-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IH9AirYmSEZwn99oFlE6MtX/M2onaeomjHaj+ntt0+UoTUH+DZLFmPXbOsNxW62m Oqwdk4kt11IystWdXc53Cg== 0000906602-99-000188.txt : 19990817 0000906602-99-000188.hdr.sgml : 19990817 ACCESSION NUMBER: 0000906602-99-000188 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCAN OPTICS INC CENTRAL INDEX KEY: 0000087086 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 060851857 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-05265 FILM NUMBER: 99693525 BUSINESS ADDRESS: STREET 1: 169 PROGRESS DR CITY: MANCHESTER STATE: CT ZIP: 06040 BUSINESS PHONE: 8606457878 MAIL ADDRESS: STREET 1: 169 PROGRESS DR CITY: MANCHESTER STATE: CT ZIP: 06040 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ( X ) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 1999 ------------------------------------------- ( )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 Identification Number) incorporation or organization) 169 Progress Drive, Manchester, CT 06040 - --------------------------------------------------------------------------- (Address of principal executive offices) Zip Code (860) 645-7878 - ---------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ( X ) YES ( ) NO The number of shares of common stock, $.02 par value, outstanding as of August 13, 1999 was 7,396,232.
SCAN-OPTICS, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (thousands, except share data) June 30, 1999 December 31, 1998 - ----------------------------------------------------------------------------------- (UNAUDITED) Assets Current Assets: Cash and cash equivalents $ 251 $ 216 Accounts receivable less allowance of $221 at June 30, 1999 and $206 at December 31, 1998 28,378 22,725 Inventories 10,682 11,478 Deferred taxes 1,082 960 Deferred costs, net of revenues 499 502 Prepaid expenses and other 1,364 1,012 ----------------------------- Total current assets 42,256 36,893 Plant and equipment: Equipment 14,063 13,601 Leasehold improvements 4,847 4,815 Office furniture and fixtures 1,311 1,307 ----------------------------- 20,221 19,723 Less allowances for depreciation and amortization 16,894 16,367 ----------------------------- 3,327 3,356 Goodwill, net 12,621 12,110 Other assets 1,531 633 ----------------------------- Total Assets $ 59,735 $ 52,992 =============================
(thousands, except share data) June 30, 1999 December 31, 1998 - ----------------------------------------------------------------------------------- (UNAUDITED) Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 4,439 $ 5,487 Notes payable to bank 11,094 11,524 Salaries and wages 1,513 2,007 Taxes other than income taxes 1,067 691 Income taxes 35 Customer deposits 258 99 Other 1,754 1,943 ------------------------------ Total current liabilities 20,125 21,786 Deferred taxes 76 263 Note payable to bank 8,500 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, 7,396,232 shares at June 30, 1999 and 7,370,482 shares at December 31, 1998 150 147 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 35,566 35,501 Retained-earnings deficit (2,097) (2,240) Foreign currency translation adjustments (636) (516) ------------------------------ 32,983 32,892 Less cost of common stock in treasury, 413,500 shares 2,646 2,646 ------------------------------ Total stockholders' equity 30,337 30,246 ------------------------------ Total Liabilities and Stockholders' Equity $ 59,735 $ 52,992 ============================== See accompanying notes.
SCAN-OPTICS, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended Six Months Ended June 30 June 30 (thousands, except share data) 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------ Revenues Product sales $ 6,941 $ 5,735 $ 13,520 $ 14,273 Service revenues 7,770 3,900 14,341 8,156 Engineering revenues 114 33 187 100 Other operating revenues 4 36 13 67 ------------------------------------------------------------------------ Total revenues 14,829 9,704 28,061 22,596 Costs and Expenses Cost of product sales 4,327 2,880 8,808 8,620 Service expenses 5,331 2,984 9,869 5,914 Sales and marketing expenses 2,218 1,566 3,577 2,919 Research and development expenses 1,424 1,235 2,908 2,519 General and administrative expenses 1,198 869 2,279 1,812 Interest expense 293 15 515 15 ------------------------------------------------------------------------ Total costs and expenses 14,791 9,549 27,956 21,799 ------------------------------------------------------------------------ Operating income 38 155 105 797 Other income, net 40 74 92 135 ------------------------------------------------------------------------ Income before income taxes 78 229 197 932 Income taxes 15 89 54 365 ------------------------------------------------------------------------ Net Income 63 140 143 567 ======================================================================== Basic earnings per share .01 .02 .02 .08 ======================================================================== Basic weighted-average shares 6,984,361 6,956,478 6,974,941 6,884,584 Diluted earnings per share .01 .02 .02 .08 ======================================================================== Diluted weighted-average shares 7,174,591 7,130,938 7,121,768 7,140,200
SCAN-OPTICS, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended June 30 (thousands) 1999 1998 - ------------------------------------------------------------------------------------------- Operating Activities Net income $ 143 $ 568 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation 529 600 Amortization 844 801 Amortization of goodwill 579 663 Provision for losses on accounts receivable 30 Deferred taxes (309) 163 Changes in operating assets and liabilities: Accounts receivable (5,198) 1,678 Inventories 1,342 2,125 Prepaid expenses and other (276) (363) Accounts payable (1,639) (183) Accrued salaries and wages (711) (649) Taxes other than income taxes 376 50 Income taxes (35) (942) Deferred costs, net of revenues 3 (215) Customer deposits 159 (2,420) Other (1,507) (313) ------------------------------ Net cash provided (used) by operating activities (5,670) 1,563 Investing Activities Business acquisitions (2,100) (12,600) Purchases of plant and equipment (333) (631) ------------------------------ Net cash used by investing activities (2,433) (13,231) Financing Activities Proceeds from issuance of common stock 68 472 Proceeds from borrowings 24,437 8,285 Principal payments on borrowings (16,367) (2) ------------------------------ Net cash provided by financing activities 8,138 8,755 Increase (decrease) in cash and cash equivalents 35 (2,913) Cash and Cash Equivalents at Beginning of Year 216 4,386 ------------------------------ Cash and Cash Equivalents at End of Period $ 251 $ 1,473 ============================== See accompanying notes.
NOTE 1 - Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 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:
June 30 December 31 (thousands) 1999 1998 - ------------------------------------------------------------------------ Finished goods $ 564 $ 1,885 Work-in-process 2,259 2,129 Service parts 4,560 3,808 Materials and component parts 3,299 3,656 ---------------------------------- $ 10,682 $ 11,478 ==================================
NOTE 3 - Acquisition Activities On June 22, 1999 the Company completed the acquisition of the product rights and certain assets of the Photomatrix Imaging Corporations subsidiary of Photomatrix, Inc. for $2.1 million in cash. The Company acquired accounts receivable net of reserves of $1.0 million, manufacturing and customer service inventory net of reserves of $1.4 million, fixed assets net of accumulated depreciation of $.1 million and other assets of $.1 million. The Company also assumed liabilities for accounts payable of $.6 million, deferred revenue of $.5 million, salary and benefits accruals of $.2 million and acquisition related expenses of $.3 million. The Company reported goodwill related to the transaction of $1.1 million which will be amortized over an average period of twelve and one-half years. The Company recently announced that it had reached an agreement in principle to acquire 100% of the stock in Agissar Corporation. NOTE 4 - 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 $406,000 and $1,717,000 as of June 30, 1999 and June 30, 1998 respectively. The weighted average interest rates on borrowings during the first half of 1999 and 1998 were 8.0% and 8.4% 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 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 June 30, 1999, the Company has approximately $340,000, $2,700,000 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 June 30, 1998, the Company had approximately $200,000, $2,750,000 and $650,000 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 six months of 1999 to offset a significant portion of the deferred tax assets related to the foreign net operating loss carryforwards and other temporary differences. The effective tax rate for the six months ended June 30, 1999 is less than the statutory rate primarily due to foreign income tax benefits. Significant components of the Company's deferred tax assets and liabilities were as follows:
June 30 December 31 (thousands) 1999 1998 - ------------------------------------------------------------------------------------- Deferred tax assets: Net operating losses $ 1,460 $ 1,475 Depreciation 179 92 Inventory valuation 174 174 Inventory 191 115 Deferred maintenance revenue 108 178 Accounts receivable reserves 26 26 Goodwill 73 59 Revenue recognition - systems undergoing acceptance testing 147 29 Vacation accrual 186 188 Other 162 162 ----------------------------- Total deferred tax assets 2,706 2,498 Deferred tax liabilities: Depreciation and other (84) ----------------------------- Total deferred tax liabilities (84) Valuation allowance (1,700) (1,717) ----------------------------- Net deferred taxes $ 1,006 $ 697 =============================
NOTE 6 - Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended Six Months Ended June 30 June 30 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------- Numerator: Net income $ 63 $ 140 $ 143 $ 567 ============================================================ Denominator: Denominator for basic earnings per share (weighted-average shares) 6,984,361 6,956,478 6,974,941 6,884,584 Effect of dilutive securities: Employee stock options 190,230 174,460 146,827 255,616 Denominator for diluted earnings per share (adjusted weghted-average ------------------------------------------------------------ shares and assumed conversions) 7,174,591 7,130,938 7,121,768 7,140,200 ============================================================ Basic earnings per share $ .01 $ .02 $ .02 $ .08 ============================================================ Diluted earnings per share $ .01 $ .02 $ .02 $ .08 ============================================================
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 has performed independent Year 2000 testing of these systems and will continue to do so through the remainder of 1999. The Company has completed its inventory of other systems, equipment and items that potentially present a Year 2000 problem. The Company completed performing internal testing and seeking outside certification of material inventoried items during the second quarter of 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 such parties to determine the extent to which they are vulnerable to the Year 2000 problem and has completed 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 third 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 June 30, 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 and six months ended June 30, 1999 and 1998 are as follows:
Three Months Ended Six Months Ended June 30 June 30 1999 1998 1999 1998 - ---------------------------------------------------------------------------------------------- Net income $ 63 $ 140 $ 143 $ 567 Foreign currency translation adjustments (48) 2 (88) 24 ----------------------------------------------- Comprehensive income $ 15 $ 142 $ 55 $ 591 ===============================================
The components of accumulated comprehensive income, net of related tax, at June 30, 1999 and December 31, 1998 are as follows:
June 30 December 31 (thousands) 1999 1998 - --------------------------------------------------------------------------------- Foreign currency translation adjustments $ (561) $ (473) ----------------------------------- Accumulated comprehensive income $ (561) $ (473) ===================================
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.
Three Months Ended Six Months Ended June 30 June 30 1999 1998 1999 1998 - ----------------------------------------------------------------------------------------------------- Revenues Product and solution sales $ 10,898 $ 6,582 $ 19,979 $ 16,832 Maintenance revenue 3,753 2,874 7,484 5,516 Contract manufacturing 178 248 598 248 ----------------------------------------------------------- Total revenues 14,829 9,704 28,061 22,596 Cost of product sales 4,327 2,880 8,808 8,620 Service expenses 5,331 2,984 9,869 5,914 ----------------------------------------------------------- Gross profit margin 5,171 3,840 9,384 8,062 Operating expenses and other income, net 5,093 3,611 9,187 7,130 ----------------------------------------------------------- Income before income taxes $ 78 $ 229 $ 197 $ 932 =========================================================== Total expenditures for additions to long-lived assets $ 219 $ 198 $ 498 $ 505
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 $14.5 million from four of the target markets during the first six months of 1999, compared to $4.4 million in target market revenue during the first six months of 1998. Revenue of $8.6 million was reported from four of the target markets during the second quarter of 1999 compared to $2.1 during the second 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 and the first six months of 1999. 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 $1.6 million in sales during the first six months of 1999, compared to $.6 million in sales during the first six months of 1998. Revenue from sales in Europe during the second quarter of 1999 were $.6 million compared to $.2 million during the second 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 July 1999, the Company signed an agreement with MailCode, Inc., valued at more than $1.5 million over twelve months for production and test of their mail sorter. The last initiative is growth through accretive 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.) On June 22, 1999, the Company completed the acquisition of the Photomatrix Scanner and Maintenance Division of Photomatrix Imaging Corporation of Carlsbad, California, including certain product and technology rights. The Company recently announced that it had reached an agreement in principle to acquire 100% of the stock of Agissar Corporation. RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 VS. 1998 Total revenues in the first six months of 1999 increased $5.5 million or 24% compared with the first six months of 1998 and $5.1 million or 53% for the second quarter of 1999 compared to the second quarter of 1998. Product sales decreased $.8 million or 5% in the first six months of 1999 compared with the first six months of 1998. Product sales increased $1.2 million or 21% in the second quarter of 1999 compared with the second quarter of 1998. Compared to the first six months of 1998, North American sales increased $3.8 million during the first six months of 1999. International sales decreased $4.6 million during the first six months of 1999 compared with the first six months of 1998. This decrease was mainly because $5.7 million in sales to the Japanese health organization during the first six months of 1998 were not repeated in 1999 but were partly offset by increases in sales to Europe. North American sales increased $.9 million during the second quarter of 1999 compared to the second quarter of 1998 due to the Company's continued focus on solutions sales. International sales increased $.3 million during the second quarter of 1999 due to the focus on sales to Europe. Service revenues increased $6.2 million in the first six months of 1999 compared to the first six months in 1998 and increased $3.9 million during the second quarter of 1999 compared to the same period in 1998. Customer service revenue in the first six months of 1999 increased $2.0 million compared to the first six months of 1998 and increased $.9 million during the second quarter of 1999 compared to the same period in 1998, mainly due to increases in the third party maintenance business. Year to date professional service revenue increased $4.2 million and increased $3.0 million in the second quarter reflecting the Company's drive to provide greater customer value through total solutions in the targeted markets. Cost of product sales increased $.2 million from the first six months of 1998 and increased $1.4 million from the second quarter of 1998. Cost of product sales as a percentage of product sales was 65% for the first six months of 1999 compared to 60% in the prior year. This percentage was 62% for the second quarter of 1999, compared to 50% in the prior year. These increases are due to changes in the overall sales mix with an increased volume of lower margin commodity items sold as part of the total customer solutions. Service expenses increased $4 million in the first six months of 1999 and increased $2.3 million in the second quarter of 1999 compared with the respective periods of 1998. Customer service expenses increased $1.8 million during the first six months of 1999 and $1 million during the second quarter of 1999, which is reflective of the ongoing operating expenses related to the increase in revenue garnered by the acquisition of the Maintenance Division of Access Corporation. Professional service expenses increased $2.2 million during the first six months of 1999 and $1.3 million during the second quarter of 1999, reflective of the increase in revenue. The professional services gross margin increased 10% to 42% in the first six months of 1999 compared to 32% in the first six months of 1998. This margin increased 37% to 44% in the second quarter of 1999 compared to 7% in the second quarter of 1998. 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 $.4 million during the first six months of 1999 and increased $.2 million during the second quarter of 1999 compared to the respective periods in 1998 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 $.5 million during the first six months of 1999 compared with the first six months of 1998. These expenses also increased $.3 million during the second quarter of 1999 compared to the second quarter of 1998. These increases are mainly due to the amortization of goodwill and expenses related to the non-compete agreements with the principals of Southern Computer Systems. Interest expense increased $.5 million during the first six months of 1999 and increased $.3 million during the second quarter of 1999 due to the increased borrowing levels of the Company. See Note 4 of the Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents at June 30, 1999 increased $35,000 from December 31, 1998. Total borrowings increased to $19.6 million at June 30, 1999 from $11.5 million at the end of 1998. On May 10, 1999, the Company amended its credit agreement with a bank to reduce the line of credit from $13 million to $10 million and to establish a $10 million, five year term loan. (See Note 4 for further details.) Additional acquisition activity may cause the Company to review other financing alternatives. Operating activities used $6.5 million of cash in the first six months of 1999. Non-cash expenses recorded during the first six months of 1999 were $1.7 million vs. $2.2 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 increased $5.7 million during the first six months of the year. This increase is partially due to the timing of collections. The collection of receivables has been slowing as a result of the transition from a product based supplier which traditionally has quicker payment time frames and experience to a more complete solutions provider which typically has extended payment terms and a slower payment history, as well as the timing of payments for large state government installations. The Company is addressing this issue with more pre-sales communications and contract language that better fits the solutions business, in order to set a proper level of expectations with its customers. The increase in accounts receivable was also due to the acquisition of Photomatrix Imaging Corporation assets which accounted for $1 million. In addition, unbilled receivables relating to professional services revenue increased $1.4 million. Total inventories decreased $.8 million from December 31, 1998. Total manufacturing inventories decreased $1.5 million from the beginning of the year mainly due to reductions in finished goods inventory of $1.3 million due to year to date sales. Customer service inventories increased $.7 million due to the customer service inventory related to the acquisition of Photomatirx Imaging Corporation assets. Prepaid expenses and other increased $.4 million mainly due to the timing of 1999 tax payments. Net plant and equipment remained flat during the first six months 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 and the acquisition of the Photomatrix Imaging Corporation fixed assets of $.1 million, offset by depreciation expense recorded during the first six months of the year. Goodwill increased by $.5 million due to the acquisition of Photomatrix Imaging Corporation assets offset by goodwill amortization recorded during the first six months of 1999. 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. Assets of Photomatrix Imaging Corporation were purchased in June of 1999. The transaction was accounted for as a purchase and the excess cost over the fair value of the net assets acquired of $1.1 million is being amortized over an average period of twelve and one half years. Other assets increased by $.9 million due to the source code licensing agreement signed with Bluebird Systems of Carlsbad, California. Accounts payable decreased $1 million from December 31, 1998 due to the timing of payments. Accrued salaries and wages decreased $.5 million during the first six months of 1999 reflecting payment of the 1998 incentive compensation of $.6 million and the December 1998 commission of $.9 million in 1999, offset by accruals for commission and vacation. Taxes other than income taxes increased $.4 million due to the timing of sales and use tax payments. SCAN-OPTICS, INC., AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. (a) The annual meeting of stockholders was held on May 21, 1999. (c) The matters voted on at the meeting, number of votes cast or withheld, number of abstentions and broker nonvotes were: 1. Election of Directors: For Withheld --- -------- E. Bulkeley Griswold 6,806,506 110,281 John J. Holton 6,680,639 125,866 Robert H. Steele 6,696,514 109,991 2. Approval of 1999 Incentive and Non-Qualified Stock Option Plan: Broker For Against Abstentions Nonvotes --- ------- ----------- -------- 3,867,095 514,700 48,220 2,376,490 3. Appointment of Ernst & Young LLP as auditors for the fiscal year ending December 31, 1999. For Against Abstentions --- ------- ----------- 6,739,680 60,233 6,593 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) 10.11. The Scan-Optics, Inc. 1999 Incentive and Non-Qualified Stock Option Plan, approved by the stockholders on May 20,1999, is incorporated herein as an Exhibit by reference to the copy filed as part of the Company's proxy statement dated April 8, 1999 for its 1999 Annual Meeting of Stockholders. (b) No reports on Form 8-K were filed during the first six months of 1999. SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SCAN-OPTICS, INC. ------------------- (Registrant) Date August 16, 1999 /ss/ --------------------------- ---------------------------------- James C. Mavel Chairman, Chief Executive Officer, President and Director Date August 16, 1999 /ss/ ---------------------------- ----------------------------------- Michael J. Villano Chief Financial Officer, Vice President and Treasurer EX-27 2
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EXHIBIT 27. SCAN-OPTICS, INC. FINANCIAL DATA SCHEDULE 6-MOS DEC-31-1999 JUN-30-1999 251,000 0 28,378,000 221,000 10,682,000 42,256,000 20,221,000 16,894,000 59,735,000 20,125,000 0 150,000 0 0 30,187,000 59,735,000 13,520,000 28,061,000 8,808,000 27,956,000 (92,000) 0 515,000 197,000 54,000 143,000 0 0 0 143,000 .02 .02
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