UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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)
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
As of August 1, 1998, 9,888,366 shares of the registrant's
Common Stock, $.01 par value, were issued and outstanding.
VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 1998 and September 30, 1997 3
Consolidated Statements of Operations
Three and Nine Months Ended June 30, 1998
and 1997 4
Consolidated Statements of Cash Flows
Nine Months Ended June 30, 1998
and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II - OTHER INFORMATION 12
SIGNATURES 13
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, September 30,
1998 1997
(Unaudited) (Audited)
CURRENT ASSETS:
Cash and cash equivalents $8,676,169 $11,571,630
Short-term investments 16,508,270 6,432,405
Accounts receivable 6,539,556 9,493,519
Inventories 8,426,579 6,195,096
Deferred tax asset 606,790 606,790
Other current assets 1,270,092 742,729
Total current assets 42,027,456 35,042,169
PROPERTY AND EQUIPMENT, at cost:
Machinery and equipment 2,216,872 2,166,867
Equipment under capital leases 198,580 198,580
Leasehold improvements 225,150 165,995
Furniture and fixtures 121,841 84,462
2,762,443 2,615,904
Less- Accumulated depreciation
and amortization 1,391,046 1,531,709
1,371,397 1,084,195
Long-term investments 252,528 1,218,856
Other assets, net 1,219,387 111,377
$44,870,768 $37,456,597
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 1,621,110 1,571,197
Accrued expenses 2,680,741 2,418,431
Customer deposits 3,126,165 1,755,788
Total current liabilities 7,428,016 5,745,416
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value-
Authorized - 30,000,000 shares
Issued and outstanding -
9,883,766 and 9,496,684 shares,
respectively 98,838 94,967
Capital in excess of par value 26,486,034 26,190,785
Retained earnings 10,857,880 5,425,429
Total stockholders' equity 37,442,752 31,711,181
$44,870,768 $37,456,597
The accompanying notes are an integral part of these
consolidated financial statements.
VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
1998 1997 1998 1997
Revenues $10,707,283 $ 8,306,256 $29,853,534 $21,929,929
Cost of revenues 4,636,171 3,417,378 12,523,992 9,104,635
Gross margin 6,071,112 4,888,878 17,329,542 12,825,294
Operating expenses:
Research and development 1,363,042 1,095,357 4,170,473 3,249,070
Selling and marketing 983,536 1,029,750 3,337,709 2,565,097
General and administrative 938,646 840,706 2,985,323 2,055,781
Litigation expenses -- 77,000 120,000 347,000
Total operating
expenses 3,285,224 3,042,813 10,613,505 8,216,948
Income from operations 2,785,888 1,846,065 6,716,037 4,608,346
Other income, net 365,147 350,594 1,041,446 668,888
Income before provision for
income taxes 3,151,035 2,196,659 7,757,483 5,277,234
Provision for income taxes 945,310 475,000 2,325,033 1,443,203
Net income $ 2,205,725 $ 1,721,659 $ 5,432,450 $ 3,834,031
NET INCOME PER SHARE
Basic $ .23 $ .18 $ .57 $ .53
Diluted $ .22 $ .17 $ .53 $ .40
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING
Basic 9,688,197 9,313,866 9,614,952 7,278,095
Diluted 10,132,223 10,327,483 10,251,710 9,679,708
The accompanying notes are an integral part of these consolidated
financial statements.
VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
June 30,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $5,432,450 $3,834,031
Adjustments to reconcile net income to
net cash provided by operating activities-
Depreciation and amortization 546,520 321,818
Changes in assets and liabilities-
Accounts receivable 2,953,963 (3,921,563)
Inventories (2,231,483) (1,403,909)
Deferred tax asset -- (80,000)
Other current assets (527,363) (230,987)
Accounts payable 49,913 (672,005)
Accrued expenses 262,310 (1,111,331)
Customer deposits 1,370,377 384,381
Net cash provided by (used in)
operating activities 7,856,687 (2,879,565)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (643,395) (357,796)
Purchases of investments (18,738,537) (6,403,812)
Maturity of investments 9,629,000 --
Decrease (increase) in other assets (1,298,336) 66,529
Net cash used in investing activities (11,051,268) (6,695,079)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the sale of common stock -- 24,887,512
Proceeds from exercise of stock
purchase warrants 84,756 32,960
Proceeds from exercise of stock options 214,364 84,125
Redemption of series A and series C
preferred stock -- (5,780,650)
Payments on capital lease obligations -- (31,898)
Net cash provided by financing activities 299,120 19,192,049
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (2,895,461) 9,617,405
CASH AND CASH EQUIVALENTS, beginning of period 11,571,630 1,661,724
CASH AND CASH EQUIVALENTS, end of period $ 8,676,169 $11,279,129
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for -
Income tax $ 1,764,584 $ 1,045,000
The accompanying notes are an integral part of these
consolidated financial statements.
VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The consolidated financial statements of Vivid
Technologies, Inc. (the Company) presented herein have been
prepared pursuant to the rules of the Securities and Exchange
Commission for quarterly reports on Form 10-Q and do not
include all of the information and note disclosures required by
generally accepted accounting principles. These statements
should be read in conjunction with the consolidated financial
statements and notes thereto for the year ended September 30,
1997, included in the Company's Form 10-K as filed with the
Securities and Exchange Commission.
The consolidated balance sheet as of June 30, 1998, the
consolidated statements of operations for the three months and
nine months ended June 30, 1998 and 1997, and the consolidated
statements of cash flows for the nine months ended June 30,
1998 and 1997, are unaudited but, in the opinion of management,
include all adjustments (consisting of normal, recurring
adjustments) necessary for a fair presentation of results for
these interim periods.
The results of operations for the nine months ended June
30, 1998 are not necessarily indicative of the results to be
expected for the entire fiscal year ending September 30, 1998.
(2) Inventories
Inventories are stated at the lower of cost (first-in,
first-out) or market and consist of the following:
June 30, September 30,
1998 1997
Raw materials $4,767,479 $3,175,211
Work-in-process 1,267,842 1,743,746
Finished goods 2,391,258 1,276,139
$8,426,579 $6,195,096
Finished goods consist of material, labor and
manufacturing overhead.
(3) Significant Customer and Concentration of Credit Risk
In the nine months ended June 30, 1998, the Company had
three customers who comprised 43%, 19% and 15% of revenues,
respectively. These customers had amounts due to the Company
of approximately $2.6 million, $2.5 million and $554,000,
respectively, at June 30, 1998. Through August 12, 1998, the
Company received payments of $3.2 million against these
receivable balances. In the nine months ended June 30, 1997,
the Company had two customers who comprised 47% and 34% of
revenues, respectively.
The Company may be affected, for the foreseeable future,
by the unstable economy caused by the currency volatility in
the Asia Pacific region. As a result, there are uncertainties
that may affect future operations, including the recoverability
of receivables. It is not possible to determine the future
effect a continuation of the economic crisis may have on the
Company's liquidity and earnings. Related effects will be
reported in the financial statements as they become known and
estimable. As of June 30, 1998, the Company had approximately
$694,000 of receivables denominated in foreign currencies.
There are no outstanding forward foreign exchange contracts.
(4) Earnings Per Share
Effective December 31, 1997, the Company adopted SFAS No.
128 "Earnings Per Share" which establishes new standards for
calculating and presenting earnings per share. The Company has
applied the provisions of SFAS 128 and Staff Accounting
Bulletin (SAB) 98 retroactively to all periods presented.
Diluted weighted average shares outstanding of approximately
407,000 and 248,000 for the three and nine months ended June
30, 1998, respectively, have been excluded from the weighted
average number of common and dilutive potential common shares
outstanding. There were no anti-dilutive shares for the three
and nine months ended June 30, 1997. The following is a
reconciliation of basic and diluted shares outstanding.
Three Months Ended
June 30, June 30,
1998 1997
Basic weighted average shares outstanding 9,688,197 9,313,866
Weighted average common equivalent shares 444,026 1,013,617
Diluted weighted average shares outstanding 10,132,223 10,327,483
Nine Months Ended
June 30, June 30,
1998 1997
Basic weighted average shares outstanding 9,614,952 7,278,095
Weighted average common equivalent shares 636,758 2,401,613
Diluted weighted average shares outstanding 10,251,710 9,679,708
(5) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. The Company does not believe
the adoption of this accounting standard will have any impact
on the Company's financial position or results of operations.
PART I - FINANCIAL INFORMATION (Continued)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES
The Company's results of operations have and may continue
to be subject to significant quarterly fluctuation due to
several factors, known and unknown, including the overall
demand for explosives detection systems, market acceptance of
the Company's products, timing of the announcement,
introduction and delivery of new products and product
enhancements by the Company and its competitors, variations in
component costs, timing of customer orders, adjustments of
delivery schedules to accommodate customers' programs, economic
conditions in the Company's targeted markets, 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 is developing a
next generation system that is intended to meet FAA
certification standards. There can be no assurance that the
Company will be able to develop such a system on a timely
basis, if at all. In addition, even if the system is
successfully developed, the anticipation of the next generation
system may have an adverse impact on financial results during
the transition period. Reference is made to the "Risk Factors"
section of the Company's report on Form 10-K for the year ended
September 30, 1997 for additional discussion of factors which
may affect the Company's results of operations.
Results of Operations
Revenues. Revenues for the third quarter of fiscal 1998
increased 29% to $10,707,283 from $8,306,256 for the third
quarter of fiscal 1997. Revenues for the current nine month
period increased 36% to $29,853,534 from $21,929,929 for the
first nine months of fiscal 1997. This increase in revenues
was the result of an increase in product sales and the
recognition of approximately $975,000 and $2.2 million in
revenues from an FAA development grant for the first three and
nine months of fiscal 1998. The increase in product sales was
primarily attributable to the total number of product shipments
to Europe, the United States, and the completion of shipments
to the new Hong Kong airport.
The Company continues to make progress on attaining FAA
certification of its next generation system. Internal testing
utilizing FAA data, which began in early July, continues and
the results to date are promising. The Company continues to
work on optimizing the system in anticipation of submitting it
to the FAA for official certification testing by calendar year
end.
During the first nine months of fiscal 1998, the Company
completed shipments to Kuala Lumpur International Airport in
Malaysia and Chek Lap Kok Airport in Hong Kong, for a total of
29 and 23 systems, respectively. In May and July respectively,
Kuala Lumpur International Airport and Chek Lap Kok Airport
celebrated the opening of their airports with Vivid systems
playing a major role in providing 100% screening of all checked
luggage. In addition, during the current quarter, Vivid
completed shipments to Terminal One at JFK. All systems were
operational, including the newly introduced Model APS for
screening hand baggage, for the successful opening of this
terminal in May. During this period the Company also shipped
systems to BAA, plc, British Airways, France, Billund Airport
in Denmark, Belfast Airport in Northern Ireland, Liverpool in
England and the FAA. In addition to the checked baggage
systems shipped, the Company delivered nine units of the Model
APS for hand baggage screening to Denmark and JFK Terminal One.
In addition to the shipments in the first nine months of fiscal
1998, the Company has received orders from the U.S. Government,
Turkey and China for building protection, and airports in the
United Kingdom, Saudi Arabia and Italy.
In the first nine months of fiscal 1998, approximately 90%
of product revenues were generated internationally,
approximately 70% in Europe, and 20% in Asia. In the third
quarter of fiscal 1998, approximately 75% of product revenues
were generated internationally, all of which was generated in
Europe. In the first nine months of fiscal 1997, 100% of
product revenues were generated internationally, approximately
60% in Europe, and 40% in Asia.
Gross Margin. Gross margin, as a percentage of sales, was
57% for the third quarter ended June 30, 1998 as compared to
59% in the third quarter of fiscal 1997. For the first nine
months of fiscal 1998 and 1997, gross margin remained
consistent as a percentage of sales at 58%. The decrease in
gross margin for the three months ended June 30, 1998 was
primarily attributable to product mix, specifically the
shipments of the newly introduced Model APS which during this
introductory period generally has a lower gross margin
percentage than the current checked baggage systems.
Research and Development Expenses. Research and
development expenses increased 24% to $1,363,042 (13% of
revenues) in the current quarter from $1,095,357 (13% of
revenues) in the third quarter of fiscal 1997. For the current
nine month period, research and development expenses increased
28% to $4,170,473 (14% of revenues) from $3,249,070 (15% of
revenues) for the first nine months of fiscal 1997. The
increase in research and development expenses in fiscal 1998
was primarily due to the addition of engineering personnel and
outside consultants working on the development of new products
and technologies, and enhancements to existing products,
including the next generation system.
Selling and Marketing Expenses. Selling and marketing
expenses decreased 4% to $983,536 (9% of revenues) in the
current quarter from $1,029,750 (12% of revenues) in the third
quarter of fiscal 1997. For the current nine month period,
selling and marketing expenses increased 30% to $3,337,709 (11%
of revenues) from $2,565,097 (12% of revenues) for the first
nine months of fiscal 1997. The decrease in selling and
marketing expenses in the current fiscal quarter was primarily
due to a decrease in commissions related to the sales in Asia,
and consulting costs, offset by an increase in public relations
costs. For the first nine months of fiscal 1998, the increase
was primarily due to additional sales and support personnel,
including expansion of operations in Europe and the
Asia/Pacific region, the payment of commissions on sales in the
Asia/Pacific region, and an overall increase in public
relations and consulting, trade shows and related travel costs.
General and Administrative Expenses. General and
administrative expenses (excluding litigation expense)
increased 12% to $938,646 (9% of revenues) in the current
quarter from $840,706 (10% of revenues) in the third quarter
of fiscal 1997. For the current nine month period, general and
administrative expenses increased 45% to $2,985,323 (10% of
revenues) from $2,055,781 (9% of revenues) for the first nine
months of fiscal 1997. The increase in general and
administrative expenses in fiscal 1998 was primarily
attributable to an increase in personnel and related costs,
including key management positions filled at the end of the
second quarter of fiscal 1997, and an increase in license fees
and patent amortization costs.
Litigation Expenses. The Company incurred no litigation
expense in the current fiscal quarter compared to $77,000 in
the third quarter of fiscal 1997, primarily in connection with
the Company's patent litigation. Litigation expense for the
first nine months of fiscal 1998 and 1997 was $120,000 and
$347,000, respectively. 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 1998 includes expenses incurred in
connection with the Company's litigation with AS&E. In January
1998, in a final judgement in favor of the Company, the Court
dismissed all of AS&E's claims and declared that the Company
does not infringe on any of AS&E's patents. In April 1998,
AS&E filed a motion to appeal this decision.
Other Income. The Company recognized net other income of
$365,147 in the current quarter compared to $350,594 in the
third quarter of fiscal 1997. Net other income increased to
$1,041,446 in the current nine month period from $668,888 in
the comparable period in fiscal 1997. The increase in fiscal
1998 was primarily attributable to an increase in interest
income attributable to higher average cash balances available
for investments. The increase in other income was slightly
offset by an increase in hedge costs associated with the
Company's forward foreign exchange contract and transaction
losses. The Company does not currently have any forward
foreign exchange contracts outstanding.
Provision for Income Taxes. The Company's effective tax
rate for the first nine months of fiscal 1998 was 30% compared
to 27% in the corresponding period in fiscal 1997. The Company
expects that its effective tax rate will be lower than the
statutory tax rates primarily due to the use of research and
development tax credits and the tax benefits associated with
the Company's foreign sales and securities corporations.
Liquidity and Capital Resources
The Company has funded its operations and capital
expenditures primarily through internally generated cash flows,
proceeds from the sale of securities and the availability of a
working capital line of credit. At June 30, 1998, the Company
had working capital of $34.6 million, including $25.2 million
in cash and cash equivalents and short-term investments. In
addition, the Company had approximately $250,000 in long-term
investments, with average maturities of 15 months. The Company
also has an unsecured $5.0 million bank line of credit which
expires on February 28, 1999. The Company's bank line of
credit bears interest at the bank's prime rate (8.5% as of June
30, 1998). At June 30, 1998, the Company had no amounts
outstanding under this line of credit.
During the first nine months of fiscal 1998, the Company's
net cash provided by operating activities was approximately
$7.9 million. During that period, net income adjusted for non-
cash expenses including depreciation and amortization totaling
$6.0 million, a decrease of $3.0 million in accounts
receivable, and an increase in customer deposits of $1.4
million were partially offset by a $527,000 increase in other
current assets and a $2.2 million increase in inventories. The
increase in inventories in the third quarter of fiscal 1998
reflects increased inventories associated with the commercial
introduction of the new Model APS system, increased sales
activity, and production of the Company's next generation
system.
The Company's capital expenditures for the first nine
months of fiscal 1998 were approximately $640,000. While the
Company does not have any significant commitments for capital
expenditures for the remainder of fiscal 1998, the Company
anticipates that it will continue to purchase equipment to
support its anticipated growth and explore acquisition
opportunities.
During the first nine months of fiscal 1998, net cash used
in investing activities was approximately $11.1 million. Net
cash used in investing activities was primarily attributable to
the net increase of $9.1 million in investments and an increase
of $1.3 million in other assets related to the licensing of
technology.
During the first nine months of fiscal 1998, net cash
provided by financing activities was approximately $300,000.
Net cash provided by financing activities was attributable to
the receipt of net proceeds from the exercise of stock options
and stock purchase warrants.
The Company has examined issues related to the Year 2000
and believes that it will not have a material impact on its
business, operations or its financial condition.
The Company believes that existing sources of liquidity,
funds expected to be generated from operations and its line of
credit will provide adequate cash to fund the Company's
anticipated working capital 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 the opening
paragraph of Item 2 above.
The Company may be affected, for the foreseeable future,
by the unstable economy caused by the currency volatility in
the Asia Pacific region. As a result, there are uncertainties
that may affect future operations, including the recoverability
of receivables. It is not possible to determine the future
effect a continuation of the economic crisis may have on the
Company's liquidity and earnings.
PART II - OTHER INFORMATION
VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES
Item 1. Legal Proceedings.
Patent Litigation. 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. In January 1998, in a final
judgment in favor of the Company, the Court dismissed all of
AS&E's claims and declared that the Company does not infringe
on any of AS&E's patents. In April 1998, AS&E filed a motion
in the Federal Court of Appeals for the First Circuit to appeal
this decision.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security-Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits furnished:
(27) Financial Data Schedule.
(b) Reports on Form 8-K.
None.
VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
Vivid Technologies, Inc.
(Registrant)
August 13, 1998 /s/ S. David Ellenbogen
Date S. David Ellenbogen
Chief Executive Officer
August 13, 1998 /s/ William J. Frain
Date William J. Frain
Chief Financial Officer and Treasurer
(Principal Financial and Chief Accounting
Officer)
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