UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
( X ) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended SEPTEMBER 30, 2000
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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 Identification Number)
incorporation or organization)
169 PROGRESS DRIVE, MANCHESTER, CT 06040-2294
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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
November 10, 2000 was 7,439,732.
<PAGE>
<TABLE>
<CAPTION>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(thousands, except share data) September 30, 2000 December 31, 1999
(UNAUDITED)
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<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents 73 38
Accounts receivable less allowance of $222 at
September 30, 2000 and $308 at December 31, 1999 14,556 18,713
Unbilled receivables - contracts in progress 4,392 5,023
Refundable income taxes 270 1,282
Recoverable income taxes 740
Inventories 10,122 10,033
Deferred costs, net of revenues 740 530
Prepaid expenses and other 1,215 976
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Total current assets 31,368 37,335
Plant and equipment:
Equipment 13,622 13,735
Leasehold improvements 5,146 5,146
Office furniture and fixtures 1,353 1,312
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20,121 20,193
Less allowances for depreciation and amortization 17,905 17,337
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2,216 2,856
Software license, net 1,483 2,040
Goodwill, net 11,299 12,523
Other assets 471 432
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Total Assets 46,837 55,186
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</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(thousands, except share data) September 30, 2000 December 31, 1999
(UNAUDITED)
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<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 7,943 8,079
Notes payable to bank 17,519 17,437
Salaries and wages 1,538 1,800
Taxes other than income taxes 384 1,110
Income taxes 87
Customer deposits 1,413 1,353
Other 2,700 2,829
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Total current liabilities 31,584 32,608
Other liabilities 541 497
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, 7,439,732 shares at September 30, 2000
and 7,396,232 shares at December 31, 1999 149 148
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 35,654 35,568
Retained-earnings deficit (17,727) (10,415)
Foreign currency translation adjustments (718) (574)
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17,358 24,727
Less cost of common stock in treasury,
413,500 shares 2,646 2,646
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Total stockholders' equity 14,712 22,081
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Total Liabilities and Stockholders' Equity 46,837 55,186
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See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
(thousands, except share data) 2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Revenues
Product sales $ 5,251 $ 5,857 $ 15,147 $ 19,377
Service revenues 4,698 6,345 15,762 20,686
Engineering revenues 66 254 132 441
Other operating revenues 13
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Total revenues 10,015 12,456 31,041 40,517
Costs and Expenses
Cost of product sales 3,487 3,530 10,548 12,338
Service expenses 4,232 6,994 15,204 16,863
Sales and marketing expenses 1,497 2,115 4,662 5,692
Research and development expenses 760 1,355 2,834 4,263
General and administrative expenses 1,052 1,312 3,307 3,591
Interest expense 726 467 1,789 982
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Total costs and expenses 11,754 15,773 38,344 43,729
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Operating loss (1,739) (3,317) (7,303) (3,212)
Other income, net (26) (58) 38 34
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Loss before income taxes (1,765) (3,375) (7,265) (3,178)
Income tax expense (benefit) 16 (1,412) 47 (1,358)
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Net Loss $ (1,781) $ (1,963) $ (7,312) $ (1,820)
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Basic loss per share $ (.25) $ (.28) $ (1.04) $ (.26)
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Basic weighted-average shares 7,027,861 6,984,361 7,024,131 6,978,081
Diluted loss per share $ (.25) $ (.28) $ (1.04) $ (.26)
=======================================================
Diluted weighted-average shares 7,027,861 6,984,361 7,024,131 6,978,081
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30
(thousands) 2000 1999
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<S> <C> <C>
Operating Activities
Net loss $ (7,312) $ (1,820)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation 670 803
Amortization 1,746 1,268
Amortization of goodwill 975 902
Provision for losses on accounts receivable 100 50
Deferred taxes (1,530)
Changes in operating assets and liabilities:
Accounts receivable 4,688 (2,814)
Refundable income taxes 1,012
Recoverable income taxes 740
Inventories (1,279) 643
Prepaid expenses and other (239) 157
Accounts payable (136) 583
Accrued salaries and wages (262) (927)
Taxes other than income taxes (726) 503
Income taxes 87 (982)
Deferred costs, net of revenues (210) (29)
Customer deposits 60 160
Other (135) (459)
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Net cash used by operating activities (221) (3,492)
Investing Activities
Business acquisitions (2,158)
Proceeds from the sale of plant and equipment 215
Purchases of plant and equipment (128) (392)
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Net cash provided (used) by investing activities 87 (2,550)
Financing Activities
Proceeds from issuance of common stock 87 68
Proceeds from borrowings 19,684 31,102
Principal payments on borrowings (19,602) (23,751)
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Net cash provided by financing activities 169 7,419
Increase in cash and cash equivalents 35 1,377
Cash and Cash Equivalents at Beginning of Year 38 216
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Cash and Cash Equivalents at End of Period $ 73 $ 1,593
======================================
See accompanying notes.
</TABLE>
<PAGE>
NOTE 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the nine month period ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2000. 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, 1999.
Certain 1999 amounts have been reclassified to conform to current year
presentation.
NOTE 2 - Inventories
The components of inventories were as follows:
September 30 December 31
(THOUSANDS) 2000 1999
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Finished goods $ 311 $ 363
Work-in-process 840 1,927
Service parts 4,632 4,429
Materials and component parts 4,339 3,314
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$ 10,122 10,033
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NOTE 3 - Credit Arrangements
On May 10, 1999, the Company amended its credit agreement (the "Agreement")
with a bank to extend the maturity date to May 10, 2002 and to reduce the
line from $13 million to $10 million. 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 million and $2.1 million at September 30, 2000
and December 31, 1999, respectively. The weighted average interest rate on
borrowings during the first nine months of 2000 and 1999 was 12.7% and
8.2%, respectively.
Additionally, on May 10, 1999, a five-year term loan in the amount of $10
million was established to better match the cash expenditures for
acquisitions with the cash flow that results from the acquired businesses.
The outstanding balance on the term loan at September 30, 2000 and December
31, 1999 was $8.5 million and $9.5 million, respectively, all of which is
classified as a current liability on the consolidated balance sheet due to
the covenant defaults noted below. Both the line of credit and the term
loan bear interest at prime plus 5%.
The circumstances surrounding this Agreement have changed significantly as
BankBoston, the prior lender, merged with Fleet National Bank on October 1,
1999. The Agreement 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. The Company
has been in default of these covenants since September 1999. The Company
has held discussions with Fleet National Bank and is currently negotiating
with the bank to restructure the borrowing arrangements and agree to new
terms and conditions as well as to obtain waivers for the covenant
defaults. At this time, no agreement has been reached. The Company
believes that the projected operating cash flow for 2000 will be adequate
to fund operations provided that there is the availability of a line of
credit or other financing arrangement of a similar size as currently
exists. Negotiations on the revision of the Agreement with Fleet National
Bank are continuing and, in addition, the Company will continue to seek
financing alternatives with other bank and finance companies, as well as
review other business and financing options.
NOTE 4 - Income Taxes
At September 30, 2000, the Company has U.S. federal and state operating
loss carryforwards of approximately $15,100,000 and $17,700,000,
respectively. The U.S. federal and state net operating loss carryforwards
expire in 2014 and 2005, respectively. At September 30, 2000, the Company
has approximately $541,000, $3,200,000 and $800,000 of net operating loss
carryforwards for Canada, the United Kingdom and Germany, respectively,
which are scheduled to expire periodically between 2000 and 2006. At
December 31, 1999, the Company has U.S. federal and state operating loss
carryforwards of $9,700,000 and $12,300,000, respectively. At December 31,
1999, the Company had approximately $470,000, $3,100,000 and $800,000 of
net operating loss carryforwards for Canada, the United Kingdom and
Germany, respectively. For financial reporting purposes, a valuation
allowance has been recorded to fully offset deferred tax assets relating to
U.S. federal, state, and foreign net operating loss carryforwards and other
temporary differences.
<PAGE>
SCAN-OPTICS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Quarter Ended September 30, 2000
Significant components of the Company's deferred tax liabilities and assets
were as follows:
<TABLE>
<CAPTION>
September 30 December 31
(THOUSANDS) 2000 1999
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<S> <C> <C>
Deferred tax assets:
Net operating losses $ 6,497 $ 5,671
Alternative minimum tax credit carryforward 168 168
Depreciation 92 92
Inventory valuation 157 163
Inventory 101 101
Deferred maintenance revenue 6
Accounts receivable reserves 81 113
Goodwill 59 71
Revenue recognition - systems undergoing
acceptance testing 8
Vacation accrual 237 237
Other 12 13
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Total gross deferred tax assets 7,404 6,643
Deferred tax liabilities:
Revenue recognition - milestone and retainer contracts (623) (989)
Depreciation and other (263) (263)
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Total gross deferred tax liabilities (886) (1,252)
Valuation allowance (6,518) (5,391)
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Net deferred tax asset $ - $ -
==================================
</TABLE>
<PAGE>
NOTE 5 - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Numerator:
Net loss $ (1,781) $ (1,963) $ (7,312) $ (1,820)
============================================================
Denominator:
Denominator for basic and diluted
earnings (loss) per share
(weighted-average shares) 7,027,861 6,984,361 7,024,131 7,126,059
============================================================
Basic earnings (loss) per share $ (.25) $ (.28) $ (1.04) $ (.26)
============================================================
Diluted earnings (loss) per share $ (.25) $ (.28) $ (1.04) $ (.26)
============================================================
</TABLE>
NOTE 6 - Year 2000 Compliance
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 compliant. In late 1999, the Company completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions
in mission critical information technology and non-information technology
systems and believes those systems successfully responded to the Year 2000
date change. The Company expensed approximately $150,000 during 1999 in
connection with remediating its systems. The Company is not aware of any
material problems resulting from Year 2000 issues, either with its
products, its internal systems, or the products and services of third
parties. The Company will continue to monitor its mission critical
computer applications and those of its suppliers and vendors throughout the
year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly.
NOTE 7 - Comprehensive Income
The components of comprehensive income (loss), net of related tax, for the
three and nine months ended September 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Net loss $(1,781) $ (1,963) $ (7,312) $ (1,820)
Foreign currency translation adjustments (47) 44 (144) (44)
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Comprehensive loss $(1,828) $ (1,919) $ (7,456) $ (1,864)
===============================================================
The components of accumulated comprehensive loss, net of related tax, at
September 30, 2000 and December 31, 1999 are as follows:
September 30 December 31
(THOUSANDS) 2000 1999
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Foreign currency translation adjustments $ (677) $ (533)
-----------------------------------
Accumulated comprehensive loss $ (677) $ (533)
===================================
</TABLE>
<PAGE>
NOTE 8 - Segment Information
The Company views its business in three distinct revenue categories:
Product and solution sales, Access services, and Contract manufacturing
services. 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>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Revenues
Solutions and products $ 5,901 $ 7,839 $ 18,429 $ 27,818
Access services 3,608 4,525 11,119 12,009
Contract manufacturing services 506 92 1,493 690
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Total revenues 10,015 12,456 31,041 40,517
Cost of solutions and products 4,677 7,385 16,497 20,142
Service expenses 3,042 3,139 9,255 9,059
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Gross profit margin 2,296 1,932 5,289 11,316
Operating expenses
and other income, net 4,061 5,307 12,554 14,494
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Loss before income taxes $(1,765) $ (3,375) $ (7,265) $ (3,178)
===========================================================
Total expenditures for additions
to long-lived assets $ 47 $ 30 $ 128 $ 406
</TABLE>
<PAGE>
NOTE 9 - Recent Accounting Pronouncements
Statement of Financial Accounting Standards (`SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities", as amended by SFAS
No.'s 137 and 138 establishes the accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded
in other contracts and for hedging activities. It requires recognition of
all derivatives as either assets or liabilities measured at their fair
value. Depending on the intended use of the derivative, changes in fair
value will be reported in the period of change as either a component of
earnings or a component of stockholders' equity. The adoption of the
standard is required for the first quarter of 2001. The Company believes
the impact of the adoption will not have a material effect on its financial
statements.
NOTE 10 - Recent Developments
The Company received notification from the Kentucky Finance and Administration
Cabinet stating that no additional funds are due on its contract with the
Revenue Cabinet. Kentucky had previously paid $4,381,756 to the Company on this
contract. The Company is evaluating its rights under the contract to collect
the unpaid amount of $3,032,614. The Company also understands that the system
continues to process tax forms on a daily basis since July of this year.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Outlook
Statements about the Company's future expectations, including future
revenues and earnings, and all other statements other than historical
facts are "forward-looking statements" made under safe harbor provisions
of the Private Securities Litigation Reform Act of 1995 and 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, which
impact capital investments by customers, the cyclical nature of funding
within federal and state government agencies, further adverse changes in
the Company's banking relationship, insufficient cash resources,
increased competition from similar products, the implementation of other
technologies which may provide alternative solutions, ability to complete
projects in a timely manner, 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, 1999.
The Company incurred a loss in 1999 and in the first three quarters of
2000. These losses were mainly attributable to professional service
revenue delays on some projects and expense overruns on others, which
continue to be addressed with a comprehensive plan. The Company also
experienced delays in the procurement of parts and the manufacture of
systems in the second and third quarters of 2000 that were a result of
the lack of cash availability. These delays negatively impacted revenue
by $1.5 million in the second quarter and $1.2 million in the third
quarter. In the fourth quarter of 1999, a plan to reduce annual expenses
by $5 million, restructure the professional service organization,
including the mix of contractors to employees, and add senior management,
as well as additional project management controls and adherence to
project implementation methodology was implemented. During the first
three quarters of 2000, the Company realized benefits from this plan
evidenced by operating expense reductions in comparison to the fourth
quarter 1999 run rates. These reductions decreased total operating
expenses by $3 million in the first quarter, $3.3 million in the second
quarter, and $4.6 million in the third quarter. Professional services
expenses were reduced from a fourth quarter 1999 level of $3.8 million to
$2.7 million in the first quarter, $2 million in the second quarter and
$1.2 million in the third quarter. These savings are due to a reduction
in the number of contract workers from an average of 53 in the fourth
quarter of 1999 to 29 in the first quarter, 21 in the second quarter, 11
in the third quarter, the hiring of professional services senior
management, the implementation of improved project methodologies and
controls on professional services projects.
The Company has three major initiatives currently underway to improve
revenue growth and profitability. They are to emphasize the "Business of
Solutions" focus in targeted markets, to decrease market risk through
expansion in the international marketplace, and to capitalize on existing
core competencies of the Company. The inability of the Company to carry
out these initiatives may have a materially adverse effect on revenue
growth and earnings.
The first initiative is to provide cost effective solutions through the
Company's development of target market data capture applications combined
with its high speed transports and archival systems. The Company has
refined its target market approach and chosen to focus primarily on the
government and insurance markets, while continuing to address the
transportation, financial and order entry markets. The Company expects to
continue to emphasize its "Business of Solutions" 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 in these new markets. The revenue for this
initiative decreased $4.4 million during the first nine months of 2000
compared to the first nine months of 1999 and increased $.6 million
during the third quarter of 2000 compared to the third quarter of 1999.
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 in the past
through relationships with highly qualified and productive distributors.
The Company will continue to focus on developing strong relationships in
Europe, Latin America and other Pacific Rim countries. During the first
nine months of 2000, revenue for this initiative increased $1.8 million
from the first nine months of 1999. During the third quarter of 2000
revenue for this initiative increased $1.7 million compared to the third
quarter of 1999.
The third initiative relates to leveraging the Company's core
competencies in an effort to add revenues and profits. The Company
believes that Access Services and contract manufacturing services have
potential to sell their individual expertise, experience and cost
effectiveness to other entities. Access Services revenue decreased $.9
million for the first nine months of 2000 compared to 1999. This
decrease was experienced in the third quarter of 2000. Contract
manufacturing revenue increased $.8 million during the first nine months
of 2000 compared with the first nine months of 1999. Contract
manufacturing revenue also increased $.4 million during the third quarter
of 2000 compared to the third quarter of 1999.
The Company has put on hold its initiative of long term growth through
accretive acquisitions of key strategic products or enterprises. When
the Company resolves the issues relating to the professional services
organization and the restructuring of its bank borrowing arrangements
(see Note 3 above), acquisitions will again be considered.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,
2000 VS. 1999
Total revenues decreased $9.5 million or 23% from the first nine months
of 1999 to the first nine months of 2000 and decreased $2.4 million or
20% from the third quarter of 1999 to the third quarter of 2000.
Product sales decreased $4.2 million or 22% in the first nine months of
2000 compared with the first nine months of 1999. Product sales
decreased $.6 million or 10% in the third quarter of 2000 compared with
the third quarter of 1999. Compared to the first nine months of 1999,
North American sales decreased $6 million and decreased $2.3 million
during the third quarter of 2000 compared to the third quarter of 1999
due to the internal focus of the sales organization on improving customer
satisfaction and assisting with professional services implementations
that began in the fourth quarter of 1999. International sales during the
first nine months of 2000 increased $1.8 million from the first nine
months of 1999 and increased $1.7 million compared to the third quarter
of 1999. In 2000, product sales were negatively impacted as a result of
cash availability. Delays in the procurement of parts and the
manufacture of systems in the second and third quarters of 2000
decreased revenue by $1.5 million in the second quarter and
$1.2 million in the third quarter.
Service revenues decreased $4.9 million during the first nine months of
2000 compared with the first nine months of 1999 and decreased $1.6
million from the third quarter of 1999. Access Services revenue during
the first nine months of 2000 decreased $.9 million from the first nine
months of 1999 and decreased $.9 million during the third quarter of 2000
compared to the same period in 1999. Professional service revenue
decreased $4 million during the first nine months of 2000 compared to the
same period in 1999 and decreased $.7 million in the third quarter due to
the continued effort to complete contracts in progress from the third and
fourth quarters of 1999 while simultaneously implementing improved project
methodologies on all new contracts.
Cost of product sales decreased $1.8 million from the first nine months
of 1999 and remained consistent with the third quarter of 1999. Cost of
product sales as a percentage of product sales was 70% for the first nine
months of 2000 compared to 64% in the prior year. This percentage was
66% for the third quarter of 2000 compared to 60% in the third quarter of
1999. These percentage increases were mainly due to changes in the
overall sales mix with an increased volume of lower margin commodity
items sold as part of the total customer solution. The gross margin was
also reduced due to the growth in contract manufacturing revenues which
accounted for 2% of the increase in the cost of product sales as a
percentage of product sales in the third quarter and 4% on a year to date
basis. The Company reduced unabsorption from the first nine months of
1999 to 2000 by $.8 million or 66% and $.2 million or 62% on a third
quarter comparison from 1999 to 2000.
Service expenses decreased $1.7 million in the first nine months of 2000
compared to the first nine months of 1999 and decreased $2.8 million in
the third quarter 1999 to 2000 comparison. Access Services expenses
increased $.2 million from the first nine months of 1999 due to salary
and benefits, bad debt expense and contracted third party service
provider expenses. Access Services expenses decreased $.1 million from
the third quarter of 1999 mainly due to a reduction in the contracted
third party service provider expenses. Professional service expenses
decreased $1.9 million compared with the first nine months of 1999 and
decreased $2.7 million compared with the third quarter of 1999 due to a
reduction in third party contractor costs, salary and benefits expenses,
travel and meal costs and an increase in billable travel. The Company
has reduced the professional service expenses by $2.6 million from a run
rate of $3.8 million in the third and fourth quarters of 1999 to $1.2
million in the third quarter of 2000.
Sales and marketing expenses decreased $1.0 million from the first nine
months of 1999 and decreased $.6 million from the third quarter of 1999
mainly due to a reduction of commission expense related to the decrease
in sales revenue and a reduction in outside service expenses and trade
show expenses offset by an increase in the provision for uncollectable
accounts receivable.
Research and development expenses decreased $1.4 million from the first
nine months of 1999 and decreased $.6 million from the third quarter of
1999 mainly due to a reduction in salary and benefit expenses, travel and
meal expenses, and consulting expenses offset by the amortization of the
software license from Bluebird Systems.
General and administrative expenses decreased $.3 million from the first
nine months and the third quarter of 1999 to 2000 mainly due to a
decrease in outside services.
Interest expense increased $.8 million from the first nine months of 1999
to 2000 and $.3 million from the third quarter of 1999 due to an increase
in borrowing rates on the outstanding bank loans from prime to prime
plus five percent. The increase in the rate is a result of the default
on certain financial covenants.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at September 30, 2000 remained consistent with
December 31, 1999 levels.
Total borrowings increased $.1 million to $17.5 million from December 31,
1999. The available balance on the line of credit was $1 million and $2.1
million at September 30, 2000 and December 31, 1999, respectively. As of
September 30, 2000, the Company is in default of certain financial
covenants on its bank debt and is currently negotiating with its bank to
restructure the borrowing arrangements and agree to new terms and
conditions. Accordingly, all bank debt has been classified as a current
liability on the consolidated balance sheet. The Company has made all
principal and interest payments required under the bank loans. The
principal payment increased from $.3 million at June 30, 2000 to $.5
million at September 30, 2000 in agreement with the original terms and
conditions of the loan document. The Company believes that the projected
operating cash flow for 2000 will be adequate to fund operations provided
that there is the availability of a line of credit or other financing
arrangement of a similar size as currently exists. (See Note 3 for
further details.)
Accounts payable decreased $.1 million from December 31, 1999 due to the
timing of payments.
Operating activities used $.2 million of cash in the first nine months of
2000.
Non-cash expenses recorded during the first nine months of 2000 were $3.5
million vs. $1.5 million for the same period in 1999. These expenses
relate to depreciation of fixed assets (discussed in net plant and
equipment below), amortization of customer service spare parts inventory,
amortization of software license, amortization of goodwill, provision for
losses on accounts receivable and deferred taxes.
Net accounts receivable decreased $6.1 million from December 31, 1999 due
to increased collections on outstanding accounts offset by sales during
the first nine months of 2000.
Unbilled receivables - contracts in progress decreased $.6 million from
December 31, 1999 due to additional revenue recorded of $3.3 million in
the first nine months of 2000 offset by billings of $3.9 million.
Total inventories increased $.1 million from December 31, 1999. Total
manufacturing inventories decreased $.1 million from the beginning of
the year mainly due to a decrease in work in process inventory of $1.1
million due to the timing of the 2000 build schedule. This decrease was
offset by an increase in stockroom inventory of $1 million due to
additional parts requirements related to the increase in the build plan
for the series 8000 scanners (the former Photomatrix (PHRX) products).
Customer service inventory increased $.2 million due to additional series
8000 parts.
Net plant and equipment decreased $.6 million from December 31, 1999
mainly due to the sale of a United Kingdom demonstration system and
depreciation expense recorded during the first nine months of the year.
Software license decreased by $.6 million from December 31, 1999 due to
the amortization of the source code licensing agreement signed in 1999
with Bluebird Systems for their DocWise product.
Goodwill decreased by $1.2 million from December 31, 1999 mainly due to
amortization recorded for the first nine months and adjustments to the
purchase price allocation for the acquisition of the assets of PHRX.
Accrued salaries and wages decreased $.3 million from December 31, 1999
due to a decrease in accrued commissions related to a decrease in
revenue.
Taxes other than income taxes decreased $.7 million from December 31,
1999 due to a decrease in accrued sales and use tax related to a decrease
in revenue.
Customer deposits increased by $.1 million due to the receipt of deposits
for customer orders of $1.1 million, offset by solutions billings of $1
million.
<PAGE>
PART II - OTHER INFORMATION
Item 5. Other Information
The Company was notified by Nasdaq that its common stock will begin listing
on the Over The Counter ("OTC") Bulletin Board as of November 10, 2000. This
action was taken because of the Company's inability to maintain the $1 per share
bid price requirement for continued listing on the Nasdaq Stock Market. The
Company expects to reapply to Nasdaq for listing as soon as they meet that
market's requirements.
Item 6. Exhibits and Reports on Form 8-K
(a) 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.
*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.
*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 The Scan-Optics, Inc. 1990 Incentive and Non-Qualified Stock
Option Plan amendment included as Item 2 in the Company's Proxy Statement dated
April 14, 1994 for the Annual Meeting of Stockholders held on May 18, 1994.
*10.7 The Scan-Optics, Inc. 1990 Stock Option Plan for Outside
Directors amendment included as Item 2 in the Company's Proxy Statement dated
April 15, 1996 for the Annual Meeting of Stockholders held on May 15, 1996.
*10.8 The Scan-Optics, Inc. 1999 Incentive and Non-Qualified Stock
Option Plan included in Exhibit A in the Company's Proxy Statement dated April
8, 1999 for the Annual Meeting of Stockholders held on May 20, 1999.
*10.9 Employment agreement, effective as of December 31, 1996, between
Scan-Optics, Inc. and James C. Mavel, included as Exhibit 10.10 in the Company's
Annual Report on Form 10-K filed for the year ended December 31, 1996.
*10.10 Executive severance agreement between Joseph P. Crouch and
Scan-Optics, Inc. dated November 15, 1999, is filed as Exhibit 10.10 in the
Company's Annual Report on Form 10-K filed for the year ended December 31, 1999.
*10.11 Executive severance agreement between Marianna C. Emanuelson and
Scan-Optics, Inc. dated November 17, 1997, is filed as Exhibit 10.11 in the
Company's Annual Report on Form 10-K filed for the year ended December 31, 1999.
*10.12 Executive severance agreement between Richard C. Goyette and
Scan-Optics, Inc. dated November 17, 1997, is filed as Exhibit 10.12 in the
Company's Annual Report on Form 10-K filed for the year ended December 31, 1999.
*10.13 Executive severance agreement between Joel K. Howser and
Scan-Optics, Inc. dated November 17, 1997, is filed as Exhibit 10.13 in the
Company's Annual Report on Form 10-K filed for the year ended December 31, 1999.
*10.14 Executive severance agreement between Clarence W. Rife and
Scan-Optics, Inc. dated November 17, 1997, is filed as Exhibit 10.14 in the
Company's Annual Report on Form 10-K filed for the year ended December 31, 1999.
*10.15 Executive severance agreement between Michael J. Villano and
Scan-Optics, Inc. dated November 17, 1997, is filed as Exhibit 10.15 in the
Company's Annual Report on Form 10-K filed for the year ended December 31, 1999.
* Exhibits so marked have heretofore been filed by the
Company with the Securities and Exchange Commission and are incorporated herein
by reference.
(b) Reports on Form 8-K
No report on Form 8-K was filed for the quarter ended September 30, 2000.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCAN-OPTICS, INC.
(Registrant)
Date November 13, 2000 /SS/
----------------- --------------------------------------
James C. Mavel
Chairman, Chief Executive Officer,
President and Director
Date November 13, 2000 /SS/
----------------- --------------------------------------
Michael J. Villano
Chief Financial Officer,
Vice President and Treasurer
