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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, 2003
---------------------
( ) 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
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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
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). ( ) YES ( X ) NO
The number of shares of common stock, $.02 par value, outstanding as of May 12,
2003 was 7,439,732.
1
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(thousands, except share data) March 31, 2003 December 31, 2002
- ---------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
Assets
Current Assets:
Cash and cash equivalents $ 661 $ 274
Accounts receivable less allowance of $1,557 at
March 31, 2003 and $1,574 at December 31, 2002 6,717 5,554
Unbilled receivables - contracts in progress 690 377
Inventories 8,628 9,139
Prepaid expenses and other 558 591
---------------------------------------------------------------
Total current assets 17,254 15,935
Plant and equipment:
Equipment 8,839 8,836
Leasehold improvements 5,209 5,209
Office furniture and fixtures 724 725
---------------------------------------------------------------
14,772 14,770
Less allowances for depreciation and amortization 13,540 13,456
---------------------------------------------------------------
1,232 1,314
Goodwill 9,040 9,040
Other assets 117 117
---------------------------------------------------------------
Total Assets $ 27,643 $ 26,406
===============================================================
2
(thousands, except share data) March 31, 2003 December 31, 2002
- -------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,440 $ 2,454
Notes payable 1,500 1,500
Salaries and wages 1,296 958
Taxes other than income taxes 386 501
Income taxes 53 45
Deferred revenue 2,324 2,217
Customer deposits 1,208 1,308
Other 1,694 1,669
--------------------------------------------------------------------
Total current liabilities 10,901 10,652
Note payable 9,592 9,042
Other liabilities 1,886 1,640
Mandatory redeemable preferred stock, par value $.02
per share, authorized 3,800,000 shares;
3,800,000 issued and outstanding 3,800 3,800
Stockholders' Equity
preferred stock, par value $.02 per share,
authorized 1,200,000 shares; none
issued or outstanding
Common stock, par value $.02 per share,
authorized 15,000,000 shares;
issued, 7,439,732 shares at March 31, 2003
and December 31, 2002 149 149
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 38,354 38,354
Accumulated retained earnings deficit (33,471) (33,667)
Accumulated other comprehensive loss (922) (918)
--------------------------------------------------------------------
4,110 3,918
Less cost of common stock in treasury,
413,500 shares 2,646 2,646
--------------------------------------------------------------------
Total stockholders' equity 1,464 1,272
--------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 27,643 $ 26,406
====================================================================
See accompanying notes.
3
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended
March 31
(thousands, except share data) 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues
Hardware and software $ 4,222 $ 3,407
Professional services 1,384 1,626
Access services 2,504 2,791
-----------------------------------------------------------
Total revenues 8,110 7,824
Costs of Revenue
Hardware and software 2,628 2,084
Professional services 768 686
Access services 2,131 2,295
-----------------------------------------------------------
Total costs of revenue 5,527 5,065
Gross Margin 2,583 2,759
Operating Expenses
Sales and marketing 928 850
Research and development 339 559
General and administrative 928 952
Interest 199 218
-----------------------------------------------------------
Total operating expenses 2,394 2,579
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Operating income 189 180
Other income, net 17 6
-----------------------------------------------------------
Income before income taxes 206 186
Income tax expense 10 20
-----------------------------------------------------------
Net Income $ 196 $ 166
===========================================================
Basic earnings per share $ .03 $ .02
===========================================================
Basic weighted-average shares 7,026,232 7,026,232
Diluted earnings per share $ .03 $ .02
===========================================================
Diluted weighted-average shares 7,162,754 7,407,136
See accompanying notes.
4
SCAN-OPTICS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
March 31
(thousands) 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 196 $ 166
Adjustments to reconcile net income
to net cash used by operating activities:
Depreciation 97 104
Amortization of customer service inventory and
software license 491 669
Changes in operating assets and liabilities:
Accounts receivable and unbilled receivables (1,476) (440)
Refundable income taxes (7)
Inventories 20 (775)
Prepaid expenses and other 33 (45)
Accounts payable (14) (272)
Accrued salaries and wages 338 (67)
Taxes other than income taxes (115) (55)
Income taxes 8 (5)
Deferred revenues 107 226
Customer deposits (100) 579
Other 267 (177)
------------------------------------------------------
Net cash used by operating activities (148) (99)
Investing Activities
Purchases of plant and equipment, net (15) (14)
------------------------------------------------------
Net cash used by investing activities (15) (14)
Financing Activities
Proceeds from borrowings 1,700 700
Principal payments on borrowings (1,150) (1,225)
------------------------------------------------------
Net cash provided (used) by financing activities 550 (525)
Increase (decrease) in cash and cash equivalents 387 (638)
Cash and Cash Equivalents at Beginning of Year 274 1,662
-----------------------------------------------------
Cash and Cash Equivalents at End of Period $ 661 $ 1,024
=====================================================
See accompanying notes.
5
SCAN-OPTICS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Quarter Ended March 31, 2003
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,
2003, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2003. 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, 2002.
Certain 2002 amounts have been reclassified to conform to current year
presentation.
NOTE 2 - Inventories
- ------
The components of inventories were as follows:
March 31 December 31
(thousands) 2003 2002
- --------------------------------------------------------------------------------
Finished goods $ 58 $ 56
Work-in-process 1,988 1,325
Service parts 3,615 3,715
Materials and component parts 2,967 4,043
------------------------------
$ 8,628 $ 9,139
=============================
NOTE 3 - Credit Arrangements
- ------
Notes payable reflect borrowings under a credit agreement ("Agreement") with
Patriarch Partners, LLC. ("Patriarch"). The Agreement allows for borrowings
under a revolving line of credit facility of $10 million and a term loan of $2
million.
As of December 31, 2002, the Company executed an amendment to the loan with
Patriarch to modify the capital expenditure covenant, from a maximum of $50,000
per quarter, to a maximum of $375,000 per year.
6
SCAN-OPTICS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Quarter Ended March 31, 2003
The outstanding borrowings at March 31, 2003 and December 31, 2002 were $11.1
million and $10.5 million, respectively. The revolving line of credit has been
classified as long term, with the exception of $1.5 million classified as
current, since management has the ability to maintain the March 31, 2003
outstanding balance through the next fiscal year. The available balance on the
outstanding borrowings was $.9 million and $1.5 million at March 31, 2003 and
December 31, 2002, respectively. The weighted average interest rate for the
first quarter of 2003 was 5.1% compared to 5.5% in 2002.
The carrying value of the notes payable to bank approximates its fair value and
is secured by all of the Company's assets.
NOTE 4 - Income Taxes
- ------
At March 31, 2003, the Company has U.S. federal and state operating loss
carryforwards of approximately $26,280,000 and $27,450,000, respectively. The
U.S. federal and state net operating loss carryforwards expire through 2015. At
March 31, 2003, the Company has approximately $194,000, $3,400,000 and $800,000
of net operating loss carryforwards for Canada, the United Kingdom and Germany,
respectively, which expire by 2007. At March 31, 2002, the Company had U.S.
federal and state operating loss carryforwards of approximately $18,000,000 and
$19,700,000, respectively. At March 31, 2002, the Company had approximately
$480,000, $2,700,000 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 for the first quarter of 2003
and 2002 to fully offset deferred tax assets relating to U.S. federal, state,
and foreign net operating loss carryforwards and other temporary differences.
7
SCAN-OPTICS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Quarter Ended March 31, 2003
NOTE 5 - Earnings Per Share
- ------
The following table sets forth the computation of basic and diluted earnings per
share:
March 31 March 31
2003 2002
- --------------------------------------------------------------------------------
Numerator:
Net earnings $ 196 $ 166
=====================================
Denominator:
Denominator for basic earnings
per share (weighted-average shares) 7,026,232 7,026,232
Effect of dilutive securities:
Employee stock options 136,522 380,904
-------------------------------------
Denominator for diluted earnings
per share (adjusted weighted-average
shares and assumed conversions) 7,162,754 7,407,136
=====================================
Basic earnings per share $ .03 $ .02
=====================================
Diluted earnings per share $ .03 $ .02
=====================================
NOTE 6 - Stock Based Compensation
- ------
The Company generally grants stock options to key employees and members of the
Board of Directors with an exercise price equal to the fair value of the shares
on the date of grant. The Company accounts for stock option grants in accordance
with APB Opinion No. 25, Accounting for Stock Issued to Employees, and,
accordingly, recognizes no compensation expense for the stock option grants.
Therefore, the Company has elected the disclosure provisions only of FASB
Statement No. 123.
Pro forma information regarding net income and earnings per share is required by
FASB Statement No. 123, and has been determined as if the Company had accounted
for its stock options under the fair value method of that Statement. The fair
value of these options was estimated at the date of grant using a Black-Scholes
option pricing model.
8
SCAN-OPTICS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Quarter Ended March 31, 2003
For the purpose of pro-forma disclosures, the estimated fair value of the stock
options is expensed ratably over the vesting period, which is 36 months for key
employees and 6 months for the Board of Directors. The Company's pro-forma
information follows:
For the three months ended
March 31
(thousands, except per share amounts) 2003 2002
- ---------------------------------------------------------------------------------------------------------
Net income, as reported $ 196 $ 166
Stock option expense (14) (164)
------------------------------------------
Pro forma net income $ 182 $ 2
==========================================
Basic earnings per share, as reported $ .03 $ .02
Stock option expense .00 (.02)
Pro forma basic earnings per share $ .03 $ .00
==========================================
Diluted earnings per share, as reported $ .03 $ .02
Stock option expense .00 (.02)
Pro forma diluted earnings per share $ .03 $ .00
==========================================
NOTE 7 - Comprehensive Income
- ------
The components of comprehensive income, net of related tax, for the three-months
ended March 31, 2003 and 2002 are as follows:
March 31 March 31
(thousands) 2003 2002
- ------------------------------------------------------------------------------------------------------------------
Net income $ 196 $ 166
Foreign currency translation adjustments (4) (19)
---------------------------------------
Comprehensive income $ 192 $ 147
========================================
The components of accumulated comprehensive loss, net of related tax, at March
31, 2003 and December 31, 2002 are as follows:
March 31 December 31
(thousands) 2003 2002
- ------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustments $ (899) $ (970)
---------------------------------------
Accumulated comprehensive loss $ (899) $ (970)
=======================================
9
SCAN-OPTICS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Quarter Ended March 31, 2003
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.
Three Months Ended
March 31
(thousands) 2003 2002
- ------------------------------------------------------------------------------------------------------------------
Revenues
Solutions and products $ 5,598 $ 4,527
Access services 2,504 2,791
Contract manufacturing services 8 506
---------------------------------------
Total revenues 8,110 7,824
Cost of solutions and products 3,396 2,770
Service expenses 2,131 2,295
---------------------------------------
Gross margin 2,583 2,759
Operating expenses, net 2,377 2,573
----------------------------------------
Income before income taxes $ 206 $ 186
=======================================
Total expenditures for additions to long-lived assets $ 53 $ 41
Certain 2002 amounts have been reclassified to conform to the current year
presentation.
The Solutions and Products Division includes the sale of hardware and software
products as well as professional services. Contract Manufacturing Services
provides assembly and test services under contracts with customers who develop
and sell a variety of equipment.
NOTE 9 - Bill and Hold Transactions
- ------
Revenues relating to sales of certain equipment (principally optical character
recognition equipment) are recognized upon acceptance, shipment, or installation
depending on the contract specifications. When customers, under the terms of
specific orders or contracts,request that the Company manufacture and invoice
10
SCAN-OPTICS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Quarter Ended March 31, 2003
the equipment on a bill and hold basis, the Company recognizes revenue based
upon an acceptance received from the customer. During the first quarter of 2003,
the Company recorded $1.7 million of bill and hold revenue. At March 31, 2003,
accounts receivable included bill and hold receivables of $1.5 million. There
were no bill and hold transactions in the first three months of 2002.
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. Scan-Optics, Inc. (the "Company")
and its future operations are subject to a number of risks, including those
discussed below. The following list is not intended to be an exhaustive list of
all the risks to which the Company's business is subject, but only to highlight
certain substantial risks faced by the Company. Although the Company completed a
total debt restructuring effective December 31, 2001 (see Note 3 to the
consolidated financial statements for further information), the Company remains
highly leveraged and could be adversely affected by a significant increase in
interest rates or an inability to comply with financial covenants in its debt
agreements. A one percent increase in the prime rate would increase the annual
interest cost on the outstanding loan balance at March 31, 2003 of approximately
$11 million by $.1 million. The Company's business could be adversely affected
by downturns in the domestic and international economy. The Company's
international sales and operations are subject to various international business
risks. The Company's revenues depend in part on contracts with various state or
federal governmental agencies, and could be adversely affected by patterns in
government spending. The Company faces competition from many sources, and its
products may be replaced with products relying on alternative technologies. The
Company's business could be adversely affected by technological changes.
The Company achieved net income of $.2 million in the first quarter of 2003
consistent the first quarter of 2002.
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, introduction of a Business Process Outsourcing
Service and expansion of the Access Services Division to include enterprise wide
maintenance services. The inability of the Company to carry out these
initiatives may have a material adverse effect on revenue growth and earnings.
11
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 has chosen to focus primarily on the government and
insurance markets, while continuing to address the transportation, assessment,
financial and order fulfillment 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 Company's revenue in the solutions initiative
increased $1.5 million from 2002 to 2003 mainly due to an increase in the
government market.
The second initiative, introduced in early 2003, is a Business Process
Outsourcing ("BPO") Service to capture images of documents for subsequent
document management, storage and retrieval. The Company's new BPO Services
provide a low-risk, cost-effective solution for customers with document imaging
needs. As increasing numbers of both government and commercial clients migrate
from paper-based filing systems to image-based storage and retrieval systems,
they are faced with the need to convert their existing paper files or to
outsource the activity. The BPO services offer customers a high quality, turnkey
outsourcing solution utilizing the Company's proprietary hardware technology, as
well as its software skills, resources and process controls.
The third initiative, recently announced by our Access Services Division, is an
expansion to include enterprise wide maintenance services for network and
network related equipment. Leveraging off the experience it has gained through
its many third party agreements, Access Services is well positioned to expand
maintenance coverage and provide customers with "one number to call" for
maintenance services regardless of the equipment manufacturer. Through the
division's 120 technical service representatives strategically located
throughout the US, the Company believes that it can provide high quality, cost
effective enterprise maintenance to its existing customer base as well as new
accounts.
While the Company is principally focused on improving the profitability of its
existing operations, the Company may consider acquiring key strategic products
or enterprises. Acquisitions will be considered based upon their individual
merit and benefit to the Company.
Results of Operations for the Three Months Ended March 31, 2003 vs. 2002
- ------------------------------------------------------------------------
Total revenues increased $.3 million or 4% from the first quarter of 2002 to the
first quarter of 2003.
Hardware and software revenues increased $.8 million or 24% in the first quarter
of 2003 compared with the first quarter of 2002. North American sales increased
$.9 million or 28% due to increased order activity related to the replacement of
older Series 9000 scanners with the new generation scanner, the 9000M.
International sales decreased $.1 million or 75%.
12
Professional services revenues decreased $.2 million or 15% in the first quarter
of 2003 compared with the first quarter of 2002, due mainly to reduced contract
revenue and program change requests. The decrease is due to a change in sales
mix from solutions sales to hardware replacement sales, which typically only
contain a small professional services application conversion engagement.
Access Services revenues decreased $.3 million or 10% from the first quarter of
2002, due mainly to a decrease in revenue from the Company's proprietary
maintenance contracts as a result of lower maintenance rates for the latest
generation of the Series 9000 scanner, the 9000M, as compared to the earlier
Series 9000 scanner. The Company was also impacted by a few customers
discontinuing maintenance due to changes in their business.
Cost of hardware and software increased $.5 million from the first quarter of
2002 as a reflection of the increase in revenues. Cost of hardware and software
sales as a percentage of revenue was 62% for the first quarter of 2003, compared
to 61% in the prior year.
Cost of professional services increased $.1 million from the first quarter of
2003 compared to the same period in 2002. The Professional Services organization
includes software product support and professional services implementation. The
product support organization recorded a gross margin of 63% in the first quarter
of 2003 vs. 70% in the prior year. The professional services implementation
group recorded a gross margin of 23% in the first quarter of 2003 vs. 47% in the
prior year. The decrease in margin is mainly due to a decrease in revenue due to
a change in sales mix from solutions sales to hardware replacement sales, which
typically only contain a small professional services application conversion
engagement.
Cost of Access Services in the first quarter of 2003 decreased $.2 million in
comparison with the first quarter of 2002. The decrease was mainly due to a
reduction in salaries and related benefits as a result of a decrease in
headcount and increased efficiency.
Sales and marketing expenses increased $.1 million from the first quarter of
2002 mainly due to a increase in consulting fees and outside services related to
third party contracts with a telesales organization as well as a dedicated
reseller for certain government agencies.
Research and development expenses decreased $.2 million from the first quarter
of 2002 mainly due to a decrease in software license amortization related to the
BlueBird software agreement, which has been fully amortized. The investment in
research and development initiatives are consistent with the prior year.
General and administrative expenses were consistent with the first quarter of
2002.
Interest expense remained consistent with the first quarter of 2002.
13
Liquidity and Capital Resources
- -------------------------------
Cash and cash equivalents at March 31, 2003 increased $.4 million from December
31, 2002 levels.
Total borrowings increased $.6 million at March 31, 2003 from $10.5 million at
the end of 2002. The available balance on the line of credit was $.9 million at
March 31, 2003. The Company is in compliance with all of the financial covenants
as of March 31, 2003. The Company anticipates meeting its current obligations
and resource needs through the funds generated from operations. (See Note 3 for
further details.)
Operating activities used $.1 million of cash in the first three months of 2003.
Non-cash expenses recorded during the quarter were $.6 million vs. $.8 million
for the same period in 2002. These expenses relate to depreciation of fixed
assets (discussed in net plant and equipment below), amortization of customer
service inventory and amortization of software license.
Net accounts receivable and unbilled receivables increased $1.5 million from
December 31, 2002 due to the timing of collection of outstanding receivables.
Total inventories at March 31, 2003 decreased $.5 million from December 31,
2002. Total manufacturing inventories decreased $1 million, offset by a $.6
million increase in work-in-process, from the beginning of the year mainly due
to timing for the second quarter build process. Customer service inventories
decreased $.1 million due mainly to the amortization of inventory.
Net plant and equipment decreased $.1 million from December 31, 2002 mainly due
to depreciation expense reported during the quarter.
Accounts payable was consistent with the balance at December 31, 2002.
Salaries and wages increased $.3 million mainly due to the bonus accrual related
to the 2003 bonus accrual and an increase in accrued vacation and commissions.
Taxes other than income taxes decreased $.1 million from December 31, 2002 due
to a decrease in sales and use taxes due to timing of payments.
Customer deposits decreased $.1 million from December 31, 2002 due to the
transfer of deposits to accounts receivable to offset recorded product sales.
Deferred revenues increased $.1 million due to the timing of annual billings.
14
Other liabilities increased $.2 million due to the recording of a sales type
lease that resulted in deferred income during the first quarter of 2003.
15
OTHER MATTERS
Rider 17 A
Critical Accounting Policies
Our critical accounting policies are discussed in Management's Discussion and
Analysis of Consolidated Financial Condition and Results of Operations in our
Annual Report on Form 10-K For the year ended December 31, 2002. The preparation
of our financial statements requires us to make estimates that affect the
reported amounts of assets, liabilities, revenue and expenses and related
disclosures of contingent assets and liabilities. We base our accounting
estimates on historical experience and other factors that are believed to be
reasonable under the circumstances. However, actual results may vary from these
estimates under different assumptions or conditions.
Quantitative and Qualitative Disclosures About Market Risk
In 2001, the Company completed a total debt restructuring (see Note 3 for
further information), however, the Company remains highly leveraged and could be
adversely affected by a significant increase in interest rates. A one percent
increase in the prime rate would increase the annual interest cost on the
outstanding loan balance at March 31, 2003 of approximately $11 million by $.1
million. The Company has minimal foreign currency translation risk. All
international sales other than sales originating from the UK and Canadian
subsidiaries are denominated in United States dollars. Refer to the Outlook
section of Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations.
Disclosure Controls and Procedures
The Company evaluated the design and operation of its disclosure controls and
procedures to determine whether they are effective in ensuring that the
disclosure of required information is timely made in accordance with the
Exchange Act and the rules and forms of the Securities and Exchange Commission.
This evaluation was made under the supervision and with the participation of
management, including the Company's principal executive officer and principal
financial officer within the 90-day period prior to the filing of this Quarterly
Report on Form 10-Q The principal executive officer and principal financial
officer have concluded, based on their review, that the Company's disclosure
controls and procedures, as defined at Exchange Act Rules 13a-14(c) and
15d-14(c), are effective to ensure that information required to be disclosed by
the Company in reports that it files under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. No significant changes were
made to the Company's internal controls or other factors that could
significantly affect these controls subsequent to the date of their evaluation.
16
SCAN-OPTICS, INC., AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6 (B) - REPORTS ON FORM 8-K
For the Three Months Ended March 31, 2003
No reports on Form 8-K were filed during the first quarter of 2003.
17
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 15, 2003 / ss/
--------------------------------- -----------------------------------
James C. Mavel
Chairman, Chief Executive Officer,
President and Director
Date May 15, 2003 / ss/
--------------------------------- ------------------------------------
Michael J. Villano
Chief Operating Officer, Chief
Financial Officer,
Vice President and Treasurer
18
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, James C. Mavel, Chairman, Chief Executive Officer and President of
Scan-Optics, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Scan-Optics, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statement
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
19
Date: May 15, 2003
/ ss/
-----------------------------------
James C. Mavel
Chairman, Chief Executive Officer
and President
20
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Michael J. Villano, Chief Operating Officer ,Chief Financial Officer,
Vice President and Treasurer of Scan-Optics, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Scan-Optics, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statement
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
21
Date: May 15, 2003
/ ss/
-----------------------------------
Michael J. Villano
Chief Operating Officer, Chief Financial
Officer, Vice President and Treasurer
22