Imaging Corporation of Carlsbad,
California, including certain product and technology rights. 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 consummated,
unless the law otherwise requires.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 VS. 1998
Total revenues increased $.4 million or 3% from the first quarter of 1998 to
the first quarter of 1999.
Product sales decreased $2.0 million or 23% in the first quarter of 1999
compared with the first quarter of 1998. North American sales increased $2.7
million or 149% due to the continued focus on solutions sales growth in this
geographic area. International sales decreased $4.7 million or 70% mainly due
to the $5.7 million in sales to the Japanese health organization in the first
quarter of 1998, partly offset by an increase in sales to Europe during the
first quarter of 1999.
Service revenues increased $2.3 million during the first three months of 1999
compared to the same period in 1998. Hardware maintenance and support revenue
increased $1.1 million mainly due to the increase in the third party
maintenance business. Professional service revenue increased $1.2 million
reflecting the Company's drive to provide greater customer value through total
solutions in the targeted markets.
Cost of product sales decreased $1.3 million from the first quarter of 1998.
Cost of product sales as a percentage of product sales was 68% for the first
quarter of 1999, compared to 67% in the prior year. The components of cost of
sales changed markedly from the first quarter of 1998 to the first quarter of
1999. In the first quarter of 1998, cost of sales reflected a lower gross
margin on sales, mainly due to the low margin on product sales to the Japanese
health organization, offset by manufacturing efficiencies achieved from the
production volume. In the first quarter of 1999, manufacturing volume was
down; however, this was offset by the increased gross margin on end user sales.
Service expenses increased $1.6 million in the first quarter of 1999 compared
with the respective period of 1998. Customer service expenses increased $.7
million which is reflective of the increase in revenue. The gross margin on
customer service revenue increased 3% from 21% in the first quarter of 1998 to
24% in the first quarter of 1999. Professional service expenses increased $.9
million, reflective of the increase in revenue. The gross margin on
professional service revenue was 47% in the first quarter of 1998, and 40% in
the first quarter of 1999. The Company continues to focus on and invest in the
target market solution applications which require skilled employees to deliver
the hardware, software, and professional services to meet the customers'
complete solution requirements.
Research and development expenses increased $.2 million from the first quarter
of 1998 to the first quarter of 1999 mainly due to the continued investment in
core technologies and application software to meet the requirements of the
target markets.
General and administrative expenses increased $.1 million from the first
quarter of 1998 to the first quarter of 1999 mainly due to the amortization of
goodwill.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at March 31, 1999 increased $18,000 from December 31,
1998.
As of March 31, 1999, the Company had $11.5 million in outstanding borrowings
against its $13 million line of credit. The Company negotiated changes to the
line of credit effective May 10, 1999, which are outlined in Note 4. Additional
acquisition activity may cause the Company to review other financing
alternatives.
Operating activities provided $.4 million of cash in the first three months of
1999.
Non-cash expenses recorded during the quarter were $.9 million vs. $.9 million
for the same period in 1998. These expenses relate to depreciation of fixed
assets (discussed in net plant and equipment below), amortization of customer
service spare parts inventory, amortization of goodwill, provisions for losses
on accounts receivable and deferred taxes.
Net accounts receivable decreased $1.1 million during the first quarter of the
year due to collections on 1998 sales offset by first quarter 1999 sales.
Total inventories decreased $.8 million in the first quarter of 1999. Total
manufacturing inventories decreased $.8 million from the beginning of the year
due to reductions in work-in-process inventory of $.8 million due to the timing
of the manufacturing production cycle. Customer service inventories remained
consistent with the beginning of the year levels.
Net plant and equipment remained flat during the first quarter of 1999 mainly
due to $.3 million of additions related to internal computer equipment and the
capitalization of test time related to the implementation of the internal
corporate information system, offset by $.3 million of depreciation expense
recorded during the first three months of the year.
Goodwill decreased by $.3 million due to the amortization recorded for the
quarter. Southern Computer Systems (SCS), a privately held company, was
purchased in June of 1998. The transaction was accounted for as a purchase and
the excess cost over the fair value of the net assets acquired of $9.2 million
is being amortized over a twenty year period. The acquisition of the
maintenance division of Access Corporation, which also occurred in June of
1998, was accounted for as a purchase and the excess cost over fair value of
the net assets acquired of $3.5 million is being amortized over a five year
period.
Other assets increased by $.9 million due to the source code licensing agreement
signed with Bluebird Systems of Carlsbad, California.
Accounts payable decreased $1.6 million from December 31, 1998 due to the
timing of payments.
Accrued salaries and wages decreased $1 million during the first quarter of
1999 reflecting the disbursement of the 1998 incentive compensation of $.6
million and the December 1998 commission of $.9 million. This was partly
offset by the accrual of commissions related to the first quarter of 1999.
Taxes other than income taxes increased $.2 million due to the timing of sales
and use tax payments.
Customer deposits increased $1 million from December 31, 1998, mainly due to
the receipt of a $.9 million deposit from a customer for work to be performed
during 1999.
<PAGE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6 (B) - REPORTS ON FORM 8-K
For the Three Months Ended March 31, 1999
No reports on Form 8-K were filed during the first three months of 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCAN-OPTICS, INC.
(Registrant)
Date MAY 14, 1999 /ss/
----------------- -------------------------------------
James C. Mavel
Chairman, Chief Executive Officer,
President and Director
Date MAY 14, 1999 /ss/
---------------- -------------------------------------
Michael J. Villano
Chief Financial Officer,
Vice President and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
EXHIBIT 27.
SCAN-OPTICS, INC.
FINANCIAL DATA SCHEDULE
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 234,000
<SECURITIES> 0
<RECEIVABLES> 21,630,000
<ALLOWANCES> 192,000
<INVENTORY> 10,694,000
<CURRENT-ASSETS> 34,826,000
<PP&E> 20,002,000
<DEPRECIATION> 16,612,000
<TOTAL-ASSETS> 51,519,000
<CURRENT-LIABILITIES> 20,330,000
<BONDS> 0
<COMMON> 148,000
0
0
<OTHER-SE> 30,173,000
<TOTAL-LIABILITY-AND-EQUITY> 51,519,000
<SALES> 6,579,000
<TOTAL-REVENUES> 13,232,000
<CGS> 4,481,000
<TOTAL-COSTS> 13,165,000
<OTHER-EXPENSES> (52,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 222,000
<INCOME-PRETAX> 119,000
<INCOME-TAX> 39,000
<INCOME-CONTINUING> 80,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 80,000
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
