UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 0-28946
Vivid Technologies, Inc.
(Exact name of registrant as specified in its charter)
Delaware 04-3054475
(State of incorporation) (I.R.S. Employer Identification No.)
10E Commerce Way, Woburn, Massachusetts 01801
(Address of principal executive offices) (Zip Code)
(781) 938-7800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained to the best of Registrant's knowledge, in definitive proxy
or information statements incorporated by reference to Part III of
this Form 10-K or any amendment to this Form 10-K. [ X ]
The aggregate market value of the Registrant's Common Stock, $.01 par
value, held by non-affiliates of the registrant as of November 28,
1997 was $123.5 million based on the price of $15.88 on that date on
the Nasdaq National Market. As of December 17, 1997, 9,517,601
shares of the Registrant's Common Stock, $.01 par value, were issued
and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Company's Proxy Statement involving the election
of directors, which is expected to be filed within 120 days after the
end of the Company's fiscal year, are incorporated by reference in
Part III (Items 10, 11, 12 and 13) of this Report.
Part I
Item 1. Business
Information contained in this Report contains forward-looking
statements such as statements of the Company's plans, objectives,
expectations and intentions, that can often be identified by the use
of forward-looking terminology, such as "may," "will," "expect,"
"anticipate," "believe," "plan," "intend," "could," "estimates," "is
being" or "goal" or other variations of these terms or comparable
terminology. Such statements, which include statements relating to
the anticipated growth of the market for explosives detection
equipment, the Company's ability to develop and market new products
and the Company's ability to enter new markets, and other matters are
subject to risks and uncertainties that could cause actual results to
differ materially from those anticipated. The cautionary statements
made in this Report should be read as being applicable to all forward-
looking statements wherever they appear in this Report. The forward-
looking statements contained herein speak only as of the date of this
Report. Vivid expressly disclaims any obligation or undertaking to
release publicly any updates or revisions to any such statement or
reflect any change in Vivid's expectations or any change in events,
conditions or circumstances on which any such statement is based.
Factors that could cause or contribute to such differences include
those discussed in the risk factors set forth in Item 7 below (the
"Risk Factors") as well as those discussed elsewhere herein.
Vivid Technologies, Inc. ("Vivid" or the "Company") is a leading
developer, manufacturer and marketer of automated inspection systems
that detect explosives in airline checked baggage. The Company also
offers a system that can be used to screen carry-on baggage and
enhance building security. The Company's family of advanced
explosives detection systems identify targeted materials by analyzing
the physical characteristics of each item in a bag or parcel,
including the atomic number and mass, using patented composition
analysis techniques and proprietary dual energy X-ray technology.
These systems automatically (without the use of an operator) isolate
and identify targeted materials within a bag or parcel, thereby
preventing a suspect bag or parcel from being loaded into an aircraft
or entering a building until cleared by operator inspection. The
Company's systems can also be used to identify a wide variety of
other substances, including drugs and currency.
In 1993, the Company's automated systems were successfully
deployed in airports as part of an integrated multi-level checked
baggage screening approach that is being adopted in many countries
throughout the world. As of September 30, 1997, the Company had sold
more than 220 systems for installation in airports throughout Europe,
Asia and the United States of which over 180 systems had been shipped
and installed. Airports at which the Company's systems are deployed
include London Heathrow and London Gatwick, Paris Charles de Gaulle,
Hong Kong's Chek Lap Kok, Malaysia's Kuala Lumpur, Amsterdam, Zurich,
Brussels, Glasgow and Alicante in Spain.
The Company was incorporated as a Massachusetts corporation in
May 1989 under the name of QDR Security, Inc. The Company changed
its name to Vivitech, Inc. in June 1989 and was renamed Vivid
Technologies, Inc. in September 1989. In October 1996, the Company
changed its state of incorporation to Delaware.
Industry Background
Markets. There are over 600 commercial airports worldwide
providing scheduled service to more than 2.5 billion passengers per
year. Of these airports, over 400 are located in the United States,
150 in Europe and 50 in the Asia-Pacific region. Based upon the
installations of the Company's systems, the Company believes that one
integrated multi-level checked baggage screening system can serve up
to approximately one million passengers per year in mid-size and
large airports. The capabilities of each integrated multi-level
system at each airport, as well as the number of systems required,
will vary depending upon a variety of factors, including the
explosives detection equipment deployed, the configuration of the
airport's baggage handling systems, the nature of the integration of
the explosives detection equipment with the airport's baggage
handling systems and the profile of the airport's passenger traffic
flow. Airports deploying advanced explosives detection equipment,
including smaller airports, may choose to implement freestanding
systems in addition to or as an alternative to integrated systems.
The Company believes that the implementation of effective
checked baggage screening will highlight the ineffectiveness of
conventional X-ray systems to identify explosives in carry-on
baggage. The United Nations International Civil Aviation
Organization ("ICAO") requires all 184 member states to inspect 100%
of international carry-on baggage for the detection of weapons, and
virtually all airports use conventional X-ray systems for this
purpose. The Company believes that several thousand of these
conventional X-ray systems are installed in airports throughout the
world, and that these systems are candidates for replacement with
more sophisticated systems.
Market Evolution and Government Initiatives. In the 1970s, in
response to hijackings, airports worldwide began to install X-ray
systems to screen carry-on baggage for weapons such as guns and
knives. When combined with walk-through metal detectors, these
systems substantially reduced the number of airplane hijackings. The
success of these systems in airports also fostered their adoption for
use by governmental agencies and private companies. As the threat to
civil aviation evolved in the early 1980's from hijackings to
bombings, many countries required checked baggage on international
flights to be inspected. Most equipment initially deployed for this
purpose has been conventional X-ray systems. Although conventional X-
ray systems are effective for the detection of weapons made from
dense materials with defined shapes, such as guns and knives, they
are ineffective in detecting explosive materials that are not as
dense and can be molded into virtually any shape.
In response to the December 1988 bombing of Pan American Flight
103 over Lockerbie, Scotland, many countries began the installation
of systems that could detect plastic and other explosives in airline
baggage. Europe, led by the United Kingdom, has been at the
forefront of deploying advanced automated explosives detection
equipment. The United Kingdom Department of Transport (the "UK DOT")
has required the United Kingdom's commercial airports to deploy
systems for 100% screening of international checked baggage. The
European Civil Aviation Conference ("ECAC"), an organization of 36
member states, has resolved to implement 100% screening of
international checked baggage. Several of those countries, including
Belgium, France, Netherlands, Spain and Switzerland, have begun to
implement checked baggage screening approaches similar to that
adopted by the United Kingdom.
In the Asia/Pacific region, two major new airports in Malaysia
and Hong Kong have purchased integrated systems and plan to commence
operations with 100% checked baggage screening in place. Other new
airports and terminals in the region, including those in Singapore,
South Korea and Thailand, are being designed to include 100%
screening of international checked baggage using advanced automated
explosives detection systems. These and other countries in the
region, including Japan, Philippines, Australia and New Zealand, are
also studying the implementation of these systems at existing
airports.
Following the Pan American Flight 103 bombing, the United States
enacted the Aviation Security Improvement Act of 1990 (the "Aviation
Security Act"). The Aviation Security Act directed the Federal
Aviation Administration (the "FAA") to develop a standard for
explosives detection systems and required airports in the United
States to deploy systems meeting this standard by 1993. To date, no
system has demonstrated that it meets the FAA standard under
realistic airport operating conditions, including processing baggage
at throughput rates required by airport operators and airlines. As a
result, the FAA has not required the installation of automated
explosives detection systems, and only a limited number of these
systems have been deployed, primarily on a test basis, in the United
States. Although ECAC has adopted a standard similar to the FAA
standard as a long-term goal, they have allowed and promoted the
deployment of effective systems even though overall they do not meet
the standards.
In response to the crash of TWA Flight 800 off Long Island, New
York in July 1996, President Clinton formed the White House
Commission on Aviation Safety and Security, chaired by Vice President
Gore (the "Gore Commission"), to review airline and airport security
and oversee aviation safety. The Gore Commission released its
initial and final reports in September 1996 and February 1997,
respectively, and in October 1996, the United States enacted the
Federal Aviation Re-Authorization Act of 1996 (the "Re-Authorization
Act") which included an allocation for the purchase of explosives
detection systems and other advanced security equipment by air
carriers and airport authorities. The Re-Authorization Act requires
that, until such time that the FAA determines that the equipment
certified by the FAA is commercially available and has successfully
completed operational testing, the FAA shall facilitate the
deployment of other commercially available explosives detection
devices which the FAA determines will enhance aviation security.
During 1997, the FAA purchased a variety of state-of-the-art
explosives detection devices from several manufacturers, including
eight systems from the Company.
Implementation of Checked Baggage Systems. Effective screening
of checked baggage for explosives and other contraband is a complex
task. To accomplish this task while meeting the operational
requirements of airports, a screening system must be flexible,
accurate, fast, reliable and cost-effective. The screening system
must have the ability to effectively identify a wide range of
explosives, including plastic explosives that can be molded into
virtually any shape. In addition, the system must have an acceptable
false alarm rate, rejecting only a limited percentage of explosive-
free luggage. The system must also process baggage rapidly and have
limited downtime to avoid delays. Costs associated with installation
include the cost of modifying the airport's baggage handling system
to accommodate the explosives detection equipment and the cost of
integrating that equipment with the baggage handling system. A key
component of the cost of operation is the staffing associated with
operating these systems.
Several advanced explosives detection systems have been
developed to address these requirements, each with its own inherent
advantages and limitations. These systems include dual energy X-ray,
trace detection and computed tomography ("CT") systems. Dual energy
X-ray systems measure the X-ray absorption properties of a bag's
contents at two different X-ray energies to determine if any of the
items have the physical characteristics of explosive materials.
Trace detection equipment, known as "sniffers," detects particulate
and chemical traces of explosive materials collected by manually
wiping or vacuuming the bag under inspection. CT systems use
hundreds of partial X-ray images, referred to as slices, to analyze
the contents of a bag. The FAA first certified a CT-based system in
December 1994. However, as recommended by the Gore Commission's
final report and as required by the Re-Authorization Act, this system
must undergo further testing to resolve whether it can operate under
realistic airport operating conditions, including processing baggage
at required throughput rates.
In 1993, BAA plc ("BAA"), formerly the British Airport Authority
and one of the first airport operators to implement 100% checked
baggage screening using automated explosives detection equipment,
developed a multi-level automated screening approach that integrates
the explosives detection equipment directly into the airport baggage
handling systems. The multi-level approach, which is being adopted
throughout Europe and the Asia-Pacific region, separates the
screening process into multiple steps, and permits the use of
equipment at each stage that is most suitable for the requirements of
that particular stage.
Under the multi-level approach, a fully-automated Level 1
explosives detection system is integrated into the existing airport
baggage handling system to screen rapidly all baggage without an
operator in attendance. Bags rejected by the Level 1 system are
subjected to Level 2 inspection. Level 2 inspection equipment allows
an operator to review and manipulate images of the contents of the
rejected bags provided by a Level 1 system. If the operator rejects
the bag, it is forwarded for Level 3 inspection. Level 3 inspection
is the slowest and most detailed process. Bags rejected at Level 3
are then opened and inspected by hand in the presence of the
passenger. Bags not rejected at any inspection level are conveyed by
the baggage handling system for loading into the aircraft. This
multi-level approach, when implemented with rapid automated
explosives detection equipment, can maintain the processing rates of
existing baggage handling systems. The multi-level approach also
significantly reduces operating costs by reducing staffing
requirements.
Level 1 inspection systems, which must inspect all baggage on a
conveyor line, are often required to inspect baggage during peak
periods at the rate of 900 to 1,500 bags per hour (2.4 to 4.0 seconds
per bag) in order to avoid delays in the baggage handling process.
Level 2 inspection systems are often required to process baggage at
the rate of 180 to 360 bags per hour (10 to 20 seconds per bag).
Level 3 systems can be slower to accommodate the greater precision
required for the operator to fully inspect the bag in order to avoid
the undesirable and expensive final inspection process, which
requires the bag to be reunited with the passenger and inspected by
hand.
As a result of their high throughput rates, dual energy X-ray
explosives detection systems have been deployed in all fully
integrated Level 1 and most Level 2 installations. Trace Detection,
and to a lesser extent CT scanners, have generally been deployed as
Level 3 systems. More recently, enhanced versions of dual energy X-
ray explosives detection systems have been deployed as Level 3
systems. In addition, trace detection, dual energy X-ray and CT
scanners have been deployed as free-standing checked baggage
explosives detection systems.
Implementation of Carry-on Baggage Systems. There are currently
no requirements for the use of automated explosives detection systems
to screen carry-on baggage. However, the presence of explosives in
carry-on baggage poses a serious threat to civil aviation. A
published industry source estimated that approximately one quarter of
bombs smuggled on board aircraft were hidden in carry-on baggage. As
the global implementation of hold baggage systems continues,
regulators are shifting their focus to the detection of explosives in
carry-on baggage. The final report of the Gore Commission
recommended that the FAA begin conducting feasibility studies with
regard to the use of advanced explosives detection equipment for
carry-on baggage systems. The FAA performed an initial evaluation of
advanced explosives detection equipment for carry-on baggage systems
in May and June 1997.
Products
The Company develops, manufactures and markets a family of
advanced automated systems that can detect explosives and other
contraband in airline baggage and other parcels. The first market to
emerge for these systems has been explosives detection for airline
baggage. The Company's product line includes Level 1 and Level 2
integrated automated explosives detection systems for checked
baggage, freestanding automated explosives detection systems for
Level 3, terminal and baggage hall inspection of checked baggage, and
an automated explosives detection system for carry-on baggage, hand
baggage and parcels. As of September 30, 1997, the Company had
shipped and installed approximately 180 systems for use in airports
throughout Europe, the Asia-Pacific region and North America.
Each of the Company's automated checked baggage explosives
detection systems uses a proprietary instrumentation quality power
supply that generates alternating high (150kV) and low (75kV) energy
pulses at film safe levels of exposure. The power supply is driven
by an X-ray controller that uses both current and source voltage
feedback to maintain a stable, repeatable fan shaped X-ray beam. As
the X-ray beam passes through the bag and its contents, a portion of
the beam is absorbed (referred to as X-ray absorption or attenuation)
and a portion is scattered. The beam that passes through the bag
without being absorbed or scattered is referred to as the transmitted
beam and contains information regarding the X-ray absorption
properties of the objects within the bag at each of the two levels of
energy generated by the X-ray tube. This information can be used to
analyze the atomic number, mass and other physical characteristics of
the objects within the bag. The transmitted beam also contains
information that can be used to make high quality images of the
contents of a bag.
The Company's automated checked baggage explosives detection
systems incorporate a high resolution detector array that collects
high quality data from the transmitted X-ray beam consisting of more
than one million pixels of information per bag. The systems then
employ the Company's patented composition analysis software
algorithms to identify and separate the individual objects within a
bag, including objects between other items or within a container.
These algorithms also analyze the atomic number, mass and other
characteristics of each of those objects to determine whether they
match those of a targeted item, such as explosives or other
contraband. Additional algorithms detect materials such as lead that
could be used to shield an explosive device from this analysis.
X-ray absorption analysis techniques are less effective for
detecting certain configurations of explosives which only absorb a
very small fraction of the transmitted beam. However, these
materials tend to scatter X-rays more than other materials. The
Company has developed proprietary scatter detection enhancement
("SDE") technology that enhances its systems' ability to detect these
configurations. The Company's SDE technology, which includes a
combination of additional detector arrays and software, measures and
analyzes the scattered X-ray intensity emitted from baggage in both
the forward and backward direction. If the scatter levels indicate
the possible presence of a suspect material in a bag, the affected
area is further analyzed to determine if a threat is present. The
Company has incorporated SDE technology in most of its checked
baggage inspection products, either as an option or a standard
feature, and also offers this technology as an upgrade for existing
systems.
Both the Company's composition and scatter analysis techniques
result in a computer-generated decision regarding the contents of the
baggage screened. Any bag that is determined to contain a suspect
object will cause the system to reject the bag. In the case of an
operator-attended system, such as a Level 2 or Level 3 system, an
image of the rejected bag is presented to an operator for detailed
inspection. The bag image is presented in high-resolution gray
scale, with the suspect object highlighted in color. The system can
be programmed to sound an alarm, as well as require the operator to
acknowledge the alarm by pressing a designated button to either
reject or clear the bag.
The Company has integrated its products into a wide range of
airport baggage handling systems. These products make use of an
effective control software developed by the Company to facilitate
communication between the explosives detection system and the airport
baggage handling system. If no suspect object is detected by the
automated system, a "clear" status is sent to the baggage handling
system, allowing the bag to continue directly to the aircraft. If a
suspect object is detected, a "reject" message is sent to the baggage
handling system, requiring the next level of inspection. The Company
has gained broad acceptance of its control software by working
closely with many of the major baggage handling systems and control
systems contractors.
The Company's systems are offered in a variety of configurations
depending on the application or installation requirements.
Integrated Models. The Company's first integrated products were
the VIS Level 1 inspection system and the VDS Level 2 inspection
system. The VIS Level 1 system is used to inspect 100% of the
baggage on a baggage conveyor line. The system is capable of
automatically inspecting up to 1,500 bags per hour without an
operator. The VDS Level 2 system is designed to provide an operator
with a high quality image in addition to automatically highlighting
suspicious objects as an aid to the operator to inspect bags rejected
by the automated Level 1 system. The system also allows the operator
to view the contents of a bag using various imaging modes and
magnifications to determine whether the bag should be cleared or sent
to Level 3 for additional investigation.
The VIS-W was the Company's first single system alternative to
discrete Level 1 and Level 2 systems. The VIS-W combines a VIS Level
1 X-ray system ("VIS mainframe") with a single remote Level 2
operator workstation. The VIS mainframe transmits images of rejected
bags to the Level 2 operator workstation. Level 2 inspection is then
performed by an operator at a workstation in the same manner as an
operator of a discrete Level 2 VDS system, thereby eliminating the
need for a separate Level 2 explosives detection system to re-scan
all bags rejected at Level 1.
The VIS-M, introduced in April 1996, further extends the
capability of the workstation concept by allowing several VIS
mainframes to be interconnected ("Matrixed") with multiple Level 2
operator workstations. During off-peak periods, workstations can be
switched off, thereby significantly reducing staffing requirements
and operating costs. The efficiency gained by the additional
workstations combined with enhanced baggage control software allows
an operator to review images of the contents of a bag while the bag
continues en route to the aircraft. This eliminates the need and
associated costs of a secondary conveyor system to hold the bags
while Level 2 inspection is taking place. These costs can be a
significant portion of the total cost of purchase and installation of
a multi-level integrated explosives detection approach. The baggage
handling systems in the new airports in Malaysia and Hong Kong have
been designed to capitalize on the VIS-M's Matrixing capability by
interconnecting several of the Company's VIS-M systems with multiple
workstations to achieve 100% checked baggage screening.
Freestanding Models. The Company's freestanding checked baggage
explosives detection systems are intended to be installed in an
airport terminal, such as in front of airline check-in counters or in
a baggage handling hall. The H-1 inspects bags in the upright
position, as they tend to be carried by a passenger. The VDS series
of systems, which can be used as freestanding systems, inspect
baggage lying flat as they are transported on a conveyor belt.
In 1996, the Company introduced a modified version of the
operator-attended VDS system to serve as a Level 3 inspection system.
Since less than 1% of the bags reach Level 3, additional time is
available for bag inspection. This version, the VDS-II, combines the
Company's SDE capability with a high-resolution image to enhance
detection capability. The system is a low cost alternative to CT
scanners for Level 3 inspection. It is also faster and less labor
intensive than trace detection systems. This system can be
integrated into a baggage handling system or used as a freestanding
system in a baggage handling hall or terminal.
In 1996, the Company also introduced a modified version of the
VDS-II to serve as an inspection system for the inspection of baggage
that exceeds the maximum dimensions that can be accommodated by
standard baggage handling conveyor lines. The system can be
integrated into a baggage handling system or used as a freestanding
system in a baggage hall or terminal.
Carry-on Model. The Company offers its Model APS system to
inspect carry-on baggage, hand baggage and parcels for explosives or
contraband material. The system is being evaluated by various
governmental agencies. The Model APS is similar in configuration to
conventional X-ray systems used to screen for concealed weapons
currently installed in airports and government and private
facilities. While an operator is required to inspect each bag for
weapons, the Model APS automatically alerts the operator to the
presence of suspect explosive materials. The Model APS incorporates
an advanced proprietary operator interface that allows the operator
to view the contents of a bag using various imaging modes and
magnifications to determine whether the bag should be cleared or
rejected for further inspection.
The Company developed the APS system with Gilardoni, S.p.A.
("Gilardoni"), a manufacturer of conventional X-ray weapons screening
systems and X-ray based equipment for the medical field. The system
combines many of the advanced detection algorithms developed by the
Company for its automated checked baggage explosives detection
systems with an X-ray main frame using conventional dual energy X-ray
technology. The arrangement with Gilardoni greatly reduced the time-
to-market of the Company's APS carry-on baggage inspection system.
In July 1997, the first sale of an APS system was completed to the
Public Intelligence Department in Riyadh, Saudi Arabia. In November
1997, the Company received an order for seven Model APS systems for
the new Terminal One at JFK International Airport in New York. This
will be the first terminal in the world to screen all carry-on
baggage for explosives.
Other Products and Applications
The Company believes that installations of advanced automated
explosives detection systems at airports will accelerate the adoption
of this technology for other security applications, including the
protection of government and private facilities, and the screening of
mail. The Company is also exploring opportunities with various
governmental authorities and agencies in the United States and
internationally to use its equipment for the detection of illicit
drugs and the illegal export of currency. Further, the Company
believes that its technology can expand the traditional role of X-ray
technology in process control applications by providing enhanced or
new value-added functions such as material analysis, segregation and
sorting of materials, and quality control. See "Risk Factors -
Developing Market; Uncertainty of Market Acceptance" and "-
Uncertainty of Product Development."
Products Under Development
The Company's product development efforts are focused on
developing new products for the explosives and contraband detection
system market and further enhancing the functionality, reliability
and performance of its existing product line. The Company is
developing an explosives detection system, based upon the Company's
current technology, to meet FAA certification requirements. This
development effort is being funded in part by a two year $3.4 million
research grant from the FAA awarded in May 1997. This grant is
subject to termination by the government at any time. There can be
no assurance that the Company will be able to develop a system that
will meet FAA certification requirements on a timely basis, if at
all, or that if developed, the system will be commercially
successful. See "Risk Factors - Dependence on Government Regulation"
and " - Uncertainty of Product Development."
Marketing and Sales
The company sells and markets its products through its direct
sales force as well as independent sales representatives and
distributors in certain foreign countries, including Spain, France,
Hong Kong, Japan and Malaysia. As of September 30, 1997, the Company
had an 11 person marketing and sales staff. Two members of this
staff are located in the United Kingdom, one in Switzerland and one
in Kuala Lumpur. The Company also has a director of business
development for the United States based in New Jersey with a primary
focus on the non-aviation applications for the Company's systems.
The remainder of the marketing and sales staff is headquartered at
the Company's offices in Woburn, Massachusetts.
In the United States, the Company is working actively with the
FAA, other government agencies, airlines, airport operators and
congressional committees to promote the efficacy and cost-
effectiveness of its products for deployment in United States
airports. The Company is also working with United States and foreign
governmental agencies to promote its products for non-aviation
applications. In addition, the Company markets its products through
participation in trade shows, publication of articles and advertising
in trade journals, participation in industry forums and standard
setting organizations, and distribution of sales literature. The
Company benefits from customer referrals and the use of certain
customer installations as demonstration sites for its systems. In
fiscal 1995, 1996 and 1997, international sales accounted for
approximately 91%, 95% and 97%, respectively, of the Company's
revenues. All of these foreign sales were to the United Kingdom,
other European countries and the Asia-Pacific region. See "Risk
Factors - Reliance on International Sales" and "Note 6 in Notes to
Consolidated Financial Statements."
The selling process for the Company's products often involves a
team comprised of individuals from sales and marketing, engineering,
operations and senior management. This team frequently engages in a
multi-level sales effort directed toward a variety of constituents
which may include government regulators, the local airport operator
or authority, systems integrators and airlines. The Company's sales
effort with certain of its customers has extended over several years.
Potential customers frequently require the Company's products to be
tested against various performance standards and competitive
products. The Company maintains demonstration units for this purpose
and intends to increase its investment in demonstration units in
order to accelerate the introduction of its products to new
customers. Delays in anticipated purchase orders by the Company's
customers and potential customers could have a material adverse
effect on the Company's business. See "Risk Factors - Lengthy Sales
Cycle."
The Company has entered into an arrangement with Gilardoni for
the manufacture and sale of the Model APS carry-on baggage explosives
detection system. Under this arrangement, the Company has the
exclusive right to manufacture and sell this system in the United
States, the United Kingdom, certain other European countries and
Mexico. In addition, the Company has agreed not to sell any
competitive X-ray-based system within its territory unless
manufactured by Gilardoni or the Company. The Company intends to
pursue strategic alliances, acquisitions and licenses of
complementary technologies to further enhance its growth. See "Risk
Factors - Management of Growth."
In fiscal 1995, 1996 and 1997, sales to BAA accounted for
approximately 76%, 79% and 39%, respectively, of the Company's
revenues. Additionally, in fiscal 1997 Airport Authority Hong Kong
and Toyo Kanetsu K.K., the baggage-handling contractor for Malaysia's
Kuala Lumpur International Airport, accounted for 19% and 27%,
respectively, of the Company's revenues. See "Risk Factors -
Customer Concentration."
Customer Service and Support
The Company provides a high level of customer support to assist
in the installation and integration of the Company's products into
its customers' facilities and to assist in maintaining the
reliability of the Company's products once installed. The Company
offers a number of customer support services, including applications
support, training, system preventative and corrective maintenance,
and upgrades. The Company generally provides one year parts warranty
and offers primary and back-up service contracts to its customers.
The Company's customer support staff currently includes five support
engineers at its headquarters in Massachusetts, five support
engineers operating out of the Company's offices in the United
Kingdom and two support engineers in the Asia-Pacific region.
Regulation
The explosives detection systems manufactured and marketed by
the Company for use in airports are subject to regulation by the FAA,
corresponding foreign governmental authorities and ICAO, the United
Nations organization for establishing standard practices for the
aviation industry on a worldwide basis. Sales of the Company's
explosives detection systems for use in airports have been and will
continue to be dependent upon governmental initiatives to require or
support the screening of baggage with advanced explosives detection
systems. Substantially all of such systems have been installed at
airports in countries in which the applicable governmental or
regulatory authority overseeing the operations of the airport has
mandated such screening. Such mandates are influenced by many
factors outside of the control of the Company, including political
and budgetary concerns of governments, airlines and airports. See
"Risk Factors - Dependence on Government Regulation."
The FAA currently requires all carry-on baggage and
international checked baggage to be inspected by hand search or with
conventional X-ray equipment. United States airlines operating at
airports outside of the United States are required to meet FAA
security requirements in addition to the requirements of the local
authorities. The FAA permits the use of the Company's systems by
United States airlines at foreign airports as an alternative to
conventional X-ray equipment.
Under the Aviation Security Act, the FAA was required to develop
a standard for explosives detection systems and to certify equipment
that met this standard under realistic airport operating conditions.
The Aviation Security Act also required the deployment of certified
equipment within the United States by 1993. To date, no system has
demonstrated that it meets the FAA standard under realistic airport
operating conditions. As a result, the FAA has not required the
installation of automated explosives detection systems, and only a
limited number of these systems have been deployed, primarily on a
test basis, in the United States. The FAA first certified a CT-based
system in December 1994. However, as recommended by the Gore
Commission's final report and as required by the Re-Authorization
Act, this system must undergo further testing to resolve whether it
can operate under realistic airport operating conditions, including
processing baggage at required throughput rates. The Company's
systems do not meet FAA certification standards and there can be no
assurance that any of the Company's systems will ever meet this or
any other United States certification standard. Although ECAC has
adopted a standard similar to the FAA standard as a long-term goal,
they have allowed and promoted the deployment of effective systems
even though overall they do not meet the standards.
In response to the crash of TWA Flight 800, President Clinton
formed the Gore Commission to review airline and airport security and
oversee aviation safety. The Gore Commission released its initial
and final reports in September 1996 and February 1997, respectively,
and in October 1996, the United States enacted the Re-Authorization
Act which included an allocation for the purchase of explosives
detection systems and other advanced security equipment by air
carriers and airport authorities. The FAA has ordered initial
quantities of the CT-based system, trace detection systems and dual
energy X-ray based systems, including eight systems from the Company.
The deployment of these systems will allow the U.S. airlines, which
are the main users of the equipment, to gain experience with the
various technologies enabling them to determine which systems work
best in busy U.S. airport environments.
The UK DOT has mandated 100% screening of international checked
baggage in the United Kingdom. Similarly, the other ECAC member
states have resolved to implement 100% screening of international
checked baggage. The Company's Level 1, Level 2 and Level 3 systems,
as well as the Company's SDE technology, have been allowed for use by
the UK DOT. In most other ECAC member states, the Company's systems
either must be tested and approved or procured by governmental
authorities overseeing the operation of airports within the country.
In addition to the United Kingdom, the Company's systems have been
purchased or approved for use in airports in many European countries
including Belgium, France, The Netherlands, Spain and Switzerland.
Governmental authorities overseeing the construction of new
airports in the Asia-Pacific region are defining requirements for the
use of advanced explosives detection systems to achieve 100%
screening of international checked baggage at those airports. As a
result, the Company's systems are also being evaluated by the
applicable regulatory authorities in countries in the Asia-Pacific
region for purchases at new airports and have been installed for use
at the new airports being constructed in Malaysia and Hong Kong.
There can be no assurance that the Company's systems will be
purchased for installation in any of the other new airports or
terminals under construction or proposed for construction in that
region.
ICAO has adopted various recommendations and requirements for
screening of checked and carry-on baggage. Currently, ICAO requires
the screening of all international carry-on bags and recommends the
screening of international checked baggage. This requirement and
recommendation relates only to the screening of baggage and does not
require any specific technology to be used. There can be no
assurance that additional countries will mandate the implementation
of effective explosives screening or airline baggage, or that, if
mandated, the Company's systems will meet the certification or other
requirements of the applicable governmental authority. Even if the
Company's systems meet the applicable requirements, there can be no
assurance that the Company would be able to market its systems
effectively.
Research and Development
The Company's research and development efforts are focused on
developing new products for the explosives and contraband detection
system market and further enhancing the functionality, reliability
and performance of its existing product line. The Company's research
and development personnel also are involved in establishing
protocols, monitoring and interpreting and submitting test data to
the FAA and other domestic and foreign regulatory agencies to obtain
the requisite certifications, clearances and approvals for its
products. At September 30, 1997, the Company had 34 employees
engaged in research and development and engineering, including 13
employees engaged in software development. During fiscal 1995, 1996
and 1997, the Company's research and development expenses were
approximately $3.7 million, $3.5 million and $4.4 million,
respectively. In addition, during each of these years certain of the
Company's research and development expenses related to work performed
under the Company's FAA research and development grants were included
under costs of goods sold.
Intellectual Property
The Company relies upon trade secrets and patents to protect its
technology. Due to the rapid technological change that characterizes
the explosives detection system industry, the Company believes that
the improvement of existing technology, reliance upon trade secrets
and unpatented proprietary know-how and the development of new
products are generally as important as patent protection in
establishing and maintaining a competitive advantage. Nevertheless,
the Company has obtained patents and will continue to make efforts to
obtain patents, when available, in connection with its product
development program. The Company has obtained three patents and has
pending three patent applications in the United States (two of which
have been allowed but have not yet been issued). In addition, for
certain foreign countries the Company has pending patent applications
that correspond to the subject matter of certain United States
patents and patent applications. Two of the Company's United States
patents relate to applications of its dual X-ray technology and the
Company's software algorithms used to implement the Company's
screening analysis techniques. The Company's third patent relates to
the Company's SDE technology. These patents have expiration dates
ranging from 2011 to 2015. There can be no assurance that any of the
Company's unallowed patent applications will be granted, that any
patent or patent application will provide significant protection for
the Company's products or technology, be of commercial benefit to the
Company, or that its validity will not be challenged. Moreover,
there can be no assurance that foreign intellectual property laws
will protect the Company's intellectual property rights. In the
absence of significant patent protection, the Company may be
vulnerable to competitors who attempt to copy or use the Company's
products, processes or technology. See "Risk Factors - Limited
Protection of Intellectual Property Rights; Patent Litigation."
The Company has an exclusive perpetual license to use certain
patents and technology developed by Hologic, Inc. ("Hologic") for the
development, manufacture and sale of X-ray screening security systems
for explosives, drugs, currency and other contraband (subject to
termination by either party for certain defined defaults). The
Company also has a nonexclusive license to use this technology for
the development, manufacture and sale of X-ray-based products for
process control applications in the food and beverage industries.
Hologic and the Company have also granted to the other a non-
exclusive, royalty-free license to use any unpatented technology
developed by the other in connection with such party's research and
development activities. In addition, Hologic and the Company have
the right to obtain from the other an exclusive license, on
commercially reasonable terms to be negotiated, for any patented new
developments. See "Risk Factors - Limited Protection of Intellectual
Property Rights; Patent Litigation."
The Company also licenses certain other technologies used in its
products, often on an exclusive or semi-exclusive basis, for a
defined field of use. These licenses involve eight United States
patents and certain foreign patents relating to X-ray and
complimentary technology. The United States patents have expiration
dates ranging from 2002 to 2007. The Company's arrangement with
Gilardoni relating to the Company's Model APS automated explosives
detection system for screening of carry-on baggage contains cross
licenses of intellectual property rights associated with each party's
technology incorporated into the system. This license expires in
1999, subject to certain early termination and extension options.
The Company was involved in patent litigation with EG&G
Astrophysics Research Corporation ("EG&G"), in which each party
claimed that the other was infringing certain patents held by the
other. On November 6, 1996, the Company and EG&G signed a settlement
agreement pursuant to which, among other things, each party agreed
not to sue the other for patent infringement for nonmedical uses of X-
ray technology covered by each other's existing patents or by patent
applications which claim priority from such patents or, for products
existing as of September 12, 1996, covered by patents that may be
issued pursuant to existing patent applications. As a result, each
party will have broad rights to use the other's existing X-ray
technology for an unlimited period of time. There can be no
assurance that EG&G will not use the Company's technology in a manner
that would materially and adversely affect the Company's business and
financial condition.
The Company is also involved in certain patent litigation with
American Science and Engineering, Inc. ("AS&E"), whereby the Company
was seeking a declaratory judgement that it is not infringing any
AS&E patent. In connection with this litigation, AS&E filed a
counterclaim alleging that the Company is infringing one or more of
eight AS&E patents. In October 1996, the court dismissed AS&E's
infringement counterclaims, but allowed AS&E to raise more specific
infringement counterclaims upon asserting factual support for such
claims. In December 1996, AS&E filed a motion for leave to file an
amended counterclaim asserting that the Company was violating one
AS&E patent. The court subsequently dismissed AS&E's motion, but
again allowed AS&E to raise more specific infringement counterclaims
upon AS&E's asserting factual support for such claims. In February
1997, AS&E filed a further memorandum in support of its motion for
leave to file an amended counterclaim. In April 1997, the Court
denied AS&E's motion and dismissed its counterclaim without granting
leave to file an amended counterclaim. See "Risk Factors - Limited
Protection of Intellectual Property Rights; Patent Litigation" and
"Item 3. Legal Proceedings."
Competition
The markets for the Company's products are highly competitive.
Certain of the Company's competitors have substantially greater
manufacturing, marketing and financial resources than the Company.
Other major corporations have announced their intention to enter the
security screening market. Competitors may develop superior products
or products of similar quality for sale at the same or lower prices.
Moreover, there can be no assurance that the Company's products will
not be rendered obsolete by new industry standards or changing
technology. There can be no assurance that the Company will be able
to compete successfully with existing or new competitors. See "Risk
Factors - Rapid Technological Change."
While certain of the Company's competitors currently market
automated checked baggage explosives detection products that use dual
energy X-ray technology, the Company believes that it is able to
compete favorably with these products based upon the overall cost
effectiveness of the Company's systems as measured by a combination
of factors including effective automated explosives detection,
throughput, low cost of operation, installation and integration,
price, reliability, and their proven operation in a variety of
airports.
The Company's systems also compete with systems employing other
technologies including CT scanner technology and trace detection
technology. A product based upon CT scanner technology currently
detects a wider range of explosives than does the Company's systems.
In 1994, the FAA first certified this CT-based system. However, as
recommended by the Gore Commission's final report and as required by
the Re-Authorization Act, this system must undergo further testing to
resolve whether it can operate under realistic airport operating
conditions. This system operates at a significantly lower throughput
rate and significantly higher expense than the Company's systems. As
a result, there have only been limited permanent installations of CT
systems in airports, typically as either Level 2 or Level 3 systems.
A new CT-based system currently is in development by another company
that is purported to have a higher throughput than the FAA certified
CT system. Products based upon trace detection technology have
throughput rates lower than those based on dual energy X-ray or CT
technology and generally have been installed as Level 3 systems.
The Company's new Model APS system, which is intended to detect
explosives in carry-on bags and personal effects at airports and
other installations, has recently been evaluated by various
government agencies. These systems will compete against conventional
X-ray systems, which are lower in price, as well as advanced
explosives detection systems being adapted by its competitors for
this use. The Model APS system will compete on the basis of price,
detection capabilities, ease of use, expense of operation and
reliability.
Manufacturing
The Company's manufacturing operations consist primarily of
assembly, test, burn-in and quality control. The Company has adopted
stringent quality assurance procedures that include standard design
practices, component selection procedures, vendor control procedures,
and comprehensive reliability testing and analysis. As a result of
these efforts, the Company has received ISO 9001 certification. The
Company's manufacturing facility is currently producing approximately
eight of the Company's checked baggage systems per month and has the
capability to accommodate production of over 20 checked baggage
systems per month. Should market conditions warrant, the Company may
choose to establish overseas manufacturing operations.
The Company purchases a major portion of the parts and
peripheral components for its products, and manufactures certain
subsystems, such as the high voltage power supply, from raw
materials. Most parts and materials are readily available from
several supply sources. During fiscal 1997, the Company entered into
a joint marketing and royalty agreement with Gilardoni for the APS
system. Currently, the Company is purchasing the mainframe and other
components of the Model APS from Gilardoni. However, the Company
intends to begin full manufacturing of the Model APS at its U.S.
facility beginning in March 1998.
Backlog
Backlog for the Company's products as of September 30, 1996 and
1997 totaled approximately $7.5 million and $15 million,
respectively. Backlog consists of purchase orders for which a
customer has scheduled delivery within the next twelve months. In
certain circumstances, orders included in backlog may be canceled or
rescheduled by customers without significant penalty. Backlog as of
any particular date should not be relied upon as indicative of the
Company's revenues for any future period.
Employees
As of September 30, 1997, the Company had 109 full-time
employees, including 30 in manufacturing operations and quality
assurance, 34 in research, development and engineering, 26 in
marketing, sales and customer support, 15 in finance and
administration and four in data management. None of the Company's
employees is represented by a union. The Company considers its
employee relations to be good.
Executive Officers of the Registrant
The executive officers of the Company and their ages are as
follows:
Name Age Position
S. David Ellenbogen 59 Chairman of the Board and Chief
Executive Officer
Dr. Jay A. Stein 55 Senior Vice President, Technical
Director and Director
Stephen A. Reber 45 President and Chief Operating
Officer
William J. Frain 31 Chief Financial Officer and
Treasurer
James J. Aldo 46 Vice President of Marketing and
Sales
Daniel J. Silva 45 Vice President of Operations
S. David Ellenbogen, a co-founder of the Company, has served as its
Chief Executive Officer and a director since its organization in June
1989 and served as its President from June 1989 until February 1997.
Mr. Ellenbogen was also a co-founder of Hologic, a developer,
manufacturer and seller of X-ray and other bone densitometers, served
as its President from October 1985 until May 1994, and is currently
its Chairman of the Board and Chief Executive Officer. Prior to
founding Hologic, Mr. Ellenbogen served as President, Treasurer and a
director of Diagnostic Technology, Inc. ("DTI"), which he co-founded
in 1981. DTI, which developed an X-ray product for digital
angiography, was acquired in 1982 by Advanced Technology
Laboratories, Inc. ("ATL"), a wholly-owned subsidiary of Squibb
Corporation. Mr. Ellenbogen was involved in the management of the
digital angiography group of ATL from 1982 to 1985. Mr. Ellenbogen
is employed by Hologic and performs part-time management services for
the Company pursuant to a management agreement between the Company
and Hologic. See "Item 13. Certain Relationships and Related
Transactions."
Dr. Jay A. Stein, a co-founder of the Company and Hologic, has
served as Senior Vice President, Technical Director and a director
for both companies since their organization. Dr. Stein co-founded
DTI with Mr. Ellenbogen in 1981, served as Vice President and
Technical Director of DTI and was Technical Director of the digital
angiography group of its successor, ATL, from 1982 to 1985. Dr.
Stein received a Ph.D. in Physics from The Massachusetts Institute of
Technology. He is the principal author of fifteen patents pertaining
to X-ray technology. Dr. Stein is employed by Hologic and performs
part-time management services for the Company pursuant to a
management agreement between the Company and Hologic. See "Item 13.
Certain Relationships and Related Transactions."
Stephen A. Reber has served as the Company's President and Chief
Operating Officer since February 1997. Prior to joining the Company,
Mr. Reber served as President of the MacBeth division of Kollmorgen
Corporation, a color instrumentation and process control producer,
from February 1994 to February 1997. Prior to joining Kollmorgen, Mr.
Reber served in various capacities at Perkin-Elmer Corporation, an
analytical instrument producer, including as General Manager, Process
Instrumentation from 1991 to 1993 and as General Manager, Aftermarket
Products Instrument Group from 1988 to 1991. Mr. Reber received BS
and MS degrees in chemical engineering from The Massachusetts
Institute of Technology and an MBA from Harvard Business School.
William J. Frain, a Certified Public Accountant, has served as
Chief Financial Officer and Treasurer since October 1996. Prior to
that, Mr. Frain served as Controller from August 1993 until October
1996. Prior to joining the Company, Mr. Frain served as an auditor at
Arthur Andersen LLP from September 1988 to August 1993.
James J. Aldo has served as Vice President of Marketing and Sales
since July 1993. Prior to that, Mr. Aldo served as Director of Sales
and Marketing since joining the Company in July 1989. Prior to
joining the Company, Mr. Aldo held positions in marketing, sales,
engineering and field service management at AS&E and served as
Eastern Regional Manager at Tegal, Inc., a subsidiary of Motorola,
Inc., a manufacturer of capital equipment for the semiconductor
industry.
Daniel J. Silva has served as Vice President of Operations since
April 1994. Prior to that, Mr. Silva served as the Company's Director
of Operations from June 1992 to April 1994. Mr. Silva was hired as an
Operations Manager in June 1991. Prior to joining the Company, Mr.
Silva held positions in manufacturing, project management and program
management at AS&E.
Significant Employees
Certain key employees of the Company who are not also executive
officers or directors are as follows:
Name Age Position
Kristoph D. Krug 44 Chief Technical Officer
Jeremy M. Attree 38 Director of Operations, Europe
Kristoph D. Krug joined the Company in July 1989 as a Project
Engineer, was promoted to Director of Research and Development
Engineering in 1992 and became Chief Technical Officer in January
1997. Mr. Krug is the author of two of the Company's patents for X-
ray screening. Prior to joining the Company, Mr. Krug was Engineering
Manager at Teradyne, Inc., a manufacturer of automated test
equipment.
Jeremy M. Attree has served as Director of Operations, Europe since
joining the Company in October 1993. From September 1991 to October
1993, Mr. Attree served as Marketing Manager for EA Technology Ltd, a
primary research and development center for the electricity industry
in the United Kingdom. Prior to joining EA Technology, Mr. Attree
served as Marketing Director and Development Manager for Schlumberger
Industries, Security Division, where he was engaged primarily in the
development of new products in the airport security field.
Item 2. Properties
The Company leases its administrative headquarters and
manufacturing facility located in Woburn, Massachusetts. The
facility consists of approximately 43,000 square feet, including
21,000 square feet dedicated to the Company's manufacturing
operations. The Company also leases 3,600 square feet of office and
manufacturing space in San Diego, California for a research and
development facility. The Company also has two offices in the United
Kingdom, leasing approximately 1,000 square feet of space for sales
and service. In addition, the Company has sales offices located in
Moudon, Switzerland and New Jersey, USA and a sales and customer
support office in Kuala Lumpur, Malaysia. The Company believes that
its facilities will be adequate for its needs for the foreseeable
future and that suitable additional space will be available at
commercially reasonable prices as needed. Should market conditions
warrant, the Company may expand its presence in Europe and the Asia-
Pacific region by establishing a manufacturing operation or expanding
its sales and support offices in one or more of those regions.
Item 3. Legal Proceedings
In May 1996, the Company commenced an action in the United
States District Court for the District of Massachusetts against AS&E
seeking a declaration that the Company does not infringe AS&E patents
related to back scattered X-rays. This followed AS&E's allegations
of infringement to third parties. No discovery has been taken to
date. Following a court decision in July 1997 construing the claims
of the AS&E patent, which decision the Company considers favorable,
in September 1997 the Company filed a motion for summary judgment of
non-infringement. AS&E has not yet filed its papers in opposition to
the Company's motion but is seeking discovery. If granted, the
Company's motion will resolve all issues remaining in the case in
favor of the Company. Earlier, in April 1997, the Court dismissed
AS&E's proposed counterclaim seeking to allege patent infringement,
so that the only remaining issue in the case is the Company's request
for declaration of non-infringement of two claims of a single AS&E
patent.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Market Information - The Company's Common Stock is quoted on the
Nasdaq National Market under the symbol "VVID." The following table
sets forth the quarterly high and low sales prices per share of
Common Stock since the Company's initial public offering on December
11, 1996, as reported by the Nasdaq National Market.
Fiscal Year Ended September 30, 1997 High Low
First Quarter 12 3/4 10
Second Quarter 24 1/2 11 7/8
Third Quarter 19 3/4 13 1/4
Fourth Quarter 18 3/8 14 1/4
Number of Holders - As of December 17, 1997, there were approximately
176 holders of record of the Company's Common Stock, including
multiple beneficial holders at depositaries, banks and brokers listed
as a single holder in the street name of each respective depositary,
bank or broker.
Dividend Policy - The Company has never declared or paid cash
dividends on its capital stock and does not plan to pay any cash
dividends in the foreseeable future. The Company's current policy is
to retain all of its earnings to finance future growth. The
Company's bank line of credit prohibits the payment of cash dividends
without prior bank approval.
Recent Sales of Unregistered Securities - The following information
is furnished with regard to all securities issued by the Registrant
within fiscal 1997 which were not registered under the Securities
Act.
From October 1, 1996 through April 3, 1997, options to purchase a
total of 130,850 shares of Common Stock granted under the
Registrant's 1989 Combination Stock Option Plan were exercised at
exercise prices ranging from $0.10 to $1.00 per share, at an
aggregate purchase price of $45,825.
The securities issued in such transactions were not registered under
the Securities Act, as amended, in reliance upon the exemptions from
registration set forth in Section 3(b) and 4(2) of the Securities
Act, relating to sales by an issuer not involving any public
offering. None of the foregoing transactions, either individually or
in the aggregate, involved a public offering.
Use of Proceeds of Initial Public Offering - On December 10, 1996,
the Securities and Exchange Commission declared effective the
Company's Registration Statement on Form S-1, Commission file number
333-14311, relating to the initial public offering of the Company's
Common Stock, $.01 par value. The offering commenced on December 11,
1996 and all shares covered by the Registration Statement were sold.
The managing underwriters for the offering were Lehman Brothers Inc.,
Cowen & Company and Needham & Company. The following sets forth
certain information regarding the offering and the Companys'
application of the net proceeds therefrom through September 30, 1997:
INFORMATION RELATING TO THE OFFERING
Number of shares registered 2,300,000
Number of shares sold by
the Company 2,300,000
Aggregate price of the offering
amount registered and sold $27,600,000
Offering Expenses:
Underwriting discounts and
commissions $1,932,000
Finders' fees --
Expenses paid to or for
underwriters --
Other expenses $45,000
Total expenses $2,777,000 (1)
Net offering proceeds $24,823,000
-------------------------
(1) No such expenses were paid directly
or indirectly to directors, officers,
general partners of the Company or their
associates; to persons owning ten percent
or more of any class of equity securities
of the Company, or to affiliates of the
Company.
USE OF PROCEEDS
Category Amount
Construction of plant, building
and facilities $22,600
Purchase and installation of
machinery and equipment $450,000
Purchase of real estate --
Acquisition of other businesses --
Repayment of indebtedness --
Redemption of redeemable preferred
stock (1) $5,780,650
Working capital $10,919,089
Temporary investments, net $6,432,405
Notes, drafts, bills of
exchange or bankers'
acceptances which mature
not later than one year from
the date of issuance
Long-term investments $1,218,856
Investment-grade commercial
paper, with an average
maturity period of 15 months
Total investments $7,651,261
Total $24,823,000
-----------------------
(1)Of this amount, approximately $900,000 was paid to Beta
Partners Limited Partnership. Frank Kenny, a director of the
Company, is a general partner of this partnership. No other
proceeds of the offering were paid directly or indirectly to
directors, officers, general partners of the Company or their
associates; to persons owning ten percent or more of any class
of equity securities of the Company; or to affiliates of the
Company.
Item 6. Selected Financial Data
The following table contains certain selected consolidated financial
data of the Company and is qualified in its entirety by the more
detailed Consolidated Financial Statements included herein. This
data should be read in conjunction with "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements appearing
elsewhere herein.
Year ended September 30,
1993 1994 1995 1996 1997
(Dollars in thousands, except per share data)
Consolidated Statement of Operations Data:
Revenues $ 2,854 $13,801 $14,437 $15,578 $31,702
Cost of revenues 1,921 6,762 6,129 6,899 13,203
Gross margin 933 7,039 8,308 8,679 18,499
Operating expenses:
Research and development 1,139 2,296 3,653 3,462 4,390
Selling and marketing 317 716 1,077 1,395 3,556
General and administrative 221 916 1,120 1,515 2,929
Litigation expenses -- 199 309 1,150 427
Total operating expenses 1,677 4,127 6,159 7,522 11,302
Income (loss) from operations (744) 2,912 2,149 1,157 7,197
Interest and other income
(expense), net (115) (2) (45) 8 862
Income (loss) before
income taxes (859) 2,910 2,104 1,165 8,059
Provision for income taxes -- 100 90 -- 2,193
Net income (loss) $ (859) $ 2,810 $ 2,014 $ 1,165 $ 5,866
Net income (loss) per
common and common
equivalent share $ (0.15) $ 0.39 $ 0.28 $ 0.15 $ 0.60
Weighted average number
of common and common
equivalent shares
outstanding 5,815 7,198 7,275 7,869 9,838
(Dollars in thousands)
September 30,
1993 1994 1995 1996 1997
Consolidated Balance Sheet Data:
Working capital $ (338) $ 2,054 $ 3,968 $ (1,037) $ 29,297
Total assets 1,509 6,365 7,740 11,963 37,457
Redeemable preferred stock,
including current portion 5,781 5,781 5,781 5,781 --
Stockholders' equity
(deficit) (5,887) (3,065) (1,045) 177 31,711
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis should be read in
conjunction with "Item 1. Business," "Item 6. Selected Financial
Data," the Company's Consolidated Financial Statements and Notes
thereto and the information described under the caption "Risk
Factors" below.
Overview
The Company was founded in 1989 to develop, manufacture and market
automated explosives detection systems following the bombing of Pan
American Flight 103 over Lockerbie, Scotland. Following its
organization, the Company undertook extensive research and
development, introducing its first free standing automated explosives
detection system, the H-1, in 1991, and its first integrated
automated explosives detection systems for Level 1 and Level 2
screening, the VIS and VDS, in 1993. The Company commenced
commercial shipments of its VIS and VDS systems in January 1994. As
of September 30, 1997, the Company had shipped and installed more
than 180 systems for use in airports throughout Europe, and in the
Asia/Pacific region. In 1997 the Company introduced the Model APS, a
freestanding system to screen carry-on baggage for explosives and
weapons. The Model APS can also be used in the non-aviation market
to screen baggage at public, private and government facilities. The
first unit was sold in June 1997 to the Public Intelligence
Department in Riyadh, Saudi Arabia for the protection of VIP's. In
November 1997, the Company received an order for seven Model APS
systems for the new Terminal One at JFK International Airport in New
York. This will be the first terminal in the world to screen all
carry-on baggage for explosives.
The Company's sales are primarily to owners and operators of
airports, including foreign governments and regulatory authorities.
The Company's revenues are derived primarily from product sales. The
Company recognizes revenue from product sales upon shipment to the
customer, provided that no significant Company obligations remain
outstanding and collection of the related receivable is deemed
probable by management. The Company accrues for anticipated warranty
and installation costs upon shipment. The Company's revenues also
include government research and development grants and revenues from
service, the sale of spare parts and training, which have comprised
less than 10% of revenues in the periods presented. The Company
recognizes revenues under its development grants as services are
rendered. In May 1997, the Company received a two-year, $3.5 million
research and development grant from the FAA to fund, in part, the
development of a cost effective, high speed explosive detection
system, based upon the Company's current proprietary technology, that
is intended to meet FAA certification requirements. The Company
commenced work under this grant in the third quarter of fiscal 1997.
The grant is subject to termination by the government at any time.
In fiscal 1995, 1996, and 1997 the Company recognized $1.4 million,
$0.7 million, and $0.8 million respectively, in development revenue
from FAA grants.
The Company has an exclusive perpetual license to use certain
patent rights and technology developed by Hologic for the
development, manufacture and sale of X-ray screening security systems
for explosives, drugs, currency and other contraband (subject to
termination by either party for certain defined defaults). The
Company also has a nonexclusive license to use these patents and
technology for the development, manufacture and sale of X-ray based
products which may be used for process control applications in the
food and beverage industries. See "Risk Factors-Limited Protection of
Intellectual Property Rights; Patent Litigation" and "Item 13.
Certain Relationships and Related Transactions."
The Company's cost of revenues includes a royalty payable with
respect to product sales and other revenues derived from the license
with Hologic. Under the terms of this exclusive agreement, this
royalty was reduced from 5% to 3% of revenues derived from such
license in January 1997 upon the Company reaching $50 million in
cumulative revenues subject to the exclusive license. Upon the
Company reaching $200 million of cumulative revenues subject to this
exclusive license, the royalty will be eliminated entirely. As of
September 30, 1997, the Company had reached approximately $79 million
in cumulative revenues. See "Item 1. Business-Intellectual Property"
and "Item 13. Certain Relationships and Related Transactions."
In fiscal 1995, 1996 and 1997, sales to BAA accounted for
approximately 76%, 79% and 39%, respectively, of revenues.
Additionally, in fiscal 1997 Airport Authority Hong Kong and Toyo
Kanetsu K.K., the baggage-handling contractor for Malaysia's Kuala
Lumpur International Airport, accounted for 19% and 27% of the
Company's revenues. The Company expects that its revenues from these
customers will decrease and will become increasingly dependent upon
sales of upgrades, replacement equipment and services. The failure
of the Company to obtain orders from customers other than these
customers would have a material adverse effect on the Company's
business and financial condition. See "Risk Factors-Customer
Concentration."
Substantially all of the Company's revenues have been generated by
sales to customers outside the United States. The Company's foreign
sales have occurred principally in the United Kingdom, other Western
European countries and more recently in the Asia/Pacific region. In
fiscal 1997, the Company received orders for 26 and 23 systems at the
Kuala Lumpur International Airport in Malaysia and Chek Lap Kok
Airport in Hong Kong, respectively, the first two airports in the
Asia/Pacific region that are adopting the integrated automated
explosives detection approach. The Company shipped all 26 systems to
Kuala Lumpur in fiscal 1997, and received a repeat order for three
systems to be used at Level 3 to be delivered in fiscal 1998. As of
September 30, 1997, the Company had shipped 16 of the 23 systems to
Hong Kong. The Company has sales and service offices in the United
Kingdom and Malaysia to support its European and Asia/Pacific
operations, respectively, and has expanded its presence in Europe and
the Middle East. The Company expects international sales to remain
an important component of its business.
The Company's export sales generally have been denominated in United
States dollars. However, during fiscal 1997 approximately 25% of the
Company's revenues were denominated in foreign currencies. The
Company on occasion has hedged its foreign currency exposure by
entering into forward foreign exchange contracts to hedge against
foreign currency fluctuations. There can be no assurance that these
hedging efforts will be successful. See "Risk Factors-Reliance on
International Sales."
Results of Operations
For the periods indicated, the following table sets forth the
percentage of revenues represented by the respective line items in
the Company's consolidated statement of operations:
Year Ended
September 30,
1995 1996 1997
Revenues 100% 100% 100%
Cost of revenues 42 44 42
Gross margin 58 56 58
Operating expenses:
Research and development 25 22 14
Selling and marketing 8 9 11
General and administrative 8 10 9
Litigation expenses 2 8 1
Total operating expenses 43 49 35
Income from operations 15 7 23
Interest and other income, net -- -- 3
Income before income taxes 15 7 26
Provision for income taxes 1 -- 7
Net income 14% 7% 19%
Fiscal Year Ended September 30, 1997 Compared to Fiscal Year Ended
September 30, 1996
Revenues. Revenues increased by approximately 104% to $31.7
million in fiscal 1997, from $15.6 million in fiscal 1996. This
increase in revenues primarily was the result of an increase in
product sales. The increase in product sales was primarily
attributable to the total number of product shipments to Europe as
well as the commencement of shipments to Chek Lap Kok Airport in Hong
Kong and shipments to Kuala Lumpur International Airport in Malaysia,
partially offset by slightly lower average selling prices of the
Company's products. During fiscal 1997, the Company shipped and
installed 76 units compared to 30 units in fiscal 1996.
Gross Margin. Gross margin increased to 58% of revenues in
fiscal 1997 compared to 56% of revenues in fiscal 1996. The increase
in gross margin in fiscal 1997 was primarily attributable to the
decrease, commencing in January 1997, in royalties due to Hologic for
the exclusive license of certain patents and technology from 5% to
3%, as well as decreased costs attributable to improved manufacturing
efficiencies recognized during the year. These decreases were
partially offset by lower average selling prices.
During the second half of fiscal 1996, the Company's product sales
consisted primarily of sales of the newly introduced VIS-M and VDS-II
as well as SDE upgrades. During fiscal 1997, the Company was able to
reduce certain component costs and achieve other manufacturing
efficiencies in the design of the VIS-M and VDS-II, which
substantially offset lower average selling prices. The Company also
had a significant increase in sales of upgrades, parts and
maintenance in fiscal 1997. During the third quarter of fiscal 1997
the Company began recognizing revenue under the $3.5 million FAA
research grant. This grant did not have a material impact on gross
margins during fiscal 1997.
Research and Development Expenses. Research and development
expenses increased by approximately 27% to $4.4 million (14% of
revenues) in fiscal 1997 from $3.5 million (22% of revenues) in
fiscal 1996. The increase in research and development expenses in
fiscal 1997 was primarily due to the addition of engineering
personnel and outside consultants working on the development of new
products and enhancements to existing products, including
enhancements to the Model APS system for carry-on baggage and the VIS-
M (Matrix configuration). Certain expenses in connection with the
development of the Company's next generation system have been
included in costs of goods sold in connection with the most recent
FAA research and development grant. As a percentage of revenues,
research and development expenses declined in the current year,
reflecting increased revenues in fiscal 1997.
Selling and Marketing Expenses. Selling and marketing expenses
increased approximately 155% to $3.6 million (11% of revenues) in
fiscal 1997 from $1.4 million (9% of revenues) in fiscal 1996. The
increase in selling and marketing expenses in fiscal 1997 primarily
was due to additional sales and support personnel, as a result of the
expansion of operations in Europe and the establishment of operations
in the Asia/Pacific region, the payment of commissions to sales
representatives in the Asia/Pacific region, and to a lesser extent an
increase in advertising, consulting, trade shows and related travel
costs. The Company anticipates that it will continue to expand its
selling and marketing efforts in fiscal 1998 in anticipation of
continued growth.
General and Administrative Expenses. General and administrative
expenses increased approximately 93% to $2.9 million (9% of
revenues) in fiscal 1997 from $1.5 million (10% of revenues) in
fiscal 1996. The increase in general and administrative expenses in
fiscal 1997 was primarily attributable to an increase in personnel
and related costs (including non-recurring costs related to
relocation fees) as well as additional overhead costs as the
headcount for the Company increased approximately 42%. The Company
anticipates that general and administrative costs will continue to
increase in anticipation of continued growth in fiscal 1998.
Litigation Expenses. The Company incurred $427,000 and $1.2
million of litigation expenses in fiscal 1997 and 1996, respectively,
primarily in connection with the Company's patent litigation with
EG&G and to a lesser extent AS&E. On November 6, 1996, the Company
entered into an agreement with EG&G to settle EG&G's patent
infringement claim against the Company. The litigation expenses in
fiscal 1997 also include expenses incurred in connection with the
Company's litigation with AS&E. In May 1996, the Company commenced
an action in the United States District Court for the District of
Massachusetts against AS&E seeking a declaration that the Company
does not infringe AS&E patents related to back scattered X-rays.
This followed AS&E's allegations of infringement to third parties.
No discovery has been taken to date. Following a court decision in
July 1997 construing the claims of the AS&E patent, which decision
the Company considers favorable, in September 1997 the Company filed
a motion for summary judgment of non-infringement. AS&E has not yet
filed its papers in opposition to the Company's motion but is seeking
discovery. If granted, the Company's motion will resolve all issues
remaining in the case in favor of the Company. Earlier, in April
1997, the Court dismissed AS&E's proposed counterclaim seeking to
allege patent infringement, so that the only remaining issue in the
case is the Company's request for declaration of non-infringement of
two claims of a single AS&E patent.
As a result of the Company's settlement with EG&G in November,
and the recent court rulings against AS&E, the Company expects
litigation expenses to decline in fiscal 1998.
Interest Income. The Company recognized net interest income of
approximately $813,000 in fiscal 1997 compared to net interest income
of $8,000 in fiscal 1996. The increase in fiscal 1997 was primarily
attributable to higher average cash balances resulting from the
receipt of proceeds from the Company's initial public offering.
Provision for Income Taxes. The Company's effective tax rate
for fiscal 1997 was 27% compared to no provision for income taxes in
fiscal 1996. The Company's effective tax rate in fiscal 1997 was
lower than the statutory tax rates primarily due to the use of tax
credits and the tax benefits associated with the Company's foreign
sales corporation. The provision for income taxes in fiscal 1996 was
a result of the Company's recognition of a deferred tax asset, which
reflected management's determination, in accordance with the
Financial Accounting Standards Board's Statement of Financial
Accounting Standards ("SFAS") No. 109, that it was more likely than
not that this deferred tax asset would be utilized.
Fiscal Year Ended September 30, 1996 Compared to Fiscal Year Ended
September 30, 1995
Revenues. Revenues increased by approximately 8% to $15.6 million
in fiscal 1996, from $14.4 million in fiscal 1995. This increase was
the result of an increase in product sales which was partially offset
by a decrease in revenue associated with the Company's 1995 FAA
development grant. The increase in product sales was primarily
attributable to an increase in unit sales, which was partially offset
by lower average selling prices.
Gross Margin. Gross margin decreased to 56% of revenues in fiscal
1996 compared to 58% of revenues in fiscal 1995. The decrease in
gross margin was primarily attributable to the Company's change in
product mix, lower average selling prices, and a reduction in
revenues associated with the Company's 1995 FAA grant which were
partially offset by manufacturing efficiencies.
During fiscal 1995 and the first half of fiscal 1996, the Company's
product sales consisted primarily of sales of the VIS-W. During the
second half of fiscal 1996, product sales shifted to the newly
introduced VIS-M, VDS-II, and SDE upgrades, each of which has a lower
average selling price than the VIS-W. The Company was able to reduce
certain component costs and achieve other manufacturing efficiencies
in the design of the VIS-M and VDS-II, which substantially offset
these lower selling prices. In addition, the Company's work under its
FAA grant was completed in the third quarter of fiscal 1996. The
effect of this grant increased the Company's gross margin by
approximately 2% in the first three quarters of fiscal 1996.
Research and Development Expenses. Research and development
expenses decreased by approximately 5% to $3.5 million (22% of
revenues) in fiscal 1996 from $3.7 million (25% of revenues) in
fiscal 1995. The decrease was primarily attributable to expenditures
in fiscal 1995 related to the Company's development of its VIS-M
product, which was substantially completed by the first quarter of
fiscal 1996.
Selling and Marketing Expenses. Selling and marketing expenses
increased by approximately 29% to $1.4 million (9% of revenues) in
fiscal 1996 from $1.1 million (8% of revenues) in fiscal 1995. The
increase was primarily attributable to additional sales and support
personnel, and to an increase in advertising, consulting and trade
show costs.
General and Administrative Expenses. General and administrative
expenses increased by approximately 35% to $1.5 million (10% of
revenues) in fiscal 1996 from $1.1 million (8% of revenues) in fiscal
1995. The increase was primarily attributable to an increase in
personnel and additional overhead costs related to the Company's move
to a new facility in March 1996.
Litigation Expenses. The Company incurred $1.2 million and $0.3
million of litigation expenses in fiscal 1996 and 1995, respectively,
primarily in connection with the Company's patent litigation with
EG&G. On November 6, 1996, the Company entered into an agreement with
EG&G to settle this litigation. The litigation expenses in fiscal
1996 also included expenses incurred in connection with the Company's
litigation with AS&E. See "Risk Factors-Limited Protection of
Intellectual Property Rights; Patent Litigation," "Item 1.
Business-Intellectual Property" and "Item 3. Legal Proceedings."
Interest Income (Expense), Net. The Company recognized net
interest income of $8,000 in fiscal 1996 and net interest expense of
$45,000 in fiscal 1995. The change in interest income (expense), net
was primarily attributable to reduced average borrowings by the
Company under its bank working capital line of credit.
Provision for Income Taxes. The Company recorded no provision for
income taxes in fiscal 1996 compared to an effective tax rate of 4%
in fiscal 1995. The provision for income taxes in fiscal 1996
reflected the Company's recognition of a deferred tax asset. If the
Company had not recognized this deferred tax asset, the Company's
effective tax rate in fiscal 1996 would have been 16%.
Liquidity and Capital Resources
Since inception, the Company has funded its operations and capital
expenditures through internally generated cash flow, proceeds from
sales of securities and the availability of a working capital line of
credit. In December 1996 and January 1997, the Company received total
net proceeds of approximately $24.8 million from the initial public
offering of its Common Stock, of which $5.8 million was used to
redeem all of the Company's outstanding shares of Series A Preferred
Stock and Series C Preferred Stock. See "Item 5. Market for
Registrant's Common Equity and Related Stockholder Matters" and "Item
13. Certain Relationships and Related Transactions."
At September 30, 1997, the Company had working capital of $29.3
million, including approximately $18.0 million in cash and cash
equivalents and short-term investments. In addition, the Company had
$1.2 million of long-term investments, none of which have maturities
of less than 18 months. The Company also has a $5.0 million bank
line of credit which expires in February 1998. The Company's bank
line of credit bears interest at the bank's prime rate (8.5% as of
September 30, 1997). The line of credit is secured by substantially
all of the Company's assets and contains certain financial and other
covenants. At September 30, 1997, the Company had no amounts
outstanding under this line of credit.
During the fiscal year ended September 30, 1997, the Company's net
cash used in operating activities was approximately $1.9 million.
During that period, net income and depreciation and amortization
expenses totaling $6.3 million, were offset by a $5.8 million
increase in accounts receivable, a $1.5 million increase in
inventories, a $1.0 million decrease in accrued expenses. The
increase in inventories and accounts receivable were primarily
attributable to the Company's increased product sales. As of
November 30, 1997, the Company received payments of approximately
$6.4 million against the outstanding receivable balance at September
30, 1997.
During the fiscal year ended September 30, 1997, the Company's net
cash used in investing activities was approximately $8.1 million,
primarily reflecting the net purchase of approximately $7.7 million
of short-term investments. Cash used in investing activities also
included capital expenditures for fiscal 1997 of approximately
$540,000. While the Company does not have any significant
commitments for capital expenditures, the Company anticipates that it
will continue to purchase equipment to support its anticipated
growth.
During the fiscal year ended September 30, 1997, net cash provided
by financing activities was $19.9 million, primarily attributable to
the receipt of net proceeds of approximately $24.8 million from the
initial public offering of the Company's common stock and
approximately $800,000 of proceeds from the exercise of stock
options. The Company used approximately $5.8 million of the net
proceeds of the offering to redeem all of its outstanding shares of
mandatorily redeemable non-convertible preferred stock.
The Company does not currently have any significant capital
commitments and believes that existing sources of liquidity,
including the net proceeds of its initial public offering, funds
expected to be generated from operations and its line of credit will
provide adequate cash to fund the Company's anticipated operational
and other cash needs through at least the next twelve months.
However, for a brief discussion of the factors that could adversely
affect the Company's financial position and results of operations,
see "Risk Factors."
Recent Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share," which established new standards for
calculating and presenting earnings per share. The Company will
adopt this new standard in its fiscal 1998 financial statements,
which will require the reporting of diluted earnings per share and
basic earnings per share, as defined. SFAS No. 128 is effective for
periods ending after December 15, 1997, and early adoption is not
permitted. When adopted, the statement will require restatement of
prior years' earnings per share. For the years ended September 30,
1995, 1996 and 1997, diluted earnings per share would have been
$0.28, $0.15 and $0.60, respectively. Basic earnings per share would
have been $1.11, $0.64 and $0.78, respectively, for the same periods.
Risk Factors
This Report contains forward-looking statements that involve
risks and uncertainties, such as statements of the Company's plans,
objectives, expectations and intentions. The cautionary statements
made in this Report should be read as being applicable to all forward-
looking statements wherever they appear in this Report. The
Company's actual results could differ materially from those discussed
herein. Factors that could cause or contribute to such differences
include those discussed below, as well as those discussed elsewhere
in this Report.
Customer Concentration. In fiscal 1995, 1996 and 1997, sales to
BAA accounted for approximately 76%, 79% and 39%, respectively, of
the Company's revenues. Additionally, in fiscal 1997 Airport
Authority Hong Kong and Toyo Kanetsu K.K., the baggage-handling
contractor for Malaysia's Kuala Lumpur International Airport,
accounted for 19% and 27%, respectively, of the Company's revenues.
Each of these customers is nearing completion of deployment of
checked baggage explosives detection systems at their respective
airports. As a result, the Company expects that its revenues from
these customers will decrease and will become increasingly dependent
upon sales of upgrades, replacement equipment and services. The
inability of the Company to obtain orders from customers other than
these would have a material adverse effect on the Company's business
and financial condition.
Dependence on Government Regulation. The Company's sales of its
explosives detection systems for use in airports has been and will
continue to be dependent upon governmental initiatives to require or
support the screening of baggage with advanced explosives detection
systems. Substantially all of such systems have been installed at
airports in countries in which the applicable governmental or
regulatory authority overseeing the operations of the airport has
mandated such screening. Such mandates are influenced by many
factors outside of the control of the Company, including political
and budgetary concerns of governments, airlines and airports. In the
United States, the Aviation Security Act of 1990 directed the FAA to
develop a standard for explosives detection systems and required
airports in the United States to deploy systems meeting this standard
by 1993. The standard adopted by the FAA is more comprehensive than
standards adopted in most other countries. The FAA first certified a
computed tomography ("CT") system in December 1994. However, as
recommended by the Gore Commission's final report, issued in February
1997, and as required by the Federal Aviation Re-Authorization Act of
1996 (the "Re-Authorization Act"), this system must undergo further
testing to resolve whether it can operate under realistic airport
operating conditions, including processing baggage at required
throughput rates. To date, no system has demonstrated that it meets
the FAA standard under realistic airport operating conditions. As a
result, only a limited number of these systems have been deployed,
primarily on a test basis, in the United States. The Company's
systems do not meet the FAA certification standard. There can be no
assurance that any of the Company's systems will ever meet this or
any other United States certification standard. Moreover, there can
be no assurance that additional countries will mandate the
implementation of effective explosives screening of airline baggage,
or that, if mandated, the Company's systems will meet the
certification or other requirements of the applicable governmental
authority. See "Item 1. Business-Regulation."
In October 1996, the United States enacted the Re-Authorization
Act, which included an allocation for the purchase of explosives
detection systems and other advanced security equipment by air
carriers and airport authorities. Utilizing this allocation, the FAA
has ordered initial quantities of the CT-based system, trace
detection systems and dual energy X-ray based systems, including
eight systems from the Company. Deployment of these various systems
is not scheduled for completion until mid-1998. There can be no
assurance that the FAA will order additional systems from the
Company. See "Item 1. Business-Industry Background."
Developing Market; Uncertainty of Market Acceptance. The
explosives detection system market is at a relatively early stage of
development. Acceptance of explosives detection systems on a broad
basis will be dependent upon the acceptance and adoption of
explosives detection systems by airlines and airports throughout the
world, the expansion of applications for explosives detection
technology, government initiatives to support the expansion of this
market, the performance and price of the Company's and its
competitors' products, customer reaction to those products and
continued cost and performance improvements in explosives detection
technology. There can be no assurance that the explosives detection
market will develop further or that the Company will be successful in
marketing its products effectively and obtaining broader market
acceptance for its products. Failure to do so would have a material
adverse effect on the Company's business and financial condition.
Further, if one of the Company's or a competitor's systems were to
fail to detect explosives and such failure resulted in an airline
bombing, the ability of the Company to market its products could be
materially adversely affected. See "Item 1. Business-Industry
Background."
Significant Fluctuations and Unpredictability of Operating Results.
Significant annual and quarterly fluctuations in the Company's
results of operations may be caused by several factors, including the
overall demand for explosives detection systems, market acceptance of
the Company's products, the timing of regulatory approvals for the
Company's system and government initiatives to promote the use of
explosives detection systems such as those manufactured and sold by
the Company. Other factors that may cause fluctuations in operating
results include the timing of the announcement, introduction and
delivery of new products and product enhancements by the Company and
its competitors, variations in the Company's product mix and
component costs, timing of customer orders, adjustments of delivery
schedules to accommodate customers programs, the availability of
materials and labor necessary to produce the Company's products, the
availability of components from suppliers, the timing and level of
expenditures in anticipation of future sales, and pricing and other
competitive conditions. Customers may also cancel or reschedule
shipments and production difficulties could delay shipments.
Relatively few system sales to relatively few customers comprise a
significant portion of the Company's revenues in each quarter.
Therefore, small variations in the number of systems sold could have
a significant effect on the Company's results of operations. The
Company believes that period to period comparisons of its results of
operations are not necessarily meaningful and should not be relied
upon as indications of future performance.
Lengthy Sales Cycle. As a result of the significant capital and
other commitments required to install and integrate the Company's
products into an airport baggage handling system, foreign regulatory
approval requirements, and the developing nature of the explosives
detection market, the Company has experienced extended sales cycles
with its customers. The Company's sales efforts with certain existing
and potential customers have extended over several years. Customers
may initially purchase one or a few units for extensive testing and
evaluation before making a decision regarding volume purchases and,
in certain circumstances, the Company may provide a potential
customer with a demonstration unit for regulatory testing and
evaluation free of charge. Delays in anticipated purchase orders
could have a material adverse effect on the Company's business and
financial condition. See "Risk Factors-Significant Fluctuations and
Unpredictability of Operating Results" and "Item 1.
Business-Marketing and Sales."
Reliance on International Sales. In fiscal 1995, 1996 and 1997,
international sales accounted for approximately 91%, 95% and 97%,
respectively, of the Company's revenues. The Company anticipates
that international sales will continue to account for a significant
percentage of the Company's revenues. Risks associated with
international sales include, among other things, international
regulatory requirements and policy changes, political and economic
instability, possible foreign currency controls, intellectual
property protection, currency exchange rate fluctuations, tariffs or
other barriers, staffing and management of foreign operations,
inventory management, accounts receivable collection and the
management of distributors or representatives. In particular, recent
economic instability in the Asia/Pacific region may delay or reduce
airport capital projects in that region which could have a material
adverse effect on the Company's business. In addition, most foreign
countries have their own regulatory approval requirements for sales
of the Company's products. As a result, the Company's introduction
of new products into international markets can be costly and time
consuming, and there can be no assurance that the Company will be
able to obtain the required regulatory approvals on a timely basis,
if at all. Furthermore, the Company's international sales have been
denominated primarily in United States dollars. The Company
anticipates that its international sales may increasingly be
denominated in foreign currencies. The Company on occasion has
hedged its foreign currency exposure by entering into forward foreign
exchange contracts to hedge against foreign currency fluctuations.
There can be no assurance that these hedging efforts will be
successful or that other risks associated with international sales
and operations will not have a material adverse effect on the
Company's business and financial condition. See "Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Item 1. Business-Marketing and Sales."
Uncertainty of Product Development. The Company's success will
depend upon its ability to enhance its existing products, and to
develop new products to meet regulatory and customer requirements and
to achieve market acceptance. The enhancement and development of
these products will be subject to all of the risks associated with
new product development, including unanticipated delays, expenses,
technical problems or other difficulties that could result in the
abandonment or substantial change in the commercialization of these
enhancements or new products. Given the uncertainties inherent with
product development and introduction, there can be no assurance that
the Company will be successful in introducing products or product
enhancements, including products that meet FAA certification
standards, on a timely basis, if at all, or that the Company will be
able to market successfully these products and product enhancements
once developed.
Rapid Technological Change. The market for the Company's products
is characterized by rapid technological change and evolving industry
requirements. The Company believes that its future success will
depend in large part upon its ability to enhance its existing
products and to successfully develop new products that meet
regulatory and customer requirements and gain market acceptance.
There can be no assurance that the Company's products will not be
rendered obsolete by new industry standards or changing technology.
Competition. The markets for the Company's products are highly
competitive. The Company's systems compete against dual energy X-ray
as well as other competing technologies, including CT and trace
detection. Certain of the Company's competitors have substantially
greater manufacturing, marketing and financial resources than the
Company. In addition, other major corporations have recently
announced their intention to enter the security screening market and
currently have systems in development. One of the Company's
competitors has developed a product based upon CT scanner technology
that was certified by the FAA. However, as recommended by the Gore
Commission's final report and as required by the Re-Authorization
Act, this system must undergo further testing to resolve whether it
can operate under realistic airport operating conditions. The
Company is aware of a new CT-based system currently in development by
another company that is purported to have a higher throughput than
the FAA certified CT system. None of the Company's products have
been certified by the FAA. Competitors may develop superior products
or products of similar quality for sale at the same or lower prices.
Other technical innovations may impair the Company's ability to
market its products. There can be no assurance that the Company will
be able to compete successfully with existing or new competitors. See
"Item 1. Business-Competition."
Limited Protection of Intellectual Property Rights; Patent
Litigation. The Company's success depends significantly upon
proprietary technology. The Company relies on a combination of
patent, copyright, trademark and trade secret laws, non-disclosure
agreements and other contractual provisions to establish, maintain
and protect its proprietary rights, all of which afford only limited
protection. The Company has obtained three patents and has pending
three patent applications in the United States (two of which have
been allowed but have not yet been issued). In addition, for certain
foreign countries the Company has pending patent applications that
correspond to the subject matter of certain United States patents and
patent applications. There can be no assurance that any of the
Company's unallowed patent applications will be granted, that any
patent or patent application will provide significant protection for
the Company's products and technology, or that the Company's current
or future products, processes or technology will not be challenged
under patents held by competitors or potential competitors.
Moreover, there can be no assurance that foreign intellectual
property laws will protect the Company's intellectual property
rights. In the absence of significant patent protection, the Company
may be vulnerable to competitors who attempt to copy the Company's
products, processes or technology.
The Company has an exclusive perpetual license to use certain
patent rights and technology developed by Hologic for the
development, manufacture and sale of X-ray screening security systems
for explosives, drugs, currency and other contraband (subject to
termination by either party for certain defined defaults). The
Company also has a nonexclusive license to use this technology for
the development, manufacture and sale of X-ray-based products for
process control applications in the food and beverage industries. If
the Company desires to develop products for other applications, it
must either use alternative technology or obtain an additional
license from Hologic. There can be no assurance that the Company
would be able to develop or license alternative technology for any
additional applications, or that the Company would be able to license
Hologic's technology for these applications on favorable terms, if at
all. In addition, there can be no assurance that Hologic will not
develop or license its technology to others for applications
competitive with those that may be developed by the Company outside
of areas for which the Company has an exclusive license. See "Item
13. Certain Relationships and Related Transactions."
The Company was involved in patent litigation with EG&G
Astrophysics Research Corporation ("EG&G"), in which each party
claimed that the other was infringing certain patents held by the
other. On November 6, 1996, the Company and EG&G signed a settlement
agreement pursuant to which, among other things, each party agreed
not to sue the other for patent infringement for nonmedical uses of X-
ray technology covered by each other's existing patents or by patent
applications which claim priority from such patents, or, for products
existing as of September 12, 1996, covered by patents that may be
issued pursuant to existing patent applications. As a result, each
party will have broad rights to use the other's existing X-ray
technology for an unlimited period of time. There can be no
assurance that EG&G will not use the Company's technology in a manner
that would materially and adversely affect the Company's business and
financial condition. See "Item 1. Business-Intellectual Property."
In May 1996, the Company commenced an action in the United States
District Court for the District of Massachusetts against AS&E seeking
a declaration that the Company does not infringe AS&E patents related
to back scattered X-rays. This followed AS&E's allegations of
infringement to third parties. No discovery has been taken to date.
Following a court decision in July 1997 construing the claims of the
AS&E patent, which decision the Company considers favorable, in
September 1997 the Company filed a motion for summary judgment of non-
infringement. AS&E has not yet filed its papers in opposition to the
Company's motion but is seeking discovery. If granted, the Company's
motion will resolve all issues remaining in the case in favor of the
Company. Earlier, in April 1997, the Court dismissed AS&E's proposed
counterclaim seeking to allege patent infringement, so that the only
remaining issue in the case is the Company's request for declaration
of non-infringement of two claims of a single AS&E patent. Although
the Company does not believe that it is infringing any valid patent
of AS&E, there can be no assurance that AS&E will not make a new
counterclaim in which it raises more specific infringement
allegations. Failure of the Company to prevail in this litigation
could have a material adverse effect on the Company's business and
financial condition. See "Item 1. Business-Intellectual Property"
and "Item 3. Legal Proceedings."
Management of Growth. The Company has undergone a period of
growth, and any continued expansion may significantly strain the
Company's management, financial and other resources. Due to the
level of technical and marketing expertise necessary to support its
existing and new customers, the Company must attract and retain
highly qualified and well-trained personnel. There are a limited
number of persons with the requisite skills to serve in these
positions, and it may become increasingly difficult for the Company
to hire such personnel. The Company's expansion may also
significantly strain the Company's management, manufacturing,
financial and other resources. There can be no assurance that the
Company's systems, procedures, and controls will be adequate to
support the Company's operations or that the Company will be able to
successfully integrate its new personnel. Failure to manage the
Company's growth properly could have a material adverse effect on the
Company's business and financial condition. See "Item 1.
Business-Executive Officers of the Registrant."
Risks Associated with Possible Acquisitions. The Company intends
to pursue potential acquisitions of businesses, products and
technologies that could complement or expand the Company's business.
There can be no assurance that the Company will be able to identify
any appropriate acquisition candidate. If the Company identifies an
acquisition candidate, there can be no assurance that the Company
would be able to successfully negotiate the terms of any such
acquisition, finance such acquisition or integrate such acquired
business, products or technologies into the Company's existing
business and products. Furthermore, the negotiation of potential
acquisitions as well as the integration of an acquired business could
cause diversion of management's time and resources, and require the
Company to use working capital to consummate a potential acquisition.
There can be no assurance that a given acquisition, whether or not
consummated, would not have a material adverse effect on the
Company's business or financial condition. If the Company consummates
one or more significant acquisitions in which consideration consists
of Common Stock, stockholders of the Company could suffer significant
dilution of their interests in the Company. See "Risk
Factors-Management of Growth."
Potential for Product Liability Claims. The Company's business
involves the risk of product liability claims inherent to the
explosives detection industry. There are many factors beyond the
control of the Company that could result in the failure of the
Company's products to detect explosives, such as the reliability of a
customer's operators, the ongoing training of such operators and the
maintenance of the Company's products by its customers. For these and
other reasons, there can be no assurance that the Company's products
will detect all explosives concealed in screened bags. The failure to
detect an explosive could give rise to product liability claims and
result in negative publicity that could have a material adverse
effect on the Company's business and financial condition. The Company
currently maintains aviation product liability insurance with an
aggregate coverage limit of $150 million per year, subject to certain
deductibles and exclusions. There can be no assurance that this
insurance will be sufficient to protect the Company from product
liability claims, or that product liability insurance will continue
to be available to the Company at a reasonable cost, if at all.
Concentration of Ownership; Control by Management. As of December
17, 1997, the Company's executive officers, directors and their
affiliates and members of their immediate families beneficially owned
approximately 18% of the outstanding shares of Common Stock,
excluding shares issuable upon exercise of options and warrants. As a
result, these stockholders, if acting together, will be able to exert
substantial influence over actions requiring stockholder approval,
including the election of directors, amendments to the Company's
Restated Certificate of Incorporation, mergers, sales of assets or
other business acquisitions or dispositions.
Antitakeover Provisions. The Company's Restated Certificate of
Incorporation contains certain provisions that may discourage bids
for the Company. This could limit the price that certain investors
might be willing to pay in the future for shares of the Common Stock.
Item 8. Financial Statements and Supplementary Data
The consolidated Financial Statements and Supplementary Data of the
Company are listed under Part IV, Item 14, in this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item 10 is hereby incorporated
by reference to the text appearing under Part I, Item 1 - Business
under the caption "Executive Officers of the Registrant" in this
Report, and by reference to the Company's definitive proxy statement
to be filed by the Company within 120 days after the close of its
fiscal year.
Item 11. Executive Compensation
The information required by this Item 11 is hereby incorporated
by reference to the information under the heading "Executive
Compensation" in the Company's definitive proxy statement to be filed
by the Company within 120 days after the close of its fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The information required by this Item 12 is hereby incorporated
by reference to the information under the heading "Securities
Beneficially Owned by Directors, Officers and Principal Stockholders"
in the Company's definitive proxy statement to be filed by the
Company within 120 days after the close of its fiscal year.
Item 13. Certain Relationships and Related Transactions
The information required by this Item 13 is hereby incorporated
by reference to the information under the heading "Certain
Transactions," if any, in the Company's definitive proxy statement to
be filed by the Company within 120 days after the close of its fiscal
year.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
Page
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of September 30, 1996 and 1997 F-2
Consolidated Statements of Operations for the years ended
September 30, 1995, 1996 and 1997 F-3
Consolidated Statements of Stockholders' Equity (Deficit) for
the years ended September 30, 1995, 1996 and 1997 F-4
Consolidated Statements of Cash Flows for the years ended
September 30, 1995, 1996 and 1997 F-5
Notes to Consolidated Financial Statements F-6
(2) Financial Statement Schedules
Supplemental schedules are not provided because of the absence
of conditions under which they are required or because the
required information is given in the financial statements or
notes thereto.
(3) Listing of Exhibits
Exhibit Reference
No.
2.01 Merger Agreement between the Company A**
and the Company's Massachusetts
predecessor
3.01 Restated Certificate of Incorporation A**
3.02 By-laws of the Company A**
4.01 Specimen Certificate for shares of A**
the Company's Common Stock
4.02 Description of Capital Stock A**
(contained in the Restated
Certificate of Incorporation of the
Company, filed as Exhibit 3.01)
4.03 Description of Registration Rights A**
(contained in Exhibits 10.05, 10.11
and 10.13)
10.01 Contract for the Manufacture, Supply, A**
Installation and Commissioning of
Hold Baggage Screening Equipment
between the Company and BAA plc.
10.02 Distribution and Development A**
Agreement between the Company and
Gilardoni S.p.A.
10.02a Memorandum of Understanding between Filed herewith
Gilardoni S.p.A. and the Company
10.03 First Amended and Restated Line of A**
Credit Loan and Security Agreement
between the Company and BayBank, N.A.
and corresponding Note of the Company
in favor of BayBank, N.A.
10.04 Form of Warrant to purchase Common A**
Stock issued to certain investors.
10.05 Warrant to purchase Common Stock A**
issued to Dominion Fund II, L.P.
10.06 1989 Combination Stock Option Plan of A**
the Company*
10.07 1996 Non-Employee Director Stock A**
Option Plan of the Company*
10.08 1996 Equity Incentive Plan of the A**
Company*
10.09 Facility lease between the Company A**
and Cummings Properties Management,
Inc.
10.10 Form of Indemnification Agreement for A**
directors and officers of the Company
10.11 Series A and Series B Preferred Stock A**
Purchase Agreement
10.12 Series C and Series D Preferred Stock A**
Purchase Agreement
10.13 Conversion Agreement between the A**
Company and certain investors
10.14 Amended Shareholder Agreement among A**
the Company's Massachusetts
predecessor, S. David Ellenbogen, Jay
A. Stein and certain investors
10.15 Management Services Agreement between A**
the Company and Hologic, Inc.
10.16 License and Technology Agreement A**
between Company and Hologic, Inc.,
together with First Amendment to such
License and Technology Agreement
10.17 Description of Bonus Plan A**
10.18 Demand Line of Credit Loan and Filed herewith
Security Agreement between the
Company and BankBoston, N.A. and
corresponding Note of the Company in
favor of BankBoston, N.A.
11.01 Statement re: Computation of Per Filed herewith
Share Earnings
21.01 Subsidiaries of the Company A**
23.01 Consent of Arthur Andersen LLP Filed herewith
27.01 Financial Data Schedule Filed herewith
____________________
A Incorporated by reference to the Company's registration
statement on Form S-1 (Registration No. 333-14311). The number
set forth herein is the number of the Exhibit in said
registration statement.
* Management contract or compensatory plan or arrangement.
** In accordance with Rule 12b-32 under the Securities Exchange Act
of 1934, as amended, reference is made to the documents
previously filed with the Securities and Exchange Commission,
which documents are hereby incorporated by reference.
(b) REPORTS ON FORM 8-K
The Company did not file any current reports on Form 8-K during
the quarter ended September 30, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VIVID TECHNOLOGIES, INC.
Dated: December 29, 1997 By: /s/ Stephen A. Reber
Stephen A. Reber
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the Company and in the capacities and on the dates indicated.
Signature Title Date
/s/ S. David Ellenbogen Director and Chief December 29, 1997
S. David Ellenbogen Executive Officer
/s/ William J. Frain Chief Financial Officer December 29, 1997
William J. Frain and Treasurer
/s/ Jay A. Stein Director December 29, 1997
Jay A. Stein
Director
L. Paul Bremer III
Director
Frank Kenny
/s/ Glenn P. Muir Director December 29, 1997
Glenn P. Muir
/s/ Gerald Segel Director December 29, 1997
Gerald Segel
Report of Independent Public Accountants
To Vivid Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of
Vivid Technologies, Inc. (a Delaware corporation) and subsidiaries
as of September 30, 1996 and 1997, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended September 30,
1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Vivid Technologies, Inc. and subsidiaries as of
September 30, 1996 and 1997, and the results of their operations
and their cash flows for each of the three years in the period
ended September 30, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
October 27, 1997
VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30,
1996 1997
Assets
Current Assets:
Cash and cash equivalents $1,661,724 $11,571,630
Short-term investments -- 6,432,405
Accounts receivable 3,720,478 9,493,519
Inventories 4,741,658 6,195,096
Deferred tax asset 181,000 606,790
Other current assets 444,902 742,729
Total current assets 10,749,762 35,042,169
Property and Equipment, at cost:
Machinery and equipment 1,681,659 2,166,867
Equipment under capital leases 198,580 198,580
Leasehold improvements 143,776 165,995
Furniture and fixtures 58,855 84,462
2,082,870 2,615,904
Less-Accumulated depreciation
and amortization 1,097,717 1,531,709
985,153 1,084,195
Other Assets, net 228,077 1,330,233
$11,962,992 $37,456,597
Liabilities and Stockholders' Equity
Current Liabilities:
Obligation under capital leases $ 36,888 $ 4,366
Accounts payable 1,493,874 1,566,831
Accrued expenses 3,432,914 2,418,431
Currently redeemable Series A
preferred stock 2,343,750 --
Currently redeemable Series C
preferred stock 3,436,900 --
Customer deposits 1,042,085 1,755,788
Total current liabilities 11,786,411 5,745,416
Commitments and Contingencies
(Notes 9 and 11)
Stockholders' Equity:
Preferred stock, $.01 par value-
Authorized-1,000,000 shares
Issued and outstanding-None -- --
Convertible preferred stock, $.01 par value-
Series B-
Authorized-250,000 shares in 1996
Issued and outstanding-250,000 shares in 1996;
none in 1997 2,500 --
Series D-
Authorized-254,585 shares in 1996
Issued and outstanding-254,585 shares in 1996;
none in 1997 2,546 --
Common stock, $.01 par value-
Authorized-30,000,000 shares
Issued and outstanding-1,740,520 shares in
1996; 9,496,684 shares in 1997 17,405 94,967
Capital in excess of par value 594,279 26,190,785
Retained earnings (deficit) (440,149) 5,425,429
Total stockholders' equity 176,581 31,711,181
$11,962,992 $37,456,597
The accompanying notes are an integral part of these consolidated
financial statements.
VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Year Ended September 30,
1995 1996 1997
Revenues $14,437,220 $15,578,326 $31,702,188
Cost of Revenues (includes
approximately $929,000, $775,000 and
$988,000, respectively, of royalties
to and purchases from Hologic; see
Note 7) 6,128,986 6,899,433 13,202,925
Gross margin 8,308,234 8,678,893 18,499,263
Operating Expenses (includes
approximately $530,000, $325,000 and
$112,000, respectively, of
management service expenses from
Hologic; see Note 7):
Research and development 3,653,041 3,461,555 4,390,446
Selling and marketing 1,077,235 1,394,880 3,556,006
General and administrative 1,120,292 1,515,420 2,928,658
Litigation expenses 308,482 1,149,889 427,000
Total operating expenses 6,159,050 7,521,744 11,302,110
Income from Operations 2,149,184 1,157,149 7,197,153
Interest Income 53,378 60,616 814,966
Interest Expense (98,487) (53,001) (2,040)
Other Income, net -- -- 48,834
Income before income taxes 2,104,075 1,164,764 8,058,913
Provision for Income Taxes 90,000 -- 2,193,335
Net income $2,014,075 $1,164,764 $5,865,578
Net Income per Common and Common
Equivalent Share $ .28 $ .15 $ .60
Weighted Average Number of Common
and Common Equivalent Shares
Outstanding 7,275,138 7,868,853 9,838,300
The accompanying notes are an integral part of these consolidated
financial statements.
VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES
<TABLE>
Consolidated Statements of Stockholders' Equity (Deficit)
<CAPTION>
Series B Series D
Convertible Convertible
Preferred Stock Preferred Stock Common Stock Capital in Retained
Number $.01 Number $.01 Number $.01 Excess of Par Earnings
of Shares Par Value of Shares Par Value of Shares Par Value Value (Deficit) Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
September 30, 1994 250,000 $ 2,500 254,585 $ 2,546 1,647,600 $ 16,476 $532,238 $(3,618,988) $(3,065,228)
Exercise of stock
options -- -- -- -- 26,750 267 6,308 -- 6,575
Net income -- -- -- -- -- -- -- 2,014,075 2,014,075
Balance,
September 30, 1995 250,000 2,500 254,585 2,546 1,674,350 16,743 538,546 (1,604,913) (1,044,578)
Issuance of common
stock for services -- -- -- -- 15,000 150 44,850 -- 45,000
Exercise of stock
options -- -- -- -- 51,170 512 10,883 -- 11,395
Net income -- -- -- -- -- -- -- 1,164,764 1,164,764
Balance,
September 30, 1996 250,000 2,500 254,585 2,546 1,740,520 17,405 594,279 (440,149) 176,581
Exercise of stock
options, including
tax benefit of
$659,194 -- -- -- -- 333,800 3,338 809,231 -- 812,569
Exercise of stock
purchase warrants -- -- -- -- 76,514 765 32,195 -- 32,960
Conversion of
preferred stock
into common stock (250,000) (2,500) (254,585) (2,546) 5,045,850 50,459 (45,413) -- --
Sale of common
stock, net of
issuance costs of
approximately
$2,777,000 -- -- -- -- 2,300,000 23,000 24,800,493 -- 24,823,493
Net income -- -- -- -- -- -- -- 5,865,578 5,865,578
Balance,
September 30, 1997 -- $ -- -- $ -- 9,496,684 $ 94,967 $26,190,785 $ 5,425,429 $31,711,181
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year Ended September 30,
1995 1996 1997
Cash Flows from Operating Activities:
Net income $2,014,075 $1,164,764 $5,865,578
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities-
Depreciation and amortization 276,838 344,894 441,072
Issuance of common stock for services -- 45,000 --
Changes in assets and liabilities-
Accounts receivable (331,765) (2,552,354) (5,773,041)
Inventories (241,116) (1,557,190) (1,453,438)
Deferred tax asset -- (181,000) (425,790)
Other current assets (23,546) (387,520) (297,827)
Accounts payable (504,129) 767,303 72,957
Accrued expenses 535,331 1,156,031 (1,014,483)
Customer deposits (677,390) 1,042,085 713,703
Net cash provided by (used in)
operating activities 1,048,298 (157,987) (1,871,269)
Cash Flows from Investing Activities:
Purchase of property and
equipment, net (383,670) (427,053) (533,034)
Purchases of investments -- -- (11,650,261)
Maturity of investments 500,000 -- 3,999,000
Decrease (increase) in other assets 4,063 (37,581) 109,620
Net cash provided by (used in)
investing activities 120,393 (464,634) (8,074,675)
Cash Flows from Financing Activities:
Net proceeds from sale of
common stock -- -- 24,823,493
Proceeds from exercise of stock
purchase warrants -- -- 32,960
Redemption of Series A and Series C
preferred stock -- -- (5,780,650)
Proceeds from exercise of stock
options (including tax benefit) 6,575 11,395 812,569
Payments on capital lease
obligations -- (161,962) (32,522)
Deferred financing costs -- (127,000) --
Net cash provided by (used in)
financing activities 6,575 (277,567) 19,855,850
Net Increase (Decrease) in Cash and
Cash Equivalents 1,175,266 (900,188) 9,909,906
Cash and Cash Equivalents,
beginning of year 1,386,646 2,561,912 1,661,724
Cash and Cash Equivalents,
end of year $2,561,912 $1,661,724 $11,571,630
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the year for-
Interest $ 98,487 $ 53,001 $ 2,040
Income taxes $ 74,000 $ 351,000 $ 1,772,500
Supplemental Disclosure of Noncash
Investing and Financing Activities:
Assets acquired under capital leases $ -- $ 198,850 $ --
Conversion of Series B and D
preferred stock into common stock $ -- $ -- $ 5,045,850
The accompanying notes are an integral part of these consolidated
financial statements.
VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Operations and Significant Accounting Policies
Vivid Technologies, Inc. (the Company) is a leading developer,
manufacturer and marketer of automated inspection systems that
detect plastic and other explosives in airline baggage.
The accompanying consolidated financial statements reflect the
application of the accounting policies as described below.
(a)Principles of Consolidation
The consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries, Vivid
Technologies UK Ltd., Vivid Foreign Sales Corporation and
Vivid Securities Corporation. All material intercompany
transactions and balances have been eliminated in
consolidation.
(b)Revenue Recognition
The Company recognizes product revenue upon shipment. The
Company's product sales are not conditioned upon
satisfactory installation by the Company. Installation is
typically performed by the customer or a systems integrator
of the airport's baggage handling system. However, the
Company has typically assisted the systems integrator and
accrues for estimated installation costs, in addition to
estimated warranty costs, at the time of shipment.
During fiscal 1995, 1996 and 1997, the Company recognized
revenue of approximately $1,355,000, $716,000 and $821,000,
respectively, under two separate research and development
grants from an agency of the U.S. government to pursue
certain explosives detection research. The Company
recognizes revenue under these grants as services are
rendered, provided that the government has appropriated
sufficient funds for the work. The Company retains rights
to all technological discoveries and products resulting from
these efforts.
Customer deposits represent amounts received from customers
in advance of a shipment.
(c)Cash and Cash Equivalents and Investments
The Company considers all highly liquid investments with
original maturities of three months or less to be cash
equivalents. Included in cash equivalents at September 30,
1997 are funds held in money market accounts, certificates
of deposit, municipal bonds and repurchase agreements with
overnight maturities. Cash equivalents at September 30,
1996 included repurchase agreements with overnight
maturities.
The Company accounts for investments in accordance with
Statement of Financial Accounting Standards (SFAS) Opinion
No. 115, Accounting for Certain Investments in Debt and
Equity Securities. Under this standard, investments that the
Company has the positive intent and ability to hold to
maturity are reported at amortized cost, which approximates
fair market value, and are classified as held-to-maturity.
The investments that the Company has deemed held-to-maturity
include certificates of deposit, municipal bonds and
commercial paper, which total approximately $13,672,000 and
have an average original maturity of six months at
September 30, 1997. The Company did not classify any
investments as held-to-maturity at September 30, 1996.
Investments purchased to be held for indefinite periods of
time and not intended at the time of purchase to be held
until maturity are classified as available-for-sale and
reported at fair market value. Unrealized gains (losses) on
available-for-sale securities were not material in 1996 and
1997. The investments that the Company has deemed available-
for-sale include repurchase agreements with overnight
maturities and money market funds totaling approximately
$1,210,000 and $4,699,000 at September 30, 1996 and 1997,
respectively. Investments with maturities of greater than
three months but less than one year are classified as short-
term investments. Investments with maturities of greater
than one year have been classified as long-term. As of
September 30, 1997, the Company had long-term investments of
approximately $1,219,000 included in other assets, consisting
of investment-grade commercial paper, with an average
maturity period of 15 months.
(d)Concentration of Credit Risk and Significant Customers
SFAS No. 105, Disclosure of Information About Financial
Instruments with Off-Balance-Sheet Risk and Financial
Instruments with Concentrations of Credit Risk, requires
disclosure of any significant off-balance-sheet and credit
risk concentrations. Financial instruments that subject the
Company to credit risk consist primarily of cash and cash
equivalents, investments and trade accounts receivable. The
Company places its investments in financial institutions.
The Company has not experienced any material losses on these
investments to date. The Company has not experienced any
material losses related to receivables from individual
customers or groups of customers in the baggage security and
inspection industry.
The Company has entered into a forward foreign exchange
contract to hedge a receivable denominated in a foreign
currency. At September 30, 1997, the Company had
approximately $5,393,000 of forward exchange contracts
against specific balances denominated in Hong Kong dollars
which mature through February 2, 1998. The unrealized gain
(loss) was not material in 1997.
The Company received greater than 10% of total revenues from
the following customers during the years ended September 30,
1995, 1996 and 1997.
Percentage of Total Revenues
Customer Customer Customer
A B C
Year ended September 30, 1995 76% -- --
Year ended September 30, 1996 79% -- --
Year ended September30, 1997 39% 19% 27%
The Company had accounts receivable balances greater than 10%
of total accounts receivable from the following customers as
of September 30, 1996 and 1997:
Percentage of Total Accounts Receivable
Customer Customer Customer Customer
A B C D
As of September 30, 1996 94% -- -- --
As of September 30, 1997 -- 61% 12% 15%
Subsequent to September 30, 1997, the Company received
payments aggregating approximately $6,437,000 against the
accounts receivable balances due as of that date.
(e)Disclosure of Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash
and cash equivalents, investments, accounts receivable and
accounts payable. The carrying amounts of the Company's cash
and cash equivalents, investments, accounts receivable and
accounts payable approximate fair value due to the short-term
nature of these instruments.
(f) Translation of Foreign Currencies
The accounts of the Company's foreign subsidiary are
translated in accordance with SFAS No. 52, Foreign Currency
Translation. In translating the accounts of the foreign
subsidiary into U.S. dollars, assets and liabilities are
translated at the rate of exchange in effect at year-end,
while stockholders' equity is translated at historical rates.
Revenue and expense accounts are translated using the
weighted average exchange rate in effect during the year.
Foreign currency translation gains or losses for Vivid
Technologies UK Ltd. are included in the accompanying
consolidated statements of operations since the functional
currency for this subsidiary is the U.S. dollar. The Company
had sales of approximately $8,044,000 denominated in foreign
currencies during 1997. The Company recognized a loss of
approximately $47,000 related to such foreign currency
transactions in 1997 which is included in other income, net
in the accompanying consolidated statements of operations.
(g)Inventories
Inventories are stated at the lower of cost (first-in, first-
out) or market and consist of the following:
September 30,
1996 1997
Raw materials $3,336,696 $3,175,211
Work-in-process 858,983 1,743,746
Finished goods 545,979 1,276,139
$4,741,658 $6,195,096
Finished goods and work-in-process inventories consist of
direct materials, labor and overhead.
(h)Depreciation and Amortization
The Company provides for depreciation and amortization by
charges to operations using straight-line and declining-
balance methods, which allocate the cost of property and
equipment over their estimated useful lives, as follows:
Assets Estimated
Classification Useful Life
Machinery and equipment 5 years
Equipment under capital leases Life of lease
Leasehold improvements Life of lease
Furniture and fixtures 7 years
(i)Other Assets
Other assets consist primarily of long-term investments,
deposits and patent costs. Patent costs are being amortized
over 10 years using the straight-line method. At September
30, 1996, other assets also included deferred financing costs
associated with the Company's initial public offering. The
Company periodically assesses the realizability of intangible
assets, including patent costs, in accordance with SFAS No.
121, Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of. The Company has not
recorded any impairment of its intangible assets to date.
(j)Net Income per Common and Common Equivalent Share
Net income per common and common equivalent share is computed
by dividing net income by the weighted average number of
common and common equivalent shares outstanding during the
period, assuming the automatic conversion of all then
outstanding shares of convertible preferred stock into
5,045,850 shares of common stock. Pursuant to the
requirements of the Securities and Exchange Commission Staff
Accounting Bulletin No. 83, common stock issued and stock
options granted during the period from December 1995 to
December 1996 have been included in the calculation of
weighted average number of common shares outstanding for all
periods prior to December 1996. Fair market value for the
purpose of the calculation was assumed to be $13.00. Common
stock equivalents issued in earlier and subsequent periods
have been included when the effect would be dilutive. Fully
diluted net income per common and common equivalent share has
not been separately presented, as the amounts would not be
materially different from net income per common and common
equivalent share as presented.
In March 1997, the Financial Accounting Standards Board
(FASB) issued SFAS No. 128, Earnings Per Share, which
established new standards for calculating and presenting
earnings per share. The Company will adopt this new standard
in its fiscal 1998 financial statements, which will require
the reporting of diluted earnings per share and basic
earnings per share, as defined. SFAS No. 128 is effective
for periods ending after December 15, 1997, and early
adoption is not permitted. When adopted, the statement will
require restatement of prior years' earnings per share. For
the years ended September 30, 1995, 1996 and 1997, diluted
earnings per share would have been $0.28, $0.15 and $0.60,
respectively. Basic earnings per share would have been
$1.11, $0.64 and $0.78, respectively, for the same periods.
(k)Management Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
(l)Research and Development and Software Development Costs
Research and development costs have been charged to
operations as incurred. SFAS No. 86, Accounting for the
Costs of Computer Software To Be Sold, Leased or Otherwise
Marketed, requires the capitalization of certain computer
software development costs incurred after technological
feasibility is established. The Company believes that once
technological feasibility of a software product has been
established, the additional development costs incurred to
bring the product to a commercially acceptable level are not
significant.
(2) Income Taxes
The Company accounts for income taxes under SFAS No. 109,
Accounting for Income Taxes, the objective of which is to
recognize the amount of current and deferred income taxes at the
date of the financial statements as a result of all differences
in the tax basis and financial statement carrying amount of
assets and liabilities as measured by enacted tax laws.
The approximate income tax effect of each type of temporary
difference and carryforward is as follows:
September 30,
1996 1997
Research and development
credit carryforwards $69,000 $32,000
Nondeductible accruals 97,000 27,000
Nondeductible reserves 278,000 543,000
Unamortized start-up costs 24,000 --
Other temporary differences 53,000 4,790
Valuation allowance (340,000) --
Net deferred tax asset $181,000 $606,790
Under SFAS No. 109, the Company recognizes a deferred tax asset
for the future benefit of its temporary differences if it
concludes that it is more likely than not that the deferred tax
asset will be realized. The reduction in the valuation allowance
from September 30, 1996 to September 30, 1997 is due to
management's belief that it is more likely than not that the
majority of the deferred tax assets will be realized.
A reconciliation of the federal statutory rate to the Company's
effective tax rate is as follows:
September 30,
1995 1996 1997
Income tax provision at federal
statutory rate 34.0% 34.0% 34.0%
Increase (decrease) in tax resulting from-
State tax provision, net of federal benefit 6.3 8.1 3.2
Foreign sales corporation benefit -- (7.5) (5.0)
Foreign net operating losses not benefited -- 4.1 --
Net operating loss carryforwards utilized (31.2) -- --
Reduction in valuation allowance -- (15.5) (1.2)
Research and development tax credit utilized (6.8) (24.1) (3.8)
Alternative minimum taxes 2.0 -- --
Other -- 0.9 (0.2)
Effective tax rate 4.3% --% 27.0%
The provision for income taxes in the accompanying consolidated
statements of income consists of the following:
September 30,
1995 1996 1997
Federal-
Current $ 90,000 $179,000 $2,173,335
Deferred -- (179,000) (224,000)
90,000 -- 1,949,335
State-
Current -- 2,000 271,000
Deferred -- (2,000) (27,000)
-- -- 244,000
$ 90,000 $ -- $2,193,335
(3) Line of Credit
The Company has a secured demand line of credit with a bank for
$5,000,000. Borrowings under the line are available through
February 28, 1998 and bear interest at one of several interest
rates, including the bank's prime rate (8.5% at September 30,
1997) and a LIBOR index rate. There were no amounts outstanding
under this line at September 30, 1996 and 1997. The line of
credit is collateralized by substantially all assets of the
Company.
(4) Redeemable Preferred Stock
The Company had previously authorized 578,065 shares of
redeemable preferred stock, par value $.01 per share, of which
234,375 shares and 343,690 shares had been designated as Series A
and Series C redeemable preferred stock, respectively. In
connection with the Company's initial public offering, the
Company redeemed all outstanding shares of Series A and Series C
redeemable preferred stock for approximately $5,781,000, which
represents a redemption value of $10.00 per share.
(5) Stockholders' Equity
(a) Preferred Stock
In December 1996, the Company's Board of Directors authorized
the issuance of up to 1,000,000 shares of undesignated $.01
par value preferred stock, the rights and privileges of which
are to be determined by the Company's Board of Directors.
The Series A, B, C and D preferred stock are no longer
authorized. There are no preferred shares outstanding as of
September 30, 1997.
(b) Common Stock
In October 1996, the Company approved the Restated
Certificate of Incorporation, which includes an increase in
the authorized shares of common stock to 30,000,000. The
Company has reserved the following number of common shares as
of September 30, 1997:
Exercise of stock purchase warrants 323,210
Exercise of stock options 1,565,680
1,888,890
In July 1996, the Company issued 15,000 shares of common
stock to a customer at no cost in lieu of fees on certain
sales of the Company's products for which the customer
provided substantial assistance through access to the
customer's facilities and liaison activities. The Company
recorded a $45,000 charge to selling and marketing expenses
for the issuance of these shares during fiscal 1996.
(c)Initial Public Offering
During fiscal 1997, the Company completed its initial public
offering of 2,300,000 shares of the Company's common stock at
$12.00 per share. The Company received net proceeds of
approximately $24,823,000 after deducting the underwriters'
commission and issuance costs. In December 1996, the Company
used approximately $5,781,000 of the net proceeds to redeem
all of its outstanding shares of redeemable Series A and
Series C preferred stock. In connection with the initial
public offering, all of the Company's Series B and Series D
preferred stock was converted into an aggregate of 5,045,850
shares of common stock.
(d)Stock Plans
1989 Combination Stock Option Plan
The Company's 1989 Combination Stock Option Plan (the 1989
Plan) provides for the grant to key employees incentive
stock options to purchase shares of the Company's common
stock at a price not less than fair market value as
determined by the Board of Directors, or nonqualified
options at a price specified by the Board of Directors.
Under the 1989 Plan, the Company has reserved shares for the
granting of options to purchase up to 1,250,000 shares of
the Company's common stock.
The 1996 Equity Incentive Plan
In October 1996, the Company approved the 1996 Equity
Incentive Plan (the Equity Plan) for which the Company
reserved shares for the granting of options or other equity
awards to purchase up to 750,000 shares of the Company's
common stock.
The 1996 Nonemployee Director Stock Option Plan
In October 1996, the Company approved the 1996 Nonemployee
Director Stock Option Plan (the Director Plan) for which the
Company has reserved shares for the granting of options to
purchase up to 125,000 shares of the Company's common stock.
As of September 30, 1997, there were 676,980 options
available for future grants under all plans. A summary of
stock option activity under all plans is as follows:
Weighted
Average
Price per Exercise
Shares Share Price
Outstanding, September 30, 1994 712,250 $.10-1.00 $ .39
Granted 119,250 1.00 1.00
Exercised (26,750) .10- .50 .25
Terminated (47,330) .50-1.00 .81
Outstanding, September 30, 1995 757,420 .10-1.00 .46
Granted 157,750 1.00-3.00 2.22
Exercised (51,170) .10-1.00 .85
Terminated (7,100) .50-1.00 .87
Outstanding, September 30, 1996 856,900 .10-3.00 .78
Granted 386,050 9.50-17.00 14.27
Exercised (333,800) .10-3.00 .46
Terminated (20,450) .50-3.00 1.15
Outstanding, September 30, 1997 888,700 $.10-$17.00 $6.75
Exercisable, September 30, 1997 264,540 $.10-$9.50 $ .65
The range of exercise prices for options outstanding and
options exercisable at September 30, 1997 are as follows:
<TABLE>
<CAPTION>
Weighted Average Options Outstanding Options Exercisable
Range of Remaining Contractual Weighted Average Weighted Average
Exercise Price Life (in years) Number Exercise Price Number Exercise Price
<S> <C> <C> <C> <C> <C>
$0.10 - $1.00 5.4 418,850 $ 0.57 248,000 $ 0.42
$3.00 - $9.50 8.9 108,300 $ 4.47 16,540 $ 4.08
$10.75 - $15.50 9.4 131,300 $11.68 -- --
$15.88 - $17.00 9.5 230,250 $16.25 -- --
Total 7.47 888,700 $ 6.75 264,540 $ 0.65
</TABLE>
The Company accounts for its stock-based compensation plans
under Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees. In October 1995, the FASB
issued SFAS No. 123, Accounting for Stock-Based Compensation,
which established a fair-value-based method of accounting for
stock-based compensation plans. The Company has adopted the
disclosure-only alternative under SFAS No. 123 which requires
disclosure of the pro forma effects on net income and
earnings per share as if SFAS No. 123 had been adopted, as
well as certain other information.
The Company has computed the pro forma disclosures required
under SFAS No. 123 for all stock options and warrants granted
to employees of the Company in fiscal 1996 and 1997 using the
Black Scholes option pricing model prescribed by SFAS No.
123. The assumptions used to calculate the SFAS No. 123 pro
forma disclosure and the weighted average information for
1996 and 1997 are as follows:
Year Ended
September 30,
1996 1997
Risk-free interest rate 6.04 6.01
Expected dividend yield -- --
Expected lives (in years) 4.7 4.9
Expected volatility 53% 52%
Weighted-average grant date
fair value of options
granted during the year $1.10 $7.16
The pro forma effect of applying SFAS No. 123 for all options
and warrants granted to employees of the Company in 1996 and
1997 would be as follows:
Year Ended
September 30,
1996 1997
Net income as reported $1,164,764 $5,865,578
Pro forma net income $1,125,371 $5,104,357
Net income per common and
common equivalent share,
as reported $0.15 $0.60
Pro forma net income per
common and common
equivalent share $0.14 $0.52
The resulting pro forma compensation expense may not be
representative of the amount to be expected in future years
as the pro forma expense may vary based on the number of
options granted. The Black-Scholes option pricing model was
developed for use in estimating the fair value of traded
options that have no vesting restrictions and are fully
transferable. In addition, options pricing models require the
input of highly subjective assumptions, including expected
stock price volatility. Because the Company's employee stock
options have characteristics significantly different from
those of traded options and because changes in the subjective
input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair
value of its employee stock options.
(e) Series B and D Convertible Preferred Stock
The Company had previously authorized 504,585 shares of
convertible preferred stock, par value $.01 per share, of
which 250,000 shares and 254,585 shares had been designated
as Series B and Series D convertible preferred stock,
respectively. In connection with the Company's initial public
offering, all shares of Series B and Series D convertible
preferred stock were converted into an aggregate 5,045,850
shares of common stock.
(f)Stock Purchase Warrants
In conjunction with a $400,000 promissory note issued in
fiscal 1992 and repaid in fiscal 1993, the Company sold a
warrant, at nominal value, to purchase 42,667 shares of the
Company's common stock at $1.50 per share. The warrant was
to expire in December 2001. This stock purchase warrant was
exercised during fiscal 1997, resulting in a net issuance of
39,789 shares of common stock.
In conjunction with the issuance of certain convertible notes
issued in fiscal 1993, the Company sold, at nominal value,
warrants to purchase 361,002 shares of the Company's common
stock for $1.50 per share. The warrants expire in December
2001. During fiscal 1997, warrants to purchase 37,792 shares
were exercised resulting in the net issuance of 36,725 shares
of common stock.
(6) Geographical Sales Data
Export sales as a percentage of the Company's total revenues are
as follows:
September 30,
1995 1996 1997
Europe 90.6% 95.0% 51.5%
Asia -- 0.3 45.7
Other -- 0.1 0.2
Total 90.6% 95.4% 97.4%
Substantially all of the Company's assets are located in the
United States.
(7) Related Party Transactions
(a)Management Services Agreement
The Company has an agreement with Hologic, Inc. (Hologic), an
affiliated company, whereby Hologic provides management,
administrative and support services. In addition, the
Company subleased its facilities from Hologic under a
sublease agreement, which was terminated in February 1996,
for approximately $15,000 per month. The Company paid
Hologic for all direct costs incurred, as well as a portion
of Hologic's overhead costs, as defined, representing a pro
rata portion of costs attributable to the Company. Expenses
charged to operations under these agreements were
approximately $530,000, $325,000 and $112,000 in fiscal 1995,
1996 and 1997, respectively. The Company also made purchases
of approximately $210,000 from Hologic in fiscal 1995. The
Company had no purchases from Hologic in 1996 or 1997.
Approximately $34,000 and $20,000 had not been paid as of
September 30, 1996 and 1997, respectively, under the
management services agreement.
(b)License and Technology Agreement
The Company has an agreement with Hologic whereby the Company
has a perpetual, exclusive, worldwide license to utilize
certain of Hologic's technology and patents for the purpose
of developing the Company's X-ray screening security systems
for explosives, drugs, currency and other contraband (the
Exclusive License). In September 1996, this license was
amended to grant the Company a nonexclusive license to
utilize these patents and technology for certain new product
development for other applications (the Nonexclusive
License). Royalty payments to Hologic under the Exclusive
License are 5% of revenues, as defined, on the first $50
million in sales; thereafter, payments are 3% on revenues up
to $200 million, with no royalty payments on aggregate
revenues in excess of $200 million. During 1997, the Company
reduced its royalty payments to 3% under the Exclusive
License upon achievement of cumulative revenues in excess of
$50 million. Royalty payments under the Nonexclusive License
are 3% on sales up to $200 million, with no royalty payments
on aggregate revenues in excess of $200 million. The
agreement terminates by mutual agreement of the two parties
or upon certain other defined circumstances. During fiscal
1995, 1996, and 1997, the Company incurred royalty expenses
under the Exclusive License of approximately $719,000,
$775,000 and $988,000, respectively, of which approximately
$624,000 and $753,000 had not been paid as of September 30,
1996 and 1997, respectively. To date, the Company has not
incurred any royalty expenses under the Nonexclusive License.
(8) Profit-Sharing 401(k) Plan
The Company has a qualified profit-sharing plan covering
substantially all of its employees. Contributions to the plan
are at the discretion of the Company's Board of Directors. The
Company has recorded approximately $65,000, $65,000 and $74,000
as a provision for the profit-sharing contribution for fiscal
1995, 1996 and 1997, respectively.
(9) Commitments and Contingencies
(a)Operating Leases
In March 1996, the Company moved into a new facility. The
Company is renting the facility under an operating lease
which expires in February 2001. The Company's future minimum
lease payments under all operating leases as of September 30,
1997 are approximately as follows:
Year Amount
1998 $ 389,000
1999 389,000
2000 389,000
2001 162,000
$1,329,000
Rent expense charged to operations for the year ended
September 30, 1995 and the first five months of fiscal 1996
was approximately $15,000 per month as a part of the
management services agreement with Hologic. Rent expense
charged to operations since the Company moved operating
facilities through September 30, 1996 and for fiscal 1997
were approximately $227,000 and $438,000, respectively.
(b)Capital Leases
The Company leases certain equipment under capital leases
which expire through June 1999.
(c)Patent Infringement Claims
In October 1994, EG&G filed a patent infringement claim
against the Company in the United States District Court for
the District of Massachusetts, alleging that certain of the
Company's products infringed a patent held by EG&G. EG&G
sought damages and expenses from the Company and sought to
enjoin the Company from selling products that allegedly
infringed the EG&G patent. In December 1994, the Company
filed an answer denying any infringement and counterclaims
seeking to invalidate the EG&G patent and alleging that EG&G
infringed three patents owned or licensed by the Company. On
November 6, 1996, the Company and EG&G entered into a
settlement agreement relating to this litigation. Amounts
incurred related to the claim, including the settlement, are
included in litigation expenses in the accompanying
statements of operations.
In May 1996, the Company commenced an action in the United
States District Court for the District of Massachusetts
against AS&E seeking a declaration that the Company does not
infringe AS&E patents related to back scattered X-rays. This
followed AS&E's allegations of infringement to third parties.
No discovery has been taken to date. Following a court
decision in July 1997 construing the claims of the AS&E
patent, which decision the Company considers favorable, in
September 1997 the Company filed a motion for summary
judgment of non-infringement. AS&E has not yet filed its
papers in opposition to the Company's motion but is seeking
discovery. If granted, the Company's motion will resolve all
issues remaining in the case in favor of the Company.
Earlier, in April 1997, the Court dismissed AS&E's proposed
counterclaim seeking to allege patent infringement, so that
the only remaining issue in the case is the Company's request
for declaration of non-infringement of two claims of a single
AS&E patent.
(d)Patent License Agreement
During fiscal 1996, the Company entered into a patent license
agreement for the exclusive license of certain explosives
detection technology. Under this agreement, the Company is
required to pay aggregate royalties of up to $1,000,000 based
on net sales, as defined. During fiscal 1996 and 1997, the
Company incurred approximately $28,000 and $97,000,
respectively, of royalty expense related to this agreement.
(e)Joint Development and Royalty Agreement
During fiscal 1997, the Company entered into a joint
development and royalty agreement for the development of
certain explosives detection technology. Under the terms of
the agreement, the Company is required to pay a royalty of
$3,000 per unit sold of the developed product for the first
167 units. No royalty expenses were incurred for the year
ended September 30, 1997.
(10) Accrued Expenses
Accrued expenses in the accompanying consolidated balance sheets
consist of the following:
September 30,
1996 1997
Payroll and payroll-related $513,967 $601,959
Accrued warranty 773,000 798,000
Accrued royalties 651,424 789,684
Accrued legal 1,291,877 75,954
Other 202,646 152,834
$3,432,914 $2,418,431
(11) Subsequent Event
Subsequent to year-end, the Company entered into an exclusive
technology license agreement. Under the agreement, the Company
paid $1,250,000 for the exclusive right to manufacture, use or
sell the licensed technology for a three-year period, with a
nonexclusive right for the remainder of the life of the patents.
The Company will have the option to extend the exclusive rights
beyond three years. Upon the ultimate commercialization of the
technology, the Company will also be required to pay royalties on
sales of products incorporating the licensed technology, as
defined.
Exhibit 10.02a
Memorandum of Understanding between
Gilardoni S.p.A. Vivid Technologies, Inc.
as of March 26, 1997
1. Prepaid Royalty Payment to Gilardoni:
A non-refundable payment of $501,000 USD paid to Gilardoni.
Vivid to allocate for their financing over the first 167 units
and pay Gilardoni per the following schedule.
a) $150,000 upon signing and receipt of manufacturing documentation
for FEP Platform (except monobloc and inverter).
b) $150,000 upon completion of acceptance testing of initial two
systems delivered to Vivid. Acceptance criteria to be agreed to by
April 10, 1997 and testing to be complete by June 1, 1997.
c) $201,000 upon first product shipped by Vivid with both parties
making every reasonable effort to complete by January 1, 1998.
2. Ongoing Royalty Payments:
a) A royalty payment of $3,000 will be paid to Gilardoni for each
of the first 167 units, per item 1.
b) Royalty payments made to Gilardoni decrease to $2,000 per unit
on the 168th unit and for the life of the product.
c) A royalty payment of $3,000 will be paid to Vivid for each CDS
Console product and software that Gilardoni uses in manufacturing its
products.
3. Pricing:
a) FEP Platform transfer price not to exceed $29,500 which includes
$3,000 profit.
b) Price for the initial 100 Monoblock/Inverter Board sets is
$6,250 per set.
c) Price of the Monoblock/Inverter Board set reduces to $5,250 from
the 101st set.
d) Vivid always receives most favored pricing.
e) Gilardoni will manufacture and test (integration) the Joint
System for Vivid at a transfer price to be developed on the cost plus
fee basis used to determine the transfer pricing for the FEP
Platform.
f) Vivid to purchase the initial eight FEP Platforms at $32,000 by
7 April, 1997 for delivery (shipment from Mandello) as follows: 2
units on April 10th, 3 units on May 30th and 3 units on June 15th.
Funds advanced by Vivid on behalf of Gilardoni for the development of
the A/D Printed Circuit Board will be deducted from the invoice for
the shipment of the first FEP Platform. Standard payment terms to
apply.
g) The CDC Console cost will not exceed $6,100. And a transfer
price will be developed on the cost plus fee basis used to determine
the transfer pricing for the FEP Platform. Vivid will supply all
manufacturing drawings to Gilardoni.
4. Territories:
a) Gilardoni receives exclusive rights for the Joint Products for
Italy, Cyprus, Bulgaria, Tunis, Brazil, Argentina, Libya, and Iran.
Gilardoni receives exclusive rights for Vivid Products for Italy.
b) Rights for the territories of Greece and Romania for Joint
System to be upon mutual acceptance at a later date.
c) Vivid receives exclusive rights for the Joint Products and FEP
Products in North America.
d) All other territories are exclusive to Vivid for the Joint
System and non-exclusive for FEP Products unless mutually agreed
otherwise.
5. Performance improvements and cost reductions developed by one
party will be made available to the other party, prior to the
development being offered to a third party, at reasonable charges to
be negotiated on a case by case basis.
6. For the life of the FEP Platform, the sole manufacturing source
for the Monobloc (and inverter) will be Gilardoni.
7. Vivid will evaluate Gilardoni as an alternative supplier of
monoblocs, x-ray tubes and generators for Vivid products.
8. Vivid to propose new discount for Vivid Products.
9. The above mentioned costs exclude packaging and shipping.
10. The final agreement subject to legal review (and a contract) and
Board of Directors approval by each parties.
11. The final agreement is subject to Vivid finalizing an agreement
with the University of Alabama regarding the Barnes patents.
12. The term of the Agreement is for 3 years, with a 1 year notice
of termination. This includes an automatic renewal.
For Gilardoni S.p.A.: For Vivid Technologies, Inc.
/s/ Richard P. Bisson /s/ Stephen A. Reber
Richard P. Bisson Stephen A. Reber
Managing Director President
March 26, 1997 26 March, 1997
Date Date
Exhibit 10.18
DEMAND LINE OF CREDIT
LOAN AND SECURITY AGREEMENT
THIS DEMAND LINE OF CREDIT LOAN AND SECURITY AGREEMENT, dated May 30,
1997, by and between VIVID TECHNOLOGIES, INC., a Delaware corporation
duly qualified in Massachusetts and with a principal place of
business in Woburn, Massachusetts (the "Borrower") and BANKBOSTON,
N.A., a national banking association with its head office in Boston,
Massachusetts (the "Lender"), successor by merger with BAYBANK, N.A.
W I T N E S S E T H:
BACKGROUND. The Borrower has requested the Lender to lend it up to
$5,000,000.00 on a revolving loan basis (the "Loan"). The Lender is
willing to accommodate the Borrower's requests upon the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises herein contained,
and each intending to be legally bound hereby, the parties agree as
follows:
ARTICLE 1. DEFINITIONS
As used herein:
1.01 "Accounts," "Chattel Paper," "Contracts," "Documents,"
"Equipment," "Fixtures," "General Intangibles," "Goods,"
"Instruments," and "Inventory" shall have the same respective
meanings as are given to those terms in the Uniform Commercial Code
as presently adopted and in effect in the Commonwealth of
Massachusetts.
1.02 "Advance(s)" means the Lender's Loan advances to the Borrower
under this Agreement to reimburse the Borrower for amounts paid or to
be paid by the Borrower for Goods.
1.03 "Affiliate" means, as to any Person, each other Person that
directly, or indirectly through one or more intermediaries, controls,
or is controlled by, or under common control with, such Person or is
a related entity (including, but not limited to, partnerships, joint
ventures, joint stock companies, corporations) to the Borrower.
1.04 "Agreement" means this Demand Line of Credit Loan and Security
Agreement, as the same may from time to time be amended or
supplemented.
1.05 "Availability Date" means February 28, 1998. The Availability
Date may be extended by the Lender at its sole discretion.
1.06 "Borrowing Availability" means the amount which is equal at any
given time to the total of (1) the Borrowing Base, less (2) the
aggregate amount of all Advances then outstanding together with
interest at the Rate, as defined in Section 2.05 hereof.
1.07 "Borrowing Base" means a maximum credit availability of
$5,000,000.00, pursuant to the Loan. At no time shall the Borrowing
Base exceed $5,000,000.00.
1.08 "Business Day" means any day other than a Saturday, Sunday, or
other day on which commercial banks in Boston, Massachusetts are
authorized or required to close pursuant to Massachusetts or Federal
laws; if the day relates to a LIBOR Loan, LIBOR Interest Period or
notice with respect to a LIBOR Loan, "Business Day" shall mean a day
on which dealings in U. S. Dollar deposits are also carried on in the
London interbank market and banks are open for business in London on
which the Federal Reserve Bank of New York is open for business.
1.09 "Closing" has the meaning given to such term in Section 3.01.
1.10 "Collateral" has the meaning given to such term in Section 4.01.
1.11 "Collateral Documents" means the UCC Financing Statements
specified in Section 3.01(C) and the documents, whether deliverable
at or after the Closing, required under Article 4.0.
1.12 "Current Assets" means, at any time, all assets that should in
accordance with GAAP, be classified as current assets on a balance
sheet of the Borrower and its Subsidiary.
1.13 "Current Liabilities" means, at any time, all Indebtedness that
should, in accordance with GAAP, be classified as current liabilities
on a consolidated balance of the Borrower and its Subsidiary.
1.14 "Current Ratio" means, at any time, Current Assets divided by
Current Liabilities.
1.15 "Event of Default" has the meaning provided in Section 7.01.
1.16 "Financial Statements" means (1) the consolidated balance sheet
of the Borrower and its Subsidiary as of September 30, 1996, and
consolidated statements of income, stockholders' equity, and changes
in financial position, and notes thereto, of the Borrower for the
year ended on such date, certified as to the year ended September 30,
1996 by a CPA acceptable to Lender; and (2) as to the first quarter
of the 1997 fiscal year ended December 31, 1996, the consolidated
balance sheet of the Borrower and its Subsidiary and consolidated
statements of income, stockholders' equity, and changes in financial
position, and notes thereto, of the Borrower prepared and certified
by the treasurer to present fairly the consolidated financial
position and results of operations of the Borrower at such dates and
for such periods in accordance with GAAP.
1.17 "GAAP" means generally accepted accounting principles applied
consistently with such changes or modifications thereto as may be
approved in writing by the Lender.
1.18 "Indebtedness" means, as to the Borrower or any Subsidiary, all
items of indebtedness, obligation or liability whether matured or
unmatured, liquidated or unliquidated, direct or contingent, joint or
several, including, but without limitation:
(A) All indebtedness guarantied, directly or indirectly, in any
manner, or endorsed (other than for collection or deposit in the
ordinary course of business) or discounted with recourse;
(B) All indebtedness in effect guarantied, directly or
indirectly, through agreements, contingent or otherwise: (1) to
purchase such indebtedness; or (2) to purchase, sell, or lease (as
lessee or lessor) property, products, materials, or supplies or to
purchase or sell services, primarily for the purpose of enabling the
debtor to make payment of such indebtedness or to insure the owner of
the indebtedness against loss; or (3) to supply funds to, or in any
other manner invest in, the debtor;
(C) All indebtedness secured by (or for which the holder of
such indebtedness has a right, contingent or otherwise, to be secured
by) any mortgage, deed of trust, pledge, lien, security interest, or
other charge or encumbrance upon property owned or acquired subject
thereto, whether or not the liabilities secured thereby have been
assumed; and
(D) All indebtedness incurred as the lessee of Goods or
services under leases that, in accordance with GAAP, should not be
reflected on the lessee's balance sheet.
1.19 "Intellectual Property" means trademarks, service marks, trade
names, trade styles, logos, goodwill, trade secrets, patents,
copyrights and licenses acquired under any statutory, common law or
registration process in any state or nation at any time, or under any
agreement executed with any person or entity at any time. The term
"license" refers not only to rights granted by agreement from the
owner of patents, trademarks, service marks and the like, but also to
rights granted by a franchiser under a franchise or similar
agreement. The foregoing enumeration is not intended as a limitation
of the meaning of the word "license". A complete list of all of the
Borrower's Intellectual Property registrations, claims, filings, or
pending applications for any of the foregoing, wherever registered,
claimed or filed showing the place of filing, the registration,
claim, filing or application number and date is attached hereto as
Exhibit 1.19.
1.20 "Landlord's Consent and Waiver" means that certain Landlord's
Consent and Waiver, a copy of which is attached hereto as Exhibit
1.20, executed by the Borrower and to be duly recorded or filed for
the benefit of the Lender, as from time to time supplemented or
amended.
1.21 "Laws" means all ordinances, statutes, rules, regulations,
orders, injunctions, writs, or decrees of any government or political
subdivision or agency thereof, or of any court or similar entity
established by any thereof.
1.22 "LIBOR" means the London Interbank Offered Rate.
1.23 "LIBOR Interest Period" means, with respect to any LIBOR Loan,
the period commencing on the date such loan is made and ending, as
the Borrower may select pursuant to Section 2.05 of this Agreement,
7, 30, 60, 90 or 180 days thereafter; provided, however, that:
(a) no LIBOR Interest Period may extend beyond the
Availability Date;
(b) if a LIBOR Interest Period would end on a day that is
not a Business Day, such LIBOR Interest Period shall be extended to
the next Business Day unless such Business Day would fall in the next
calendar month, in which event such LIBOR Interest Period shall end
on the immediately preceding Business Day.
1.24 "LIBOR Loan" means any Advance for which the Borrower makes a
Rate Selection of a LIBOR Rate.
1.25 "LIBOR Rate" means the rate of interest determined by the Lender
to be the prevailing rate per annum at which deposits in U.S. dollars
are offered to the Lender in the interbank Eurodollar market in which
it regularly participates on or about 10:00 A.M. (Boston time) at
least three (3) Business Days before the effective date of the Rate
Selection as set forth in Section 2.05 in an amount approximately
equal to the principal amount of the Advance to which the selected
LIBOR Interest Period is to apply for a period of time approximately
equal to such LIBOR Interest Period.
1.26 "Letter of Credit" means any irrevocable letter of credit
payable in the United States or at the issuing bank, subject to
Uniform Customs and Practice for Documentary Credits (1993 Revisions)
(UCP 500) issued for the benefit of Borrower.
1.27 "Net Sales" means for the applicable period, all proceeds from
the sale of goods and services by the Borrower in the ordinary course
of the Borrower's business, net of fees, commissions, freight charges
and other allowances, adjustments, credits, or similar charges.
1.28 "Note" means the promissory note referred to in Section 2.03.
1.29 "Obligations" is intended to be used in its most comprehensive
sense and means all the obligations of the Borrower to the Lender of
every kind and description, whether direct or indirect, absolute or
contingent, primary or secondary, joint or several, due or to become
due, now existing or hereafter arising or acquired and whether by way
of loan, discount, letter of credit, lease or otherwise, including
without limitation, the following obligations:
(A) To pay the principal of, and interest on, the Note in
accordance with the terms thereof and to satisfy all other
liabilities to the Lender, whether hereunder or otherwise, whether
now existing or hereafter incurred, matured or unmatured, direct or
contingent, joint or several, including any extensions,
modifications, renewals thereof and substitutions therefor;
(B) To repay to the Lender all amounts advanced by the Lender
hereunder or otherwise on behalf of the Borrower, including, but
without limitation, advances for principal or interest payments to
prior secured parties, mortgagees, or lienors, or for taxes, levies,
insurance, rent, or repairs to, or maintenance or storage of, any of
the Collateral;
(C) To perform and observe all covenants, agreements and
undertakings of the Borrower pursuant to the terms and conditions of
this Agreement, the Collateral Documents or any other agreement or
instrument now or hereafter delivered to the Lender by the Borrower;
and
(D) To reimburse the Lender, on demand, for all of the Lender's
expenses and costs, including without limitation the reasonable fees
and expenses of its counsel, in connection with the preparation,
administration, amendment, modification, or enforcement of this
Agreement and the documents required hereunder, including, without
limitation, any proceeding brought, or threatened, to enforce payment
or performance of any of the obligations referred to in the foregoing
paragraphs (A), (B) and (C).
1.30 "Operating Account" means the account opened by Borrower at the
offices of the Lender, Account #31233852, used for the purposes of
disbursement and repayment of the Loan as set out in Sections 2.01
and 2.06.
1.31 "Permitted Liens" means:
(A) Liens for taxes, assessments, or similar charges, incurred
in the ordinary course of business, that are not yet due and payable;
(B) Pledges or deposits made in the ordinary course of business
to secure payment of worker's compensation, or to participate in any
fund in connection with worker's compensation, unemployment
insurance, old-age pensions, or other social security programs;
(C) Liens of mechanics, materialmen, warehousemen, carriers, or
other like liens, securing obligations incurred in the ordinary
course of business that are not yet due and payable;
(D) Good faith pledges or deposits made in the ordinary course
of business to secure performance of bids, tenders, contracts (other
than for the repayment of borrowed money) or leases, not in excess of
ten percent (10%) of the aggregate amount due thereunder, or to
secure statutory obligations, or surety, appeal, indemnity,
performance, or other similar bonds required in the ordinary course
of business;
(E) Encumbrances consisting of zoning restrictions, easements,
or other restrictions on the use of real property, none of which
materially impairs the use of such property by the Borrower in the
operation of its business, and none of which is violated in any
material respect by existing or proposed structures or land use;
(F) Liens in favor of the Lender, including, but not limited to
the Lender's first priority security interest on a certain telephone
system as more particularly described on Exhibit 1.31, attached
hereto and made a part hereof;
(G) Existing liens set forth or described on Exhibit 1.31,
attached hereto and made a part hereof;
(H) Purchase money security interests granted to secure not
more than seventy-five per cent (75%) of the purchase price of
assets, the purchase of which does not violate this Agreement or any
instrument required hereunder; and
(I) The following, if the validity or amount thereof is being
contested in good faith by appropriate and lawful proceedings, so
long as levy and execution thereon have been stayed and continue to
be stayed and they do not, in the aggregate, materially detract from
the value of the property of the Borrower or any Subsidiary, or
materially impair the use thereof in the operation of its business:
(1) Claims or liens for taxes, assessments, or charges due
and payable and subject to interest or penalty;
(2) Claims, liens and encumbrances upon, and defects of
title to, real or personal property, including any attachment of
personal or real property or other legal process prior to
adjudication of a dispute on the merits;
(3) Claims or liens of mechanics, materialmen,
warehousemen, carriers, or other like liens; and
(4) Adverse judgments on appeal.
1.32 "Person" means any individual, corporation, partnership,
association, joint-stock company, trust, unincorporated organization,
joint venture, court, or government or political subdivision or
agency thereof.
1.33 "Prime Rate Loan" means any Advance for which the Borrower makes
a Rate Selection of the Prime Rate.
1.34 "Records" means correspondence, memoranda, tapes, disks,
diskettes, papers, books and other documents, or transcribed
information of any type, whether expressed in ordinary or machine-
readable language.
1.35 "Stockholders' Equity" means, at any time the aggregate of
Subordinated Indebtedness, plus the sum of the following accounts set
forth on a consolidated balance sheet of the Borrower and its
Subsidiary prepared in accordance with GAAP: (A) the par or stated
value of all outstanding capital stock; (B) capital surplus; and (C)
retained earnings.
1.36 "Subordinated Indebtedness" means all Indebtedness incurred at
any time by the Borrower or any Subsidiary, the repayment of which is
subordinated to the Loan in form and manner satisfactory to the
Lender and includes, without limitation, any notes, bonds,
debentures, or other debts of Borrower to its officers, directors or
stockholders. All existing Subordinated Indebtedness is so specified
in Exhibit 1.36.
1.37 "Subsidiary" means any Affiliate that is directly, or indirectly
through one or more intermediaries, controlled by the Borrower or not
less than 50% of the voting capital stock of which is owned, directly
or through one or more intermediaries, by the Borrower.
1.38 "Tangible Net Worth" means, at any time, Stockholders' Equity,
less the sum of:
(A) Any surplus resulting from any write-up of assets
subsequent to December 31, 1996;
(B) The value of goodwill, including any amounts, however
designated on a consolidated balance sheet of the Borrower and its
Subsidiary, representing the excess of the purchase price paid for
assets or stock acquired over the value assigned thereto on the books
of the Borrower;
(C) The value of Patents, trademarks, trade names, copyrights
and licenses;
(D) Any amount at which shares of capital stock of the Borrower
appear as an asset on the Borrower's balance sheet;
(E) Loans and advances to stockholders, directors, officers, or
employees;
(F) Deferred expenses; and
(G) Any other amount in respect of an intangible that should be
classified as an asset on a consolidated balance sheet of the
Borrower and its Subsidiary in accordance with GAAP.
1.39 "Total Liabilities" means, at any time, all Indebtedness that
should, in accordance with GAAP, be classified as liabilities on a
consolidated balance of the Borrower and its Subsidiary.
1.40 Accounting. Accounting terms used and not otherwise defined in
this Agreement have the meanings determined by, and all calculations
with respect to accounting or financial matters unless otherwise
provided herein shall be computed in accordance with, GAAP.
ARTICLE 2. THE LOAN
2.01 Disbursement of the Loan.
Advances shall only be made upon the written request of the
Borrower. The Borrower may make requests for Advances by facsimile
transmissions to the Lender. The Lender will credit the proceeds of
the Loan to the Operating Account.
2.02 General Terms.
Subject to the terms hereof, the Lender will lend the Borrower,
from time to time until the Availability Date or until such time as
the Lender makes demand on the Note, whichever occurs first, such
sums in integral multiples of $10,000.00 as the Borrower may request
by written notice to the Lender as set forth herein, but which sums
shall not exceed, in the aggregate principal amount at any one time
outstanding, Five Million and 00/100 Dollars ($5,000,000.00). The
Borrower may borrow, repay and reborrow hereunder, from the date of
this Agreement until the Availability Date or such time as the Lender
makes demand on the Note, whichever occurs first.
2.03 The Note.
The Loan shall be evidenced by a note in the form attached
hereto as Exhibit 2.03, payable on demand, but in any event due and
payable on the first Business Day after the Availability Date.
2.04 The Facility Fee.
In consideration of the Loan, from and after the date of this
Agreement up to and including the Availability Date, the Borrower
shall pay the Lender a facility fee of one-quarter of one percent
(0.25%) on the average daily Borrowing Availability during each
fiscal quarter or portion thereof. The facility fee shall be
payable, without demand, on the last day of each fiscal quarter
commencing June 30, 1997. The Borrower shall make payment of the
facility fee by wire transfer, certified check or by authorizing the
Lender to withdraw readily available funds from the Operating
Account.
2.05 Interest Rate and Payments of Interest.
(A) Except as otherwise provided in Section 2.05(B), interest
on the principal balance of the Loan from time to time outstanding
until the Availability Date or demand, whichever first occurs, shall
be determined as follows:
(1) The Borrower shall have the right to select any of the
interest rates (the "Rate") set forth below to be used in computing
the rate of interest to be paid with respect to each Advance. Such
rate shall be selected in advance by the Borrower by written notice
to the Lender, specifying the date and amount of the requested
Advance, the rate selected, the effective date of such selection, and
in the case of a LIBOR Loan, the LIBOR Interest Period (the "Rate
Selection"). The Borrower may not designate more than one Rate
Selection for incremental portions of an Advance. The Rate Selection
must be received by the Lender not less than three (3) Business Days
prior to the effective date of the Rate Selection. Each Rate
Selection shall be irrevocable.
The Borrower shall have the option to elect a new Rate
Selection for a LIBOR Loan by giving written notice of such election
to the Lender received no later than 10:00 a.m. (Boston time) on that
date which is three (3) Business Days before the end of the then
applicable LIBOR Interest Period. If the Borrower does not provide
the Lender in writing with a new Rate Selection within the applicable
time limits specified herein, the Borrower shall be deemed to have
elected to convert such LIBOR Loan into a Prime Rate Loan as of the
last day of the then current LIBOR Interest Period. Notwithstanding
the foregoing, the Borrower may not select a LIBOR Interest Period
that would end, but for the provisions of the definition of LIBOR
Interest Period, after the Availability Date.
Pursuant to the foregoing paragraph, the Borrower
shall select from the following rates of interest:
(a) A floating rate equal to the Prime
Rate in effect from time to time as such rate
shall change from time to time. As used herein,
"Prime Rate" means the rate of interest published
internally and so designated by the Lender from
time to time. Each time the Prime Rate shall
change, the interest rate shall change
contemporaneously with such change in the Prime
Rate.
(b) A rate equal to the LIBOR 7-day
index rate plus two and one-quarter percent
(2.25%).
(c) A rate equal to the LIBOR 30-day
index rate plus two and one-quarter percent
(2.25%).
(d) A rate equal to the LIBOR 60-day
index rate plus two and one-quarter percent
(2.25%).
(e) A rate equal to the LIBOR 90-day
index rate plus two and one-quarter percent
(2.25%).
(f) A rate equal to the LIBOR 180-day
index rate plus two and one-quarter percent
(2.25%).
Each Advance subject to a Rate Selection under clause
(a) above shall be subject to repayment at the Borrower's option at
any time in whole or in part in increments of $10,000 plus accrued
interest to the prepayment date without penalty. If the Borrower
prepays all or any portion of an Advance made hereunder to which a
LIBOR Rate applies prior to the last day of the LIBOR Interest Period
selected for such Advance, the Borrower shall, immediately upon the
Lender's request, pay as a prepayment fee an amount calculated by the
Lender which reimburses the Lender for any loss incurred by the
Lender upon reinvestment of the balance of the Advance at a rate less
than the LIBOR Rate, plus any administrative costs incurred by the
Lender in connection therewith. The prepayment fee shall be paid to
the Lender in immediately available funds. The prepayment fee is not
intended as a penalty, but is to compensate the Lender for the
favorable credit terms and other financial accommodations extended to
the Borrower by the Lender.
(2) After the occurrence of an Event of Default, the
Availability Date or demand, if any, interest shall be paid at a Rate
equal to four percent (4%) above the Prime Rate in effect from time
to time after the first to occur of an Event of Default, the
Availability Date, or demand.
(B) It is the intention of the parties hereto to conform
strictly to applicable usury laws as in effect, from time to time,
during the term of the Loan. Accordingly, if any transaction or
transactions contemplated hereby would be usurious under applicable
law (including the laws of the United States of America, or of any
other jurisdiction whose laws may be applicable), then, in that
event, notwithstanding anything to the contrary in this Agreement or
any other agreement entered into in connection with this Agreement,
it is agreed as follows: (1) the provisions of this Section 2.05(B)
shall govern and control; (2) the aggregate of all interest under
applicable law that is contracted for, charged, or received under
this Agreement or under any of the other aforesaid agreements or
otherwise in connection with this Agreement shall under no
circumstances exceed the maximum amount of interest allowed by
applicable law, and any excess shall be promptly credited to the
Borrower by the Lender (or, if such consideration shall have been
paid in full, such excess shall be promptly refunded to the Borrower
by the Lender); (3) neither the Borrower nor any person or entity now
or hereafter liable in connection with this Agreement shall be
obligated to pay the amount of such interest to the extent that it is
in excess of the maximum interest permitted by the applicable usury
laws; and (4) the effective rate of interest shall be ipso facto
reduced to the Highest Lawful Rate hereinafter defined. All sums
paid, or agreed to be paid, to the Lender for the use, forbearance,
and detention of the indebtedness of the Borrower to the Lender
shall, to the extent permitted by applicable law, be amortized,
prorated, allocated, and spread throughout the full term of the Note
until payment is made in full so that the actual rate of interest
does not exceed the Highest Lawful Rate in effect at any particular
time during the full term thereof. The maximum lawful interest rate,
if any, referred to in this Section 2.05(B) that may accrue pursuant
to this Agreement is referred to herein as the "Highest Lawful Rate".
If at any time the Rate exceeds the Highest Lawful Rate, the rate of
interest to accrue pursuant to this Agreement shall be limited,
notwithstanding anything to the contrary in this Agreement, to the
Highest Lawful Rate, but any subsequent reductions in the Prime Rate
shall not reduce the interest to accrue pursuant to this Agreement
below the Highest Lawful Rate until the total amount of interest
accrued pursuant to this Agreement equals the amount of interest that
would have accrued if a varying rate per annum equal to the Rate had
at all times been in effect. If the total amount of interest paid or
accrued pursuant to this Agreement under the foregoing provisions is
less than the total amount of interest that would have accrued if a
varying rate per annum equal to the Rate had at all times been in
effect, then the Borrower agrees to pay to the Lender an amount equal
to the difference between (a) the lesser of (i) the amount of
interest that would have accrued if the Highest Lawful Rate had at
all times been in effect, or (ii) the amount of interest that would
have accrued if a varying rate per annum equal to the Rate had at all
times been in effect, and (b) the amount of interest accrued in
accordance with the other provisions of this Agreement.
2.06 Payment to the Lender.
Interest, computed as specified in Section 2.05 above, shall be
calculated on the basis of a 360-day year, counting the actual number
of days elapsed, and shall be payable in arrears as follows:
Interest on any Advance or portion thereof for which the Borrower
selected a rate based on the Prime Rate shall be payable on the last
day of each month. Interest on any Advance or portion thereof for
which the Borrower selects a rate based on an LIBOR Interest Period
shall be payable on the last day of the applicable LIBOR Interest
Period.
An account shall be maintained on the books of the Lender which
shall be designated as Borrower's "Loan Account," in which account a
record will be kept of all loans made by the Lender to the Borrower
under or pursuant to the Note and all payments thereon. All payments
due thereunder will first be credited to accrued but unpaid interest
and the balance to principal, except that if an Event of Default
continues beyond any applicable grace period or a demand is made for
payment, the Lender may apply amounts thereafter received to
principal and/or interest in whatever order it deems appropriate. If
more than one interest rate is applicable, such payments will be
applied as aforesaid and pro rata in relation to the increments of
principal to which such rates apply.
The Lender shall send the Borrower statements of all amounts
paid or due hereunder, which statements shall be considered correct
and conclusively binding on the Borrower unless the Borrower notifies
the Lender to the contrary within thirty (30) days of its receipt of
any statement that it deems to be incorrect. Alternatively, at its
sole discretion, the Lender may charge any other deposit account of
the Borrower or demand payment against the statements.
Nothing in this Section 2.06 shall operate to alter the demand
nature of the Loan or otherwise to reduce, diminish or impair the
Lender's cumulative rights and remedies.
ARTICLE 3. CONDITIONS PRECEDENT
The obligation of the Lender to make the Loan is subject to the
following conditions precedent:
3.01 Documents Required for the Closing.
The Borrower shall have delivered to the Lender, prior to the
initial Advance (the "Closing"), the following:
(A) The Note duly executed by the Borrower, in the form
attached hereto as Exhibit 2.03;
(B) The Financial Statements;
(C) The UCC Financing Statements and other instruments required
by Article 4.0;
(D) The fully executed Landlord's Consent and Waiver, in the
form attached hereto as Exhibit 1.20;
(E) A copy, certified as of the date of the Closing, of
resolutions of the board of directors of the Borrower, authorizing
the execution, delivery, and performance of this Agreement, the Note,
the Collateral Documents, and each other document to be delivered
pursuant hereto or in connection herewith;
(F) A copy, certified as of the date of the Closing, of the
Borrower's bylaws;
(G) A certificate of the corporate secretary or assistant
secretary of the Borrower, dated the date of the Closing, as to the
incumbency and signatures of the officers of the Borrower signing
this Agreement, the Note, the Collateral Documents, and each other
document to be delivered pursuant hereto;
(H) A copy, certified as of the most recent date practicable by
the Secretary of the State of Delaware, of the Certificate of
Incorporation of the Borrower, and all amendments thereto, together
with a certificate (dated the date of the Closing) of the corporate
secretary or assistant secretary of the Borrower to the effect that
such Certificate of Incorporation has not been further amended since
the date of the aforesaid certification of the Secretary of the State
of Delaware;
(I) Certificates of legal existence (long form) and good
standing dated as of the most recent date practicable, issued by the
Secretary of the State of Delaware and Secretary of the Commonwealth
of Massachusetts as to the legal existence and good standing of the
Borrower, together with a certificate (dated the date of the Closing)
of the corporate secretary or assistant secretary of the Borrower to
the effect that nothing has occurred since issuance of the
Certificates of Legal Existence and Good Standing that would prevent
either the Secretary of the State of Delaware of the Secretary of the
Commonwealth of Massachusetts from issuing updated Certificates;
(J) Certificates, as of the most recent dates practicable, of
the Secretary of the State of Delaware and the Secretary of the
Commonwealth of Massachusetts and of the secretary of state of each
other state in which the Borrower is qualified as a foreign
corporation and, if applicable, of the department of revenue or
taxation of each of the foregoing states, as to the good standing of
the Borrower, together with a certificate (dated the date of the
Closing) of the corporate secretary or assistant secretary of the
Borrower to the effect that nothing has occurred since issuance of
the Certificates of Good Standing that would prevent the respective
Departments of Revenue from issuing updated Certificates;
(K) A certificate, dated the date of the Closing, signed by the
president or a vice president of the Borrower and to the effect that:
(1) The representations and warranties set forth in
Section 5.01 are true as of the date of the Closing; and
(2) No Event of Default hereunder, and no event which,
with the giving of notice or passage of time or both, would become
such an Event of Default, has occurred as of such date;
(L) Copies of all documents evidencing the terms and conditions
of any debt specified as Subordinated Indebtedness on Exhibit 1.36
and fully executed Subordination Agreements with respect to such
Subordinated Indebtedness in form and substance satisfactory to
Lender; and
(M) A certificate of insurance as required by Section 6.01(D).
3.02 Documents Required for Advances.
At the time of, and as a condition to, any Advance subsequent to
the Closing, the Lender may require the Borrower to deliver to the
Lender a certificate, dated the date on which any such Advance is to
be made, signed by the president or a vice president of the Borrower,
and to the effect that
(1) As of the date thereof, no Event of Default has occurred
and is continuing, and no event has occurred and is continuing that,
but for the giving of notice or passage of time or both, would be an
Event of Default;
(2) No material adverse change has occurred in the business
prospects, financial condition, or results of operations of the
Borrower or any Subsidiary since the date of the Financial
Statements; and
(3) Each of the representations and warranties contained in
Section 5.01 is true and correct in all respects as if made on and as
of the date of such disbursement.
3.03 Certain Events.
At the time of, and as a condition to, the Closing and each
Advance to be made by the Lender at or subsequent to the Closing:
(A) No Event of Default shall have occurred and be continuing,
and no event shall have occurred and be continuing that, with the
giving of notice or passage of time or both, would be an Event of
Default;
(B) No material adverse change shall have occurred in the
business prospects, financial condition, or results of operations of
the Borrower or any Subsidiary since the dates of the Financial
Statements; and
(C) All of the Collateral Documents shall have remained in full
force and effect.
3.04 Legal Matters.
At the time of the Closing and each subsequent Advance, all
legal matters incidental thereto shall be satisfactory to Bowditch &
Dewey, LLP, legal counsel to the Lender.
ARTICLE 4. COLLATERAL SECURITY
4.01 Composition of the Collateral.
The property in which a security interest is granted pursuant to
the provisions of Sections 4.02 and 4.03 is herein collectively
called the "Collateral". The Collateral, together with all other
property of the Borrower of any kind held by the Lender, shall stand
as one general, continuing collateral security for all Obligations
and may be retained by the Lender until all Obligations have been
satisfied in full.
4.02 Rights in Property Held by the Lender.
As security for the prompt satisfaction of all Obligations, the
Borrower hereby assigns, transfers, and sets over to the Lender all
of its right, title, and interest in and to, and grants the Lender a
lien on and a security interest in, all amounts that may be owing,
from time to time, by the Lender to the Borrower in any capacity,
including, but without limitation, any balance or share belonging to
the Borrower, or any deposit or other account with the Lender, which
lien and security interest shall be independent of, and in addition
to, any right of set-off that the Lender has under Section 8.07 or
otherwise.
4.03 Rights in Property Held Either by the Borrower or by the
Lender.
As further security for the prompt satisfaction of all of the
Obligations, the Borrower hereby assigns to the Lender all of its
right, title and interest in and to, and grants the Lender a lien
upon and a continuing security interest in, all of the following,
wherever located, whether now owned or hereafter acquired, together
with all replacements therefor, accessions thereto, and proceeds
(including, but without limitation, insurance proceeds) and products
thereof:
(A) All Inventory with the sole exception of the two fully
working prototype systems located at the Borrower's facility at 10E
Commerce Way, Woburn, Massachusetts, and further described as
follows:
Horizontal System Prototype Vertical System Prototype
Part # 10004-10001 Part # 10004-10001 VR
Model: H1 Model: VDS-1
Serial #: P002 Serial #: V001
(B) All Accounts, including but not limited to, Contracts,
accounts receivable, contract rights, and Chattel Paper, regardless
of whether or not they constitute proceeds or products of other
Collateral;
(C) All General Intangibles, regardless of whether or not they
constitute proceeds or products of other Collateral, including,
without limitation, all the Borrower's rights (which the Lender may
exercise or not as it in its sole discretion may determine) to
acquire or obtain Goods and/or services with respect to the
manufacture, processing, storage, sale, shipment, delivery or instal
lation of any of the Borrower's Inventory or other Collateral;
(D) All products of and accessions to any of the Collateral;
(E) All liens, guaranties, securities, rights, remedies and
privileges pertaining to any of the Collateral, including the right
of stoppage in transit;
(F) All obligations owing to the Borrower of every kind and
nature, and all choses in action;
(G) All tax refunds of every kind and nature to which the
Borrower is now or hereafter may become entitled no matter however
arising, including, without limitation, loss carryback refunds;
(H) All Intellectual Property, goodwill, trade secrets,
computer programs, customer lists, trade names, trademarks,
copyrights and patents;
(I) All Chattel Paper, Documents and Instruments (whether
negotiable or non-negotiable, and regardless of their being attached
to Chattel Paper);
(J) All Equipment, including without limitation machinery,
furniture, motor vehicles, Fixtures and all other Goods used in the
conduct of the business of the Borrower;
(K) All proceeds of Collateral of every kind and nature and in
whatever form, including, without limitation, both cash and non-cash
proceeds resulting or arising from the rendering of services by the
Borrower or the sale or other disposition by the Borrower of the
Inventory or other Collateral;
(L) All books, Records, computer disks, diskettes, electronic
data and other information relating to the conduct of the Borrower's
business including, without in any way limiting the generality of the
foregoing, those relating to its Accounts; and
(M) All deposit accounts maintained by the Borrower with any
bank, trust company, investment firm or fund, or any similar
institution or organization.
4.04 Priority of Liens.
The foregoing liens shall be first and prior liens except for
Permitted Liens.
4.05 UCC Financing Statements.
(A) The Borrower will:
(1) Execute such UCC financing statements (including
amendments thereto and continuation statements thereof) in form
satisfactory to the Lender as the Lender, from time to time, may
specify;
(2) Pay, or reimburse the Lender for paying, all costs and
taxes of filing or recording the same in such public offices as the
Lender may designate; and
(3) Take such other steps as the Lender, from time to
time, may direct, including the noting of the Lender's lien on the
Collateral and on any certificates of title therefor, all to perfect
to the satisfaction of the Lender the Lender's interest in the
Collateral.
(B) In addition to the foregoing, and not in limitation
thereof:
(1) A carbon, photographic, or other reproduction of this
Agreement shall be sufficient as a UCC financing statement and may be
filed in any appropriate office in lieu thereof; and
(2) To the extent lawful, the Borrower hereby appoints the
Lender as its attorney-in-fact (without requiring the Lender to act
as such) to execute any UCC financing statement in the name of the
Borrower, and to perform all other acts that the Lender deems
appropriate to perfect and continue its security interest in, and to
protect and preserve, the Collateral.
4.06 Mortgagees', Landlords', and Warehousemen's Waivers.
The Borrower will, within twenty (20) days after any request of
the Lender, cause any mortgagee of real estate owned by the Borrower,
any landlord of premises leased by the Borrower, and any warehouseman
or other bailee on whose premises any of the Collateral may be
located to execute and deliver to the Lender instruments, in form and
substance satisfactory to the Lender, by which such mortgagee,
landlord or warehouseman or other bailee waives its rights, if any,
in and to all Goods composing a part of the Collateral.
ARTICLE 5. REPRESENTATIONS AND WARRANTIES
5.01 Original.
To induce the Lender to enter into this Agreement, the Borrower
represents and warrants to the Lender as follows:
(A) The Borrower is a corporation duly organized, validly
existing, and in good standing under the Laws of the State of
Delaware and is duly qualified to do business in the Commonwealth of
Massachusetts; the Borrower has no Subsidiaries other than the
Subsidiary named in Exhibit 5.01(A); each Subsidiary is a corporation
duly organized, validly existing, and in good standing under the Laws
of its jurisdiction of incorporation, all as set forth in Exhibit
5.01(A); the Borrower and Subsidiary have the lawful power to own
their properties and to engage in the businesses they conduct, and
each is duly qualified and in good standing as a foreign corporation
in the jurisdictions wherein the nature of the business transacted by
it or property owned by it makes such qualification necessary; the
states in which the Borrower and the Subsidiary are qualified to do
business are set forth in Exhibit 5.01(A) or otherwise disclosed to
the Lender in writing; the percentage of the Borrower's ownership of
the outstanding stock of the Subsidiary is as listed in Exhibit
5.01(A); the addresses of all places of business of the Borrower and
its Subsidiary are as set forth in Exhibit 5.01(A) or otherwise
disclosed to the Lender in writing; neither the Borrower nor the
Subsidiary has changed its name, been the surviving corporation in a
merger, acquired any business, or changed its principal executive
office within five (5) years and one (1) month prior to the date
hereof except as set forth in Exhibit 5.01(A); and all of the
authorized, issued, and outstanding shares of capital stock of each
Subsidiary are owned by the Borrower;
(B) Neither the Borrower nor any Subsidiary is directly or
indirectly controlled by, or acting on behalf of, any Person which is
an "Investment Company", within the meaning of the Investment Company
Act of 1940, as amended;
(C) Neither the Borrower nor any Subsidiary is in default with
respect to any of its existing Indebtedness, and the making and
performance of this Agreement, the Note, and the Collateral Documents
will not (immediately or with the passage of time, the giving of
notice, or both):
(1) violate the Certificate of Incorporation or by-laws of
the Borrower or any Subsidiary, or violate any Laws or result in a
default under any contract, agreement, or instrument to which the
Borrower or any Subsidiary is a party or by which the Borrower or any
Subsidiary or its property is bound; or
(2) result in the creation or imposition of any security
interest in, or lien or encumbrance upon, any of the assets of the
Borrower or any Subsidiary except in favor of the Lender;
(D) The Borrower has the power and authority to enter into and
perform this Agreement, the Note, and the Collateral Documents, and
to incur the obligations herein and therein provided for, and has
taken all actions necessary to authorize the execution, delivery, and
performance of this Agreement, the Note, and the Collateral
Documents;
(E) This Agreement, the Note, and the Collateral Documents are,
or when delivered will be, valid, binding, and enforceable in
accordance with their respective terms;
(F) Except as disclosed in Exhibit 5.01(F) hereto, there is no
pending order, notice, claim, litigation, proceeding, or
investigation against or affecting the Borrower or any Subsidiary,
whether or not covered by insurance, that would in the aggregate
involve the payment of $10,000.00 or more or would otherwise
materially or adversely affect the financial condition or business
prospects of the Borrower or any Subsidiary if adversely determined;
(G) The Borrower and its Subsidiary have good and marketable
title to all of their assets, none of which is subject to any
security interest, encumbrance or lien, or claim of any third Person
except for Permitted Liens;
(H) The Financial Statements, including any schedules and notes
pertaining thereto, have been prepared in accordance with GAAP, and
fully and fairly present the financial condition of the Borrower and
its Subsidiary at the dates thereof and the results of operations for
the periods covered thereby, and there have been no material adverse
changes in the consolidated financial condition or business of the
Borrower and its Subsidiary from September 30, 1996, to the date
hereof;
(I) As of the date hereof, the Borrower and its Subsidiary have
no material Indebtedness of any nature, including, but without
limitation, liabilities for taxes and any interest or penalties
relating thereto except to the extent reflected (in a footnote or
otherwise) and reserved against in the consolidated balance sheet
dated September 30, 1996 included in the Financial Statements or as
disclosed in, or permitted by, this Agreement; and the Borrower does
not know or have reasonable ground to know of any basis for the
assertion against it or any Subsidiary of any claim or litigation
related to such Indebtedness as of the date of the Closing except as
disclosed on Exhibit 5.01(F) or otherwise disclosed to the Lender in
writing;
(J) Except as otherwise permitted herein, the Borrower has
filed all federal, state, and local tax returns and other reports
required by any applicable Laws to have been filed prior to the date
hereof, has paid or caused to be paid all taxes, assessments, and
other governmental charges that are due and payable prior to the date
hereof, and has made adequate provision for the payment of such
taxes, assessments, or other charges accruing but not yet payable;
the Borrower has no knowledge of any deficiency or additional
assessment in a materially important amount in connection with any
taxes, assessments, or charges not provided for on its books;
(K) Except to the extent that the failure to comply would not
materially interfere with the conduct of the business of the Borrower
or any Subsidiary, the Borrower and its Subsidiary have each complied
with all applicable Laws with respect to (1) any restrictions,
specifications, or other requirements pertaining to products that it
manufactures or sells or to the services it performs; (2) the conduct
of its business; and (3) the use, maintenance, and operation of the
real and personal properties owned or leased by it in the conduct of
its business;
(L) No representation or warranty by or with respect to the
Borrower or any Subsidiary contained herein or in any certificate or
other document furnished by the Borrower or any Subsidiary pursuant
hereto contains any untrue statement of a material fact or omits to
state a material fact necessary to make such representation or
warranty not misleading in light of the circumstances under which it
was made;
(M) Each consent, approval or authorization of, or filing,
registration or qualification with, any Person required to be
obtained or effected by the Borrower, any Subsidiary, or any
guarantor in connection with the execution and delivery of this
Agreement, the Note, and the Collateral Documents or the undertaking
or performance of any obligation hereunder or thereunder has been
duly obtained or effected;
(N) There is no Indebtedness of the Borrower or any Subsidiary:
(1) for money borrowed, or (2) under any security agreement, mortgage
or agreement covering the lease by the Borrower or any Subsidiary as
lessee of real or personal property except as reflected in the
Financial Statements or as described in Exhibit 5.01(N);
(O) Except as described in Exhibit 5.01(O), attached hereto, or
otherwise disclosed to the Lender in writing, (a) neither the
Borrower nor any Subsidiary has any material leases, contracts, or
commitments of any kind (including, without limitation, employment
agreements; collective bargaining agreements; powers of attorney;
distribution arrangements; licenses, patents, copyrights, trademarks,
service marks or license agreements; contracts for future purchase
or delivery of Goods or rendering of services; bonuses, pension, and
retirement plans; or accrued vacation pay, insurance, and welfare
agreements); (b) to the best of Borrower's knowledge, all parties to
all such material leases, contracts, and other commitments to which
the Borrower or any Subsidiary is a party have complied with the
provisions of such leases, contracts, and other commitments; and (c)
to the best of Borrower's knowledge, no party is in default under any
term thereof and no event has occurred which, but for the giving of
notice or the passage of time, or both, would constitute a default;
(P) The Borrower has not made any agreement or taken any action
which may cause anyone to become entitled to a commission or finder's
fee as a result of or in connection with the making of the Loan;
(Q) The Borrower's consolidated federal tax returns for all
years of operation, including the year ended September 30, 1996, have
been filed with the Internal Revenue Service and have not been
challenged;
(R) Any Employee Pension Benefit Plans, as defined in the
Employee Retirement Income Security Act of 1974, as amended
("ERISA"), of the Borrower and each Subsidiary meet, as of the date
hereof, the minimum funding standards of 29 U.S.C.A. 1082 (Section
302 of ERISA), and no Reportable Event or Prohibited Transaction, as
defined in ERISA, has occurred with respect to any Employee Benefit
Plans, as defined in ERISA, of the Borrower or any Subsidiary;
(S) The liens and security interests created pursuant to
Sections 4.02 and 4.03 are and will be at the Closing in all cases
first and prior liens except for Permitted Liens;
(T) Except as shown on Exhibit 1.19, Borrower has no patent
claims, trademark or copyright registrations or other filings or
applications protecting its Intellectual Property in any
jurisdiction; and
(U) The Borrower is in full compliance with all of its tenant
obligations under that certain Commercial Lease dated December 19,
1995 between the Borrower and Cummings Properties Management, Inc.;
the Landlord's Consent and Waiver dated as of April 4, 1996 among the
Borrower, Cummings Properties Management, Inc. and the Lender is in
full force and effect; and the Borrower knows of no default under the
Commercial Lease.
5.02 Survival.
All of the representations and warranties set forth in Section
5.01 shall survive until all Obligations are satisfied in full and
there remain no outstanding commitments hereunder.
ARTICLE 6. COVENANTS OF THE BORROWER
6.01 Affirmative Covenants.
The Borrower does hereby covenant and agree with the Lender
that, so long as any of the Obligations remain unsatisfied or any
commitments hereunder remain outstanding, it will comply, or if
appropriate cause its Subsidiary to comply, at all times with the
following affirmative covenants:
(A) The Borrower will use the proceeds of the Loan for working
capital purposes and will furnish the Lender such evidence as it may
reasonably require with respect to such use;
(B) The Borrower will furnish the Lender:
(1) As soon as available, but in any event within thirty
(30) days after the close of each month in each fiscal year: (a) a
statement of stockholders' equity and a statement of changes in
financial position of the Borrower for such month; (b) an income
statement of the Borrower for such month; and (c) a balance sheet of
the Borrower as of the end of such month--all in reasonable detail,
subject to normal year-end audit adjustments and certified by the
Borrower's president or chief financial officer to have been prepared
in accordance with GAAP;
(2) As soon as available, but in any event within one
hundred twenty (120) days after the close of each fiscal year: (a) a
consolidated statement of stockholders' equity and a consolidated
statement of changes in financial position of the Borrower and its
Subsidiary for such fiscal year; (b) consolidated and consolidating
income statements of the Borrower and its Subsidiary for such fiscal
year; and (c) consolidated and consolidating balance sheets of the
Borrower and its Subsidiary as of the end of such fiscal year--all
such statements to be in reasonable detail, including all supporting
schedules and comments; the consolidated statements and balance
sheets to be audited by Arthur Andersen or another independent
certified public accountant selected by Borrower and acceptable to
the Lender, and certified by such accountants to have been prepared
in accordance with GAAP and to present fairly the consolidated
financial position and results of operations of the Borrower and its
Subsidiary; in addition, the Borrower will obtain from such
independent certified public accountants and deliver to the Lender,
within one hundred twenty (120) days after the close of each fiscal
year, their written statement that in making the examination
necessary to their certification they have obtained no knowledge of
any Event of Default by the Borrower, or disclosing all Events of
Default of which they have obtained knowledge (it being understood
and agreed by the Lender that in making their examination, such
accountants shall not be required to go beyond the bounds of
generally accepted auditing procedures for the purpose of certifying
financial statements); the Lender shall have the right, from time to
time to discuss the affairs of the Borrower directly with such
independent certified public accountants after notice to the Borrower
and opportunity of the Borrower to be represented at any such
discussions;
(3) Contemporaneously with each monthly and year-end
financial report required by the foregoing paragraphs (1) and (2), a
certificate of the president or chief financial officer of the
Borrower stating that he has individually reviewed the provisions of
this Agreement and that a review of the activities of the Borrower
during such year or monthly period, as the case may be, has been made
by him or under his supervision, with a view to determining whether
the Borrower has fulfilled all its obligations under this Agreement,
and that, to the best of his knowledge, the Borrower has observed and
performed each undertaking contained in this Agreement and is not in
default in the observance or performance of any of the provisions
hereof or, if the Borrower shall be so in default, specifying all
such defaults and events of which he may have knowledge;
(4) Promptly after the sending or making available or
filing of the same, copies of all reports, proxy statements, and
financial statements that the Borrower or any successor Person sends
or makes available to its stockholders and all registration
statements and reports that the Borrower or any successor Person
files with the Securities and Exchange Commission;
(5) Within thirty (30) days after the end of each calendar
month, in such form and detail as shall be satisfactory to the
Lender, an aging, as of the end of such month, of Accounts of the
Borrower certified by the president or controller of the Borrower to
be complete and correct;
(6) As soon as available, but in any event within one
hundred twenty (120) days after the close of each fiscal year:
financial and operating projections for the next fiscal year--all
such projections to contain such detail and to be in such form as the
Lender may request, and to include all supporting schedules and
comments, and to be certified by the president or controller of the
Borrower to be complete;
(7) Upon the Lender's request, from time to time, copies
of any or all agreements, contracts, or commitments referred to in
Section 5.01(O) hereof;
(C) The Borrower will maintain its Inventory, Equipment, real
estate, and other properties in good condition and repair (normal
wear and tear excepted), and will pay and discharge or cause to be
paid and discharged, when due, the cost of repairs to, or maintenance
of, the same, and will pay or cause to be paid in a timely manner all
rental or mortgage payments due on such real estate. The Borrower
hereby agrees that, in the event it fails to pay or cause to be paid
any such payment, it will promptly notify the Lender thereof, and the
Lender may, in its discretion, do so and on demand be reimbursed
therefor by the Borrower;
(D) The Borrower and its Subsidiary will maintain, or cause to
be maintained, public liability insurance (subject to a maximum of
$10,000.00 in deductibles for each entity) and fire and extended
coverage insurance on all assets that are of a character usually
insured by corporations engaged in the same or similar businesses,
all in form and amount sufficient to indemnify the Borrower or
Subsidiary for 100% of the appraised value of any such asset lost or
damaged (subject to any deductible customary in the Borrower's or
Subsidiary's industry) or in an amount consistent with the amount of
insurance generally carried on comparable assets within the industry
and with such insurers as may be satisfactory to the Lender. The
Borrower and its Subsidiary will cause all such insurance policies to
contain a standard mortgage clause and to be payable to the Lender as
its interest may appear, to deliver the policies of insurance to the
Lender, and, in the case of all policies of insurance carried for the
benefit of the Borrower or any Subsidiary by any lessee, sublessee,
subtenant, or other party having rights to occupy or use the mortgage
property or any part thereof or interest therein under any lease,
sublease, or other agreement (whether oral, written, or otherwise
evidenced), to cause all such policies to be payable to the Lender as
its interest may appear. Such policies shall contain a provision
whereby they cannot be cancelled except after ten (10) days' written
notice to the Lender. The Borrower will furnish to the Lender such
evidence of insurance as the Lender may require. The Borrower hereby
agrees that, in the event it or any Subsidiary fails to pay or cause
to be paid the premium on any such insurance when due, the Lender, in
its discretion, may do so and be reimbursed by the Borrower therefor.
The Borrower and each Subsidiary hereby assign to the Lender any
returned or unearned premiums that may be due the Borrower or any
Subsidiary upon cancellation by the insurer of any such policy for
any reason whatsoever and direct any such insurer to pay the Lender
any amounts so due. Provided, however, that the Lender will pay to
the Borrower or the appropriate Subsidiary any such returned or
unearned premiums within five (5) days after the receipt thereof if
there has not occurred and be continuing an Event of Default
hereunder. The Lender is hereby appointed the attorney-in-fact of
the Borrower and each Subsidiary (without requiring the Lender to act
as such) to endorse any check which may be payable to the Borrower or
any Subsidiary to collect any premiums or the proceeds of such
insurance (other than proceeds of public liability insurance), and
any amount so collected may be applied by the Lender toward
satisfaction of any of the Obligations if an Event of Default has
occurred and is continuing. If the Lender receives any proceeds from
insurance in the absence of an Event of Default, it shall remit such
proceeds to the Borrower or such Subsidiary within three (3) Business
Days after the Lender's receipt of such proceeds;
(E) The Borrower and its Subsidiary will each pay or cause to
be paid when due, all taxes, assessments, and charges or levies
imposed upon it or on any of its property or which it is required to
withhold and pay except where contested in good faith by appropriate
proceedings with adequate reserves therefor having been set aside on
its books; provided, however, that the Borrower and each Subsidiary
shall pay or cause to be paid all such taxes, assessments, charges or
levies forthwith whenever foreclosure on any lien that may have
attached (or security therefor) appears imminent;
(F) The Borrower shall permit the representatives of the Lender
to make reasonable physical inspections at any time during normal
business hours of the Collateral and of the Borrower's facilities,
activities, books and Records, and cause its officers and employees
to give full cooperation and assistance in connection therewith, so
that Lender can determine whether the Borrower has maintained the
Borrowing Base at no less than the principal amount of the Loan
outstanding; the cost of such inspections shall be paid for by
Borrower as an additional amount due under the Loan;
(G) The Borrower and its Subsidiary will each take all
necessary steps to preserve its corporate existence and franchises
and comply with all present and future Laws applicable to it in the
operation of its business, and all material agreements to which it is
subject;
(H) The Borrower and its Subsidiary will each collect its
Accounts and sell its Inventory only in the ordinary course of
business;
(I) The Borrower and its Subsidiary will each keep accurate and
complete Records of its Accounts, Inventory, and Equipment consistent
with sound business practices;
(J) The Borrower and its Subsidiary will each give prompt
notice to the Lender of (1) any litigation or proceeding in which it
is a party if an adverse decision therein would require it to pay
more than $10,000.00 or deliver assets the value of which exceeds
such sum (whether or not the claim is considered to be covered by
insurance); and (2) the institution of any other suit or proceeding
involving it that might materially and adversely affect its
operations, financial condition, property, or business prospects;
(K) Within ten (10) days after the filing thereof, the Borrower
will furnish the Lender with copies of federal income tax returns
filed by the Borrower. The Borrower will cause the full amount of
each federal and other income tax refund (including any interest
component thereof) received by the Borrower to be applied as an
immediate repayment or partial repayment of the Loan;
(L) The Borrower and its Subsidiary will each pay when due (or
within applicable grace periods) all of its other Indebtedness due
third Persons except when the amount thereof is being contested in
good faith by appropriate proceedings and with adequate reserves
therefor being set aside on its books; provided, however, that no
payment shall be made in respect to Subordinated Indebtedness except
in strict compliance with all of the terms of subordination thereof
theretofore approved in writing by the Lender. If default be made by
the Borrower or any Subsidiary in the payment of any principal (or
installment thereof) of, or interest on, any such Indebtedness, the
Lender shall have the right, in its discretion, to pay such interest
or principal for the account of the Borrower or such Subsidiary and
be reimbursed by the Borrower or such Subsidiary therefor;
(M) The Borrower and its Subsidiary will each notify the Lender
immediately if it becomes aware of the occurrence of any Event of
Default or of any fact, condition, or event that only with the giving
of notice or passage of time or both, could become an Event of
Default or if it becomes aware of any material adverse change in the
business prospects, financial condition (including, without
limitation, proceedings in bankruptcy, insolvency, reorganization, or
the appointment of a receiver or trustee), or results of operations
of the Borrower, a Subsidiary, or any guarantor or of the failure of
the Borrower or any Subsidiary to observe any of their respective
undertakings hereunder or under the Collateral Documents;
(N) The Borrower and its Subsidiary will each notify the Lender
thirty (30) days in advance of any change in the location of any of
its places of business or of the establishment of any new, or the
discontinuance of any existing, place of business;
(O) The Borrower and its Subsidiary will each (1) fund any of
its Employee Pension Benefit Plans in accordance with no less than
the minimum funding standards of 29 U.S.C.A. 1082 (Section 302 of
ERISA); (2) furnish the Lender, promptly after the filing of the
same, with copies of any reports or other statements filed with the
United States Department of Labor or the Internal Revenue Service
with respect to any such Plan; and (3) promptly advise the Lender of
the occurrence of any Reportable Event or Prohibited Transaction with
respect to any Employee Benefit Plan;
(P) With respect to Letters of Credit:
(1) The Borrower shall require that each Letter of Credit
issued for its benefit shall provide that one of the required
documents for the first payment under the Letter of Credit shall be a
copy of an assignment of proceeds executed by the Borrower (the
beneficiary of the Letter of Credit) in favor of the Lender; said
assignment shall be for the full amount of the Letter of Credit and
shall provide that all payments under the Letter of Credit shall be
made to the Operating Account;
(2) The Borrower will take all necessary and advisable
steps to ensure that the Letter of Credit will be delivered to the
paying or confirming bank and that said paying or confirming bank
shall be authorized to retain the Letter of Credit on behalf of the
Lender, which is the assignee of the proceeds thereof;
(3) In the event that the Borrower is unable to obtain the
assignment of the Letter of Credit in accordance with subparagraphs
(1) and (2) above, the Borrower shall arrange in writing (with a copy
to the Lender) with the account party under the Letter of Credit that
the issuer of said Letter of Credit include therein a provision to
the effect that payment under said Letter of Credit shall be
negotiated only at the Lender's counters or, alternatively, that
payment shall be made only to the Operating Account;
(Q) The Borrower shall require payment of all Accounts in U.S.
Dollars or in such other form or currency as is acceptable to the
Lender;
(R) So long as any Obligations are outstanding, the Borrower
shall maintain its primary depository accounts with the Lender; and
(U) The Borrower shall maintain:
(1) A Current Ratio, tested at the end of each fiscal
quarter, of not less than 1.5:1.0; and
(2) A ratio of Total Liabilities to Tangible Net Worth,
tested at the end of each fiscal quarter, of not more than 1.0:1.0.
6.02 Negative Covenants.
The Borrower does hereby covenant and agree with the Lender
that, so long as any of the Obligations remain unsatisfied or any
commitments hereunder remain outstanding, it will comply, or if
appropriate cause its Subsidiary to comply, at all times with the
following negative covenants, unless the Lender shall otherwise have
agreed in writing:
(A) Neither the Borrower nor any Subsidiary will change its
name, enter into any merger, reorganization or recapitalization, or
reclassify its capital stock without at least thirty (30) days'
advance written notice to the Lender; provided, however, in no event
shall any such merger, reorganization or recapitalization reduce or
result in the reduction of the Borrower's Net Worth as of March 31,
1997;
(B) Neither the Borrower nor any Subsidiary will sell,
transfer, lease, or otherwise dispose of all or (except in the
ordinary course of business) any material part of its assets;
(C) Neither the Borrower nor any Subsidiary will sell, lease,
transfer, assign, or otherwise dispose of any of the Collateral
except in the ordinary course of business;
(D) Neither the Borrower nor any Subsidiary will sell or
otherwise dispose of, or for any reason cease operating, any of its
divisions, franchises, or lines of business;
(E) Neither the Borrower nor any Subsidiary will mortgage,
pledge, grant, or permit to exist a security interest in, or a lien
upon, any of its assets of any kind, now owned or hereafter acquired,
except for Permitted Liens, liens of the Collateral Documents, and
existing liens listed on Exhibit 5.01(N) to the extent shown on
Exhibit 1.31 to be permitted to exist after the Closing;
(F) Neither the Borrower nor any Subsidiary will become liable,
directly or indirectly, as guarantor or otherwise for any obligation
of any other Person, except for the endorsement of commercial paper
for deposit or collection in the ordinary course of business;
(G) Neither the Borrower nor any Subsidiary will incur, create,
assume, or permit to exist any Indebtedness except: (1) the Loan;
(2) existing Indebtedness listed on Exhibit 5.01(N) to the extent
shown on Exhibit 1.31 to be permitted to exist after the Closing; (3)
trade indebtedness incurred in the ordinary course of business
(provided, however, that neither the Borrower nor any Subsidiary may
acquire inventory other than for cash or on open account except as
expressly approved in writing and in advance by the Lender); (4)
contingent Indebtedness permitted by Section 6.02(F); (5) operating
lease obligations incurred in the normal course of business under the
current lease arrangement; (6) Indebtedness secured by Permitted
Liens; and (7) Subordinated Indebtedness;
(H) The Borrower shall not declare, pay or set apart any funds
for the payment of any dividends (other than dividends payable in
shares of the Borrower's stock) on any class of shares of the
Borrower's stock, or apply any of its funds, property or assets to,
or set apart any funds, property or assets for, the purchase,
redemption or other retirement of, or make any other distribution, by
reduction of capital or otherwise, in respect of any class of shares
of the Borrower's stock, or with respect to any other funds or assets
without the prior written consent of the Lender;
(I) Neither the Borrower nor any Subsidiary will form any
subsidiary, make any investment in (including any assignment of
Inventory or other property), or make any loan in the nature of an
investment to, any Person, other than investments of the Borrower in
the Subsidiary listed on Exhibit 5.01(A);
(J) Neither the Borrower nor any Subsidiary will make payments
on account of the purchase or lease of consolidated fixed assets
that, in the aggregate, in any fiscal year (commencing with the
current fiscal year) will exceed the depreciation taken or to be
taken with respect to consolidated fixed assets during such year; as
used in this paragraph, the term "lease" means a lease reflected on a
consolidated balance sheet of the Borrower and its Subsidiary or a
lease that should be so reflected under GAAP;
(K) Neither the Borrower nor any Subsidiary will purchase or
otherwise invest in or hold securities, nonoperating real estate, or
other nonoperating assets except: (1) direct obligations of the
United States of America, or of a bank with assets of not less than
$50,000,000.00 or other investments approved in advance in writing by
the Lender; (2) the present investment in any such assets held as of
September 30, 1996 and reflected in the Financial Statements; and (3)
operating assets that hereafter become nonoperating assets;
(L) Neither the Borrower nor any Subsidiary will transfer,
purchase or redeem, or permit any subsidiary to transfer or purchase,
any shares of the Borrower's capital stock unless such transfer,
purchase or redemption is effected solely from the proceeds of and
within a reasonable time after the issuance to third parties by the
Borrower or its subsidiary of capital stock which is in addition to
the capital stock of the Borrower or its subsidiary, as the case may
be, outstanding on the date of this Agreement;
(M) Neither the Borrower nor any Subsidiary will prepay any
Subordinated Indebtedness, Indebtedness for borrowed money except the
Obligations, or Indebtedness secured by any of its assets (except the
Obligations), or enter into or modify any agreement as a result of
which the terms of payment of any of the foregoing Indebtedness are
waived or modified;
(N) Neither the Borrower nor any Subsidiary will enter into any
sale-leaseback transaction;
(O) Neither the Borrower nor any Subsidiary will acquire or
agree to acquire any stock in, or all or substantially all of the
assets of, any Person, without at least thirty (30) days' advance
written notice to the Lender;
(P) Neither the Borrower nor any Subsidiary will furnish the
Lender any certificate or other document that will contain any untrue
statement of material fact or that will omit to state a material fact
necessary to make it not misleading in light of the circumstances
under which it was furnished;
(Q) Neither the Borrower nor any Subsidiary will directly or
indirectly apply any part of the proceeds of the Loan to the
purchasing or carrying of any "margin stock" within the meaning of
Regulation U of the Board of Governors of the Federal Reserve System,
or any regulations, interpretations, or rulings thereunder;
(R) The Borrower shall make no payments of principal, interest,
or of any other amounts under any Subordinated Indebtedness until all
amounts outstanding under the Loan ("Senior Debt") have been paid in
full; in the event of the dissolution or winding up of the Borrower's
business affairs, the Subordinated Indebtedness shall at all times be
subordinated to the Senior Debt. At such time as there shall exist
any Subordinated Indebtedness, the Borrower shall obtain from the
subordinated creditor a written undertaking affirming this covenant;
(S) During the term of the Loan, the Borrower shall not make
any advances to any stockholder, Affiliate or related entity
(including but not limited to, partnerships, joint ventures, joint
stock companies, corporations, parent companies or subsidiaries)
except that the Borrower may use Loan proceeds to fund its wholly
owned British subsidiary, Vivid Technologies UK Ltd.;
(T) Neither the Borrower nor any Subsidiary shall utilize the
Loan for the purpose of servicing any of the Borrower's pre-existing
or future indebtedness unrelated to the Loan; and
(U) The Borrower shall not incur a net operating loss for any
two (2) consecutive fiscal quarters or in any fiscal year.
ARTICLE 7. DEFAULT
7.01 Events of Default.
The occurrence of any one or more of the following events shall
constitute an Event of Default hereunder:
(A) The Borrower or any guarantor shall fail to pay when due
any of its Obligations to pay money to the Lender;
(B) The Borrower or any guarantor or Subsidiary shall fail to
observe or perform any of its Obligations other than payment of money
to be observed or performed by it hereunder, under any of the
Collateral Documents or otherwise, and such failure shall continue
for five (5) days after (1) notice of such failure from the Lender;
or (2) the Lender is notified of such failure or should have been so
notified pursuant to the provisions of Section 6.01(N), whichever is
earlier;
(C) The Borrower or any Subsidiary shall fail to pay any
Indebtedness due any third Persons, and such failure shall continue
beyond any applicable grace period, or the Borrower or any Subsidiary
shall suffer to exist any other event of default under any agreement
binding the Borrower or any Subsidiary;
(D) Any financial statement, representation, warranty, or
certificate made or furnished by or with respect to the Borrower or
any guarantor or Subsidiary to the Lender in connection with this
Agreement, or as inducement to the Lender to enter into this
Agreement, or in any separate statement or document to be delivered
to the Lender hereunder, shall be materially false, incorrect, or
incomplete when made;
(E) The Borrower or any guarantor or Subsidiary shall admit its
inability to pay its debts as they mature or shall make an assignment
for the benefit of itself or any of its creditors;
(F) Proceedings in bankruptcy, or for reorganization of the
Borrower or any Subsidiary, or for the readjustment of any of their
respective debts under the Bankruptcy Code, as amended, or any part
thereof, or under any other Laws, whether state or federal, for the
relief of debtors, now or hereafter existing, shall be commenced
against or by the Borrower or any guarantor or Subsidiary and, except
with respect to any such proceedings instituted by the Borrower,
guarantor or a Subsidiary, shall not be discharged within ninety
(90) days of their commencement;
(G) A receiver or trustee shall be appointed for the Borrower
or any guarantor or Subsidiary or for any substantial part of their
respective assets, or any proceedings shall be instituted for the
dissolution or the full or partial liquidation of the Borrower or any
guarantor or Subsidiary, and except with respect to any such
appointments requested or instituted by the Borrower, any guarantor
or a Subsidiary, such receiver or trustee shall not be discharged
within ninety (90) days of his appointment, and except with respect
to any such proceedings instituted by the Borrower, a guarantor or a
Subsidiary, such proceedings shall not be discharged within ninety
(90) days of their commencement, or the Borrower or any guarantor or
Subsidiary shall discontinue business or materially change the nature
of its business, or the Collateral becomes, in the reasonable
judgment of the Lender, insufficient in value to satisfy the
Obligations, or the Lender otherwise reasonably finds itself insecure
as to the prompt and punctual payment and discharge of the
Obligations;
(H) The Borrower or any guarantor or Subsidiary shall suffer
final judgments for payment of money aggregating in excess of
$10,000.00 and shall not discharge the same within a period of ninety
(90) days unless, pending further proceedings, execution has not been
commenced or, if commenced, has been effectively stayed;
(I) A judgment creditor of the Borrower or any guarantor or
Subsidiary shall obtain possession of any of the Collateral by any
means, including (without implied limitation) levy, distraint,
replevin, or self-help; or
(J) Any obligee of Subordinated Indebtedness shall fail to
comply with the subordination provisions of the instruments
evidencing such Subordinated Indebtedness.
7.02 Acceleration.
At its option, and at any time, whether immediately or
otherwise, the Lender may, upon the occurrence of any Event of
Default, declare all Obligations of the Borrower or guarantor to the
Lender immediately due and payable without further action of any kind
and without notice, demand or presentment.
7.03 Demand Nature of Obligations.
The enumeration of the non-exclusive list of Events of Default
in no way modifies the demand nature of the Obligations. The
occurrence of any one or more Events of Default may cause the Lender
(i) to make demand for payment and performance of all Obligations,
(ii) to cease making advances under the Loan, and (iii) to exercise
its cumulative rights and remedies. The Borrower acknowledges that
in so acting the Lender shall be deemed to be acting in a
commercially reasonable manner and in good faith. The Borrower
acknowledges that the occurrence of an Event of Default is not a
condition or prerequisite to the Lender making demand for payment or
performance of any of the Obligations.
ARTICLE 8. THE LENDER'S RIGHTS AND REMEDIES
8.01 The Lender's Rights Upon Default.
Upon demand on the Note or the occurrence of an Event of Default
and at any time thereafter, the Lender, without presentment, demand,
notice, protest or advertisement of any kind, will have the rights
set forth in this Article.
8.02 Account Debtors.
Upon demand on the Note or the occurrence of an Event of Default
and at any time thereafter, the Lender may notify account debtors, at
the Borrower's expense, that the Collateral has been assigned to the
Lender and that payments shall be made directly to the Lender. Upon
request of the Lender, the Borrower will notify such account debtors
that their accounts must be paid to the Lender. Upon demand on the
Note or the occurrence of an Event of Default and at all times
thereafter, the Borrower will hold all checks, drafts, cash and other
remittances in trust for the Lender and deliver them in kind to the
Lender. The Lender shall have full power to collect, compromise,
endorse, sell or otherwise deal with the Collateral or proceeds
thereof in its own name or in the name of the Borrower.
8.03 Possession and Foreclosure of Collateral.
Upon demand or the occurrence of an Event of Default and at any
time thereafter, the Lender shall have the following rights and
remedies, which rights and remedies are cumulative and not exclusive:
(i) to the extent that the Borrower could legally do so, the Lender
may enter onto, occupy and use any premises owned by the Borrower or
in which the Borrower has any interest; (ii) the Lender may take
possession of all or any Collateral; (iii) in the Lender's sole
discretion, the Lender may operate and use the Borrower's equipment,
complete work in process and sell inventory without being liable to
the Borrower on account of any losses, damage or depreciation that
may occur as a result thereof (so long as the Lender acts in good
faith); and (iv) the Lender may lease or license the Collateral to
any Person for such purposes.
In any event, the Lender may sell, lease, assign and deliver the
whole or any part of the Collateral, at public or private sale, for
cash, upon credit or for future delivery, at such prices and upon
such terms as the Lender deems advisable. The Lender may sell or
lease Collateral alone or in conjunction with other property, real or
personal, and allocate the sale proceeds or leases among the items of
Collateral sold without the necessity of the Collateral being present
at any such sale, or in view of prospective purchasers thereof. If
notice of sale is legally required, the Borrower agrees that five (5)
days oral notice shall be deemed reasonable. Upon such sale, the
Lender may become the purchaser of the whole or any part of the
Collateral sold, discharged from all claims and free from any right
of redemption. In case of any such sale by the Lender of all or any
of the Collateral on credit, or for future delivery, such Collateral
so sold may be retained by the Lender until the selling price is paid
by the purchaser. The Lender shall incur no liability in case of the
failure of the purchaser to take possession and pay for the
Collateral so sold. In case of any such failure, the said Collateral
may be resold. Any Collateral remaining unsold after being offered
at public auction may be abandoned or disposed of for no
consideration in such manner as the Lender deems appropriate.
In any event, at any time and from time to time the Lender may
abandon the Collateral or any part thereof. The Borrower agrees
immediately upon demand to take possession of any and all abandoned
Collateral and to remove it from any location in the possession of or
under the control of the Lender.
8.04 Use of Intellectual Property.
Upon demand on the Note or the occurrence of an Event of Default
and at any time thereafter, the Lender may use all or any part of the
Borrower's Intellectual Property which the Borrower now has or may
hereafter acquire. The Lender may license such Intellectual Property
to third parties, seek registration of such Intellectual Property in
any state or nation or prosecute pending applications for patents,
copyrights, trademarks, or service marks in the Borrower's name in
any state or nation.
8.05 Notification of Default to Third Parties.
Upon demand on the Note or the occurrence of an Event of Default
and at any time thereafter, the Lender may notify the Borrower's
suppliers, account debtors and other third parties of the default and
of any and all decisions made and actions taken by the Lender with
respect to this Agreement, the Obligations or the Collateral, without
liability of any kind.
8.06 Assembly of Collateral.
Upon demand on the Note or the occurrence of an Event of Default
and at any time thereafter, the Lender may require the Borrower to
assemble the Collateral in a single location at a place to be
designated by the Lender and make the Collateral at all times secure
and available to the Lender.
8.07 Right of Set-Off.
Upon demand on the Note or the occurrence of any Event of
Default and at any time thereafter, the Lender may, and is hereby
authorized by the Borrower, at any time and from time to time, to the
fullest extent permitted by applicable Laws, without advance notice
to the Borrower (any such notice being expressly waived by the
Borrower), set-off and apply any and all deposits (general or
special, time or demand, provisional or final) at any time held and
any other indebtedness at any time owing by the Lender to, or for the
credit or the account of, the Borrower against any or all of the
Obligations of the Borrower or any guarantor, now or hereafter
existing, whether or not such Obligations have matured and
irrespective of whether the Lender has exercised any other rights
that it has or may have with respect to such Obligations, including
without limitation any acceleration rights. The Lender agrees
promptly to notify the Borrower after any such set-off and
application, provided that the failure to give such notice shall not
affect the validity of such set-off and application. The rights of
the Lender under this Section 8.07 are in addition to the other
rights and remedies (including, without limitation, other rights of
set-off) which the Lender may have.
8.08 Exercise of Other Remedies.
Upon demand on the Note or the occurrence of any Event of
Default and at any time thereafter, the Lender may exercise the
remedies of a Lender afforded by the Uniform Commercial Code and
other applicable law or by the terms of any agreement between the
Borrower and the Lender.
8.09 Cumulative Rights and Remedies.
All rights and remedies of the Lender, whether provided for
herein or in other agreements, instruments or documents or conferred
by law, are cumulative and may be exercised alone or simultaneously.
ARTICLE 9. ATTORNEY-IN-FACT
9.01 Attorney-In-Fact.
Upon demand on the Note or the occurrence of an Event of Default
and at all times thereafter, the Borrower hereby irrevocably appoints
the Lender, or its designee, as the Borrower's true and lawful
attorney-in-fact, with full power as follows: (1) to endorse the
name of the Borrower on any assignments, notes, checks, drafts, money
orders, or other instruments of payment for Collateral; (2) to sign
or endorse the name of the Borrower on any negotiable instrument,
invoice, freight or express bill, bill of lading, storage or
warehouse receipts, drafts, assignments, verifications and notices in
connection with Accounts; (3) to obtain, adjust, settle and cancel,
in the Borrower's name, insurance policies as required by Section
6.01(D) and to sign the Borrower's name on settlement checks or
drafts; (4) in the Borrower's name, to do any act which this
Agreement requires Borrower to do, and, (5) to give notice to the
United States Post Office to effect changes of address so that mail
addressed to the Borrower may be delivered directly to the Lender.
In exercising this power-of-attorney, the Lender shall not be liable
to the extent that it acts in good faith.
ARTICLE 10. MISCELLANEOUS
10.01 Construction.
The provisions of this Agreement shall be in addition to those
of any security agreement, note, or other evidence of liability now
or hereafter held by the Lender, all of which shall be construed as
complementary to each other. To the extent that there appears any
conflicts between and among the documents, the order of precedence in
their construction shall be (1) the Note, (2) this Agreement and (3)
other ancillary agreements and documents presented at Closing.
Nothing herein contained shall prevent the Lender from enforcing any
or all other security agreements, notes, or other evidences of
liability in accordance with their respective terms.
10.02 Further Assurance.
From time to time, the Borrower will execute and deliver to the
Lender such additional documents and will provide such additional
information as the Lender may reasonably require to carry out the
terms of this Agreement and be informed of the status and affairs of
the Borrower.
10.03 Enforcement and Waiver by the Lender.
The Lender shall have the right at all times to enforce the
provisions of this Agreement and the Collateral Documents in strict
accordance with the terms hereof and thereof, notwithstanding any
conduct or custom on the part of the Lender in refraining from so
doing at any time or times. The failure of the Lender at any time or
times to enforce its rights under such provisions, strictly in
accordance with the same, shall not be construed as having created a
custom in any way or manner contrary to specific provisions of this
Agreement or as having in any way or manner modified or waived the
same. All rights and remedies of the Lender are cumulative and
concurrent and the exercise of one right or remedy shall not be
deemed a waiver or release of any other right or remedy.
10.04 Expenses of the Lender.
The Borrower will, on demand, reimburse the Lender for all
expenses, including the reasonable fees and expenses of legal counsel
for the Lender, incurred by the Lender in connection with the
preparation, administration, amendment, modification, or enforcement
of this Agreement and the Collateral Documents and the collection or
attempted collection of any of the Obligations.
10.05 Notices.
Any notices or consents required or permitted by this Agreement
shall be in writing and shall be deemed delivered if delivered in
person or if sent by certified mail, postage prepaid, return receipt
requested, facsimile or telegraph, as follows, unless such address is
changed by written notice hereunder:
(A) If to the Borrower:
Vivid Technologies, Inc.
10E Commerce Way
Woburn, Massachusetts 01801
Attention: Stephen A. Reber, President
With a copy to:
Jeffrey L. Keffer, Esquire
Brown, Rudnick, Freed & Gesmer
One Financial Center
Boston, Massachusetts 02111
(B) If to the Lender:
BankBoston, N.A.
7 New England Executive Park
Burlington, Massachusetts 01803
Attention: David J. Gerbereux, Vice President
and to:
Richard A. Sheils, Jr., Esquire
Bowditch & Dewey, LLP
311 Main Street
Worcester, Massachusetts 01608
10.06 Waiver and Indemnification by the Borrower.
To the maximum extent permitted by applicable Laws, the
Borrower:
(A) Waives (1) protest of all commercial paper at any time held
by the Lender on which the Borrower is in any way liable; (2) except
as the same may herein be specifically granted, notice of
acceleration and of intention to accelerate; and (3) notice and
opportunity to be heard, after acceleration in the manner provided in
Section 7.02, before exercise by the Lender of the remedies of self-
help, set-off, or of other summary procedures permitted by any
applicable Laws or by any agreement with the Borrower, and, except
where required hereby or by any applicable Laws, notice of any other
action taken by the Lender; and
(B) Indemnifies the Lender and its officers, attorneys, agents,
and employees from all claims for loss or damage caused by any act or
omission on the part of any of them except willful misconduct.
10.07 Participation.
Notwithstanding any other provision of this Agreement, the
Borrower understands that the Lender may at any time enter into
participation agreements with one or more participating banks whereby
the Lender will allocate certain percentages of its commitment to
them. The Borrower acknowledges that, for the convenience of all
parties, this Agreement is being entered into with the Lender only
and that its obligations under this Agreement are undertaken for the
benefit of, and as an inducement to, any such participating bank as
well as the Lender, and the Borrower hereby grants to each such
participating bank, to the extent of its participation in the Loan,
the right to set off deposit accounts maintained by the Borrower with
such bank.
10.08 Applicable Law.
This Agreement is entered into and performable in the
Commonwealth of Massachusetts and shall be subject to and construed
and enforced in accordance with the laws of the Commonwealth of
Massachusetts.
10.09 Binding Effect, Assignment, and Entire Agreement.
This Agreement shall inure to the benefit of, and shall be
binding upon, the respective successors and permitted assigns of the
parties hereto. The Borrower has no right to assign any of its
rights or obligations hereunder without the prior written consent of
the Lender. This Agreement, including the Exhibits hereto, all of
which are hereby incorporated herein by reference, and the documents
executed and delivered pursuant hereto, constitute the entire
agreement between the parties and may be amended only by a writing
signed on behalf of each party.
10.10 Severability.
If any provision of this Agreement shall be held invalid under
any applicable Laws, such invalidity shall not affect any other
provision of this Agreement that can be given effect without the
invalid provision, and, to this end, the provisions hereof are
severable.
10.11 Counterparts.
This Agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original, but all of which
together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as a sealed instrument as of the day and year first above
written.
VIVID TECHNOLOGIES, INC.
/s/ James J. Aldo By: Stephen A. Reber
Witness Stephen A. Reber
President
BANKBOSTON, N.A.
/s/ Greg Holloway By: /s/ David J. Gerbereux
Witness David J. Gerbereux
Vice President
COMMONWEALTH OF MASSACHUSETTS
Middlesex, ss May 30, 1997
Then personally appeared Stephen A. Reber, President of Vivid
Technologies, Inc., and acknowledged the foregoing to be the free act
and deed of said Vivid Technologies, Inc., before me.
/s/ Panagiota Twomey 6/26/97
Notary Public
My Commission Expires: January 1, 2004
EXHIBIT 1.19
BORROWER'S INTELLECTUAL PROPERTY
1. Patent No. 5,319,547 for "Device and Method for Inspection of
Baggage and Other Objects".
2. Patent No. 5,490,218 for "Device and Method for Inspection of
Baggage and Other Objects".
EXHIBIT 1.20
FORM OF LANDLORD'S CONSENT AND WAIVER
EXHIBIT 1.31
PERMITTED INDEBTEDNESS, PERMITTED LIENS
1. Security interest granted to BAA plc with respect to two working
baggage inspection prototype systems, as more fully described as
follows:
Horizontal System Prototype Vertical System Prototype
Part #10004-10001 Part #10004-10001 VR
Model: H1 Model: VDS-1
Serial #: P002 Serial #: V001
2. Security interest granted to LDI Corporation with respect to
Lease #07433 and certain computer equipment, pursuant to lease
dated 7/19/94 between LDI Corporation, as lessor, and Vivid
Technologies, Inc., as lessee.
3. Security interest granted to Hewlett-Packard Company with
respect to Financing Agreement #414469041 and certain computer
hardware and equipment pursuant to lease dated 7/28/95 between
Hewlett-Packard Co., as lessor and Vivid Technologies Co., as
lessee.
EXHIBIT 1.36
EXISTING SUBORDINATED INDEBTEDNESS
EXHIBIT 2.03
DEMAND LINE OF CREDIT NOTE
$5,000,000.00 Framingham, Massachusetts
May 30, 1997
FOR VALUE RECEIVED, VIVID TECHNOLOGIES, INC., a Delaware
corporation with its principal place of business at 10E Commerce Way,
Woburn, Massachusetts (the "Borrower"), promises to pay to BAYBANK,
N.A. (the "Lender"), or order, ON DEMAND, at the Lender's branch
office at 7 New England Executive Park, Burlington, Massachusetts,
the principal sum of FIVE MILLION AND 00/100 DOLLARS ($5,000,000.00)
(or such lesser amount as may have been advanced to the Borrower from
time to time hereunder), in lawful money of the United States of
America, with interest from the date of advancement thereof on the
unpaid balance at the rate and in the manner hereinafter provided.
This Note evidences indebtedness for one or more advances to the
Borrower's order pursuant to a Demand Line of Credit Loan and
Security Agreement dated of even date herewith by and between the
Borrower and the Lender, the terms, conditions and provisions of
which are incorporated herein by reference, as the same may from time
to time be amended (the "Agreement"). No reference to the Agreement
nor any provision thereof shall affect or impair the absolute and
unconditional obligation of the Borrower to pay the principal of and
interest on this Note as herein provided. Capitalized terms not
otherwise defined herein shall have the meanings ascribed to them in
the Agreement.
The unpaid principal balance of this Note from time to time
outstanding shall bear interest at the rate per annum selected by the
Borrower pursuant to Section 2.05 of the Agreement. Interest shall
be computed on the basis of the actual number of days elapsed over a
year assumed to have 360 days.
Principal and interest hereunder shall be payable in accordance
with the applicable provisions of Section 2.06 of the Agreement. All
indebtedness evidenced by this Note, if not sooner paid, shall in any
event be due and payable on February 28, 1998 (the "Maturity Date"),
without further notice or demand.
Prepayment of this Note shall be governed by the applicable
provisions of Section 2.05 of the Agreement.
The Borrower may borrow, repay and reborrow the principal
hereunder prior to the Maturity Date in accordance with the terms of
the Agreement, provided (i) there has been no occurrence of an Event
of Default or (ii) the Lender has not made demand on the Borrower.
Each payment made hereunder shall be applied first to interest
then due on the unpaid balance of principal and then to principal.
Upon expiration of any applicable grace period, overdue payments of
principal (whether at stated maturity, by acceleration or otherwise)
and, to the extent permitted by law, overdue interest, shall bear
interest, compounded monthly and payable on demand in immediately
available funds, at a rate per annum equal to four percent (4.00%)
above the Prime Rate, fully floating; provided that if such interest
exceeds the maximum amount permitted to be paid under applicable law,
then such interest shall be reduced to such maximum permitted amount.
If a payment of principal or interest due hereunder is not made
within ten (10) days of its due date, the Borrower will also pay on
demand in addition thereto a late charge equal to five percent
(5.00%) of the amount of such payment.
The indebtedness evidenced by this Note is secured as set forth
in the Agreement.
Any deposits or other sums at any time credited by or due from
the holder to the Borrower or any endorser or guarantor hereof and
any securities or other property of the Borrower or any endorser or
guarantor hereof at any time in the possession or custody of the
holder may at all times be held and treated as collateral security
for the payment of this Note and any and all other liabilities
(direct or indirect, absolute or contingent, sole, joint or several,
secured or unsecured, due or to become due, now existing or hereafter
arising) of any such maker to the holder. Upon the occurrence of an
Event of Default, the holder may apply or set-off such deposits or
other sums against such liabilities at any time.
The Borrower and each guarantor, endorser or other person now
or hereafter liable for the payment of any of the indebtedness
evidenced by this Note, severally agree, by making, guaranteeing or
endorsing this Note or by making any agreement to pay any of the
indebtedness evidenced by this Note, to waive presentment for
payment, protest and demand, notice of protest, demand and or
dishonor and nonpayment of this Note, and consents, on one or more
occasions, without notice or further assent (a) to the substitution,
exchange or release of the collateral securing this Note or any part
thereof at any time, (b) to the acceptance or release by the holder
or holders hereof at any time of any additional collateral or
security for or other guarantors of this Note, (c) to the
modification or amendment, at any time, and from time to time, of
this Note, the Agreement, or any instrument securing this Note at the
request of any person liable hereon, (d) to the granting by the
holder hereof of any extension of the time for payment of this Note
or for the performance of the agreements, covenants and conditions
contained in this Note, the Agreement, or any other instrument
securing this Note, at the request of any person liable hereon, and
(e) to any and all forbearances and indulgences whatsoever. Such
consent shall not alter or diminish the liability of any person.
The Borrower agrees to pay all expenses and costs, including
reasonable attorneys' fees and costs of collection, which may be
incurred by the holder hereof in connection with the enforcement of
any obligations hereunder, including without limitation
representation of the holder in any bankruptcy or insolvency
proceedings in which the Borrower is a party in interest.
IN WITNESS WHEREOF, the Borrower has executed this Note by its
duly authorized officer as an instrument under seal as of the day and
year first written above.
VIVID TECHNOLOGIES, INC.
__________________________ By:________________________________
Witness Stephen A. Reber, President
__________________________ By: /s/ William J. Frain
Witness William J. Frain, Treasurer
EXHIBIT 5.01(A)
CORPORATE BORROWER AND SUBSIDIARY INFORMATION
Vivid Technologies, Inc. (Delaware corporation)
10E Commerce Way
Woburn, MA 01801
Vivid Technologies UK, Ltd. (UK company)
Murlain House, Union Street
Chester, England CH1 1QP
Vivid Technologies UK, Ltd. is
100% owned by Vivid Technologies, Inc.
EXHIBIT 5.01(F)
PENDING LITIGATION
NONE
EXHIBIT 5.01(N)
EXISTING INDEBTEDNESS
1. Obligations to BAA Plc in connection with two baggage inspection
systems - Model H1, Serial #P002 and Model VDS-1, Serial #V001.
2. Obligations to LDI Corporation in connection with Lease #07433
and certain computer equipment.
3. Obligations to Hewlett-Packard Company in connection with
Financing Agreement #414469041.
EXHIBIT 5.01(O)
MATERIAL LEASES, CONTRACTS, COMMITMENTS
1. Commercial Lease between Cummings Properties Management, Inc.
and Vivid Technologies, Inc. dated December 19, 1995.
2. License and Technology Agreement dated as of June 22, 1989
between Hologic, Inc. and Vivitech, Inc.
3. Management Services Agreement between Hologic, Inc. and
Vivitech, Inc. dated as of June 22, 1989.
4. Vivid Technologies, Inc. has a verbal agreement with its
subsidiary, Vivid Technologies UK Ltd., pursuant to which Vivid
Technologies, Inc. pays for certain administration, marketing,
sales and customer support activities performed on behalf of
Vivid Technologies, Inc. in Europe.
5. Series A and Series B Preferred Stock Purchase Agreement.
6. Series C and Series D Preferred Stock Purchase Agreement.
7. Purchase Agreement dated as of April 20, 1994 between Vivid
Technologies, Inc. and BAA, Plc.
Exhibit 11.01
VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
Fiscal Year Ended
September 30,
1995 1996 1997
PRIMARY:
Net income $ 2,014,075 $ 1,164,764 $ 5,865,578
Weighted average common
shares outstanding 1,663,066 1,682,109 8,809,427
Assumed conversion of Series B
and Series D convertible
preferred stock (1) 5,045,850 5,045,850 --
Common stock and common stock
equivalents issued within twelve
months of initial public
offering (2) 148,419 148,419 --
Common stock equivalents 417,803 992,475 1,028,873
Weighted average number of
common and common equivalent
shares outstanding 7,275,138 7,868,853 9,838,300
Per share amount $ .28 $ .15 $ .60
(1) During fiscal 1997, the Company sold, through an initial public
offering, 2,300,000 shares of its Common Stock at $12.00 per share.
All shares of the Company's series B and series D convertible
Preferred Stock were automatically converted into 5,045,850 shares of
Common Stock at the time of the initial public offering and are
assumed to be issued Common Stock as of October 1, 1996
(2) Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, stock, stock options and stock warrants issued at
prices below the initial public offering price during the 12-month
period immediately preceding the initial filing date of the Company's
Registration Statement of its initial public offering have been
included as outstanding for all periods presented prior to the
initial public offering using the treasury-stock method and the
public offering price.
Exhibit 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K, into the
Company's previously filed Form S-8 Registration Statement File No.
333-25049.
ARTHUR ANDERSEN LLP
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 11,571,630
<SECURITIES> 6,432,405
<RECEIVABLES> 9,493,519
<ALLOWANCES> 0
<INVENTORY> 6,195,096
<CURRENT-ASSETS> 35,042,169
<PP&E> 2,615,904
<DEPRECIATION> 1,531,709
<TOTAL-ASSETS> 37,456,597
<CURRENT-LIABILITIES> 5,745,416
<BONDS> 0
0
0
<COMMON> 94,967
<OTHER-SE> 31,616,214
<TOTAL-LIABILITY-AND-EQUITY> 37,456,597
<SALES> 31,702,188
<TOTAL-REVENUES> 31,702,188
<CGS> 13,202,925
<TOTAL-COSTS> 24,505,035
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,040
<INCOME-PRETAX> 8,058,913
<INCOME-TAX> 2,193,335
<INCOME-CONTINUING> 5,865,578
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,865,578
<EPS-PRIMARY> .60
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