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 December 31, 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 January 31, 1999, 9,908,116 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
December 31, 1998 and September 30, 1998 3
Consolidated Statements of Operations
Three Months Ended December 31, 1998
and 1997 4
Consolidated Statements of Cash Flows
Three Months Ended December 31, 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 14
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, September 30,
1998 1998
(unaudited) (audited)
CURRENT ASSETS:
Cash and cash equivalents $10,662,348 $15,555,189
Short-term investments 8,471,149 10,407,209
Accounts receivable 7,411,810 7,316,863
Inventories 10,592,240 7,874,036
Deferred tax asset 606,790 606,790
Other current assets 2,937,753 1,593,021
Total current assets 40,682,090 43,353,108
PROPERTY AND EQUIPMENT, at cost:
Machinery and equipment 2,530,756 2,347,896
Equipment under capital leases 198,580 198,580
Leasehold improvements 242,596 228,374
Furniture and fixtures 131,886 129,479
3,103,818 2,904,329
Less- Accumulated depreciation
and amortization 1,563,220 1,488,893
1,540,598 1,415,436
Other assets, net 2,247,522 1,155,945
$44,470,210 $45,924,489
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, September 30,
1998 1998
CURRENT LIABILITIES:
Accounts payable $ 2,077,478 $ 846,457
Accrued expenses 2,243,817 2,766,268
Customer deposits 3,264,188 3,411,864
Total current liabilities 7,585,483 7,024,589
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value
Authorized - 1,000,000 shares -- --
Common stock, $.01 par value-
Authorized - 30,000,000 shares
Issued and outstanding -
9,909,116 and 9,904,666 shares,
respectively 99,091 99,047
Capital in excess of par value 26,752,920 26,745,142
Retained earnings 10,032,716 12,055,711
Total stockholders' equity 36,884,727 38,899,900
$44,470,210 $45,924,489
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
December 31,
1998 1997
Revenues $3,626,572 $9,399,312
Cost of revenues 2,677,337 3,856,644
Gross margin 949,235 5,542,668
Operating expenses:
Research and development 1,841,910 1,390,496
Selling and marketing 1,159,600 1,295,822
General and administrative 1,156,795 1,098,648
Total operating expenses 4,158,305 3,784,966
Income (loss ) from operations (3,209,070) 1,757,702
Other income, net 319,077 391,856
Income (loss) before provision
(benefit) for income taxes (2,889,993) 2,149,558
Provision (benefit) for
income taxes (866,998) 642,656
Net income (loss) $(2,022,995) $ 1,506,902
NET INCOME (LOSS) PER SHARE:
Basic $ (.20) $ .16
Diluted $ (.20) $ .15
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING:
Basic 9,907,323 9,509,248
Diluted 9,907,323 10,310,839
The accompanying notes are an integral part of these
consolidated financial statements.
VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
December 31,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(2,022,995) $1,506,902
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities-
Depreciation and amortization 137,769 172,365
Gain on disposal of fixed assets 3,190 --
Changes in assets and liabilities-
Accounts receivable (94,947) 4,188,847
Inventories (2,718,204) (1,110,612)
Other current assets (1,344,732) (653,396)
Accounts payable 1,231,021 765,237
Accrued expenses (522,451) 155,879
Customer deposits (147,676) 389,800
Net cash provided by (used in)
operating activities (5,479,025) 5,415,022
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (202,679) (187,730)
Purchases of investments (2,034,659) (2,946,876)
Maturity of investments 2,930,000 2,880,000
Increase in other assets (114,300) (1,252,001)
Net cash provided by (used in)
investing activities 578,362 (1,506,607)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 7,822 23,625
Net cash provided by financing activities 7,822 23,625
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (4,892,841) 3,932,040
CASH AND CASH EQUIVALENTS,
beginning of period 15,555,189 11,571,630
CASH AND CASH EQUIVALENTS,
end of period $10,662,348 $15,503,670
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for -
Income taxes $ -- $ 86,500
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,
1998, included in the Company's Form 10-K as filed with the
Securities and Exchange Commission.
The consolidated balance sheet as of December 31, 1998,
the consolidated statements of operations for the three months
ended December 31, 1998 and 1997, and the consolidated
statements of cash flows for the three months ended December
31, 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 three months ended
December 31, 1998 are not necessarily indicative of the results
to be expected for the entire fiscal year ending September 30,
1999.
(2) Inventories
Inventories are stated at the lower of cost (first-in,
first-out) or market and consist of the following:
December 31, September 30,
1998 1998
Raw materials $5,368,950 $4,061,775
Work-in-process 1,702,885 1,440,435
Finished goods 3,520,405 2,371,826
$10,592,240 $7,874,036
Finished goods consist of material, labor and
manufacturing overhead.
(3) Significant Customer and Concentration of Credit Risk
In the three months ended December 31, 1998, the Company
had three customers who comprised 26%, 11% and 11% of revenues,
respectively. These customers had amounts due to the Company
of approximately $1,226,000, $613,000 and $410,000 at December
31, 1998. Through February 8, 1999, the Company received
payments of $1,122,000 against these receivable balances. In
the three months ended December 31, 1997, the Company had three
customers who comprised 35%, 28% and 13% 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 December 31, 1998, the Company had
approximately $408,000 of receivables denominated in foreign
currencies. There are no outstanding foreign exchange
contracts.
(4) Earnings Per Share
A reconciliation of basic and diluted weighted average
shares outstanding is as follows:
Three Months Ended
December 31, December 31,
1998 1997
Basic weighted average shares outstanding 9,907,323 9,509,248
Weighted average common equivalent shares -- 801,591
Diluted weighted average shares outstanding 9,907,323 10,310,839
Common equivalent securities of approximately 1,178,000
and 230,000 have been excluded from the weighted average number
of common and dilutive potential common shares outstanding for
the three months ended December 31, 1998 and 1997,
respectively.
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, 1998 for additional discussion of factors which
may affect the Company's results of operations.
Results of Operations
Revenues. Revenues for the first quarter of fiscal 1999
decreased 61% to $3,626,572 from $9,399,312 for the first
quarter of fiscal 1998. This decrease in revenues was the
result of a decrease in product sales and a decrease in revenue
from an FAA development grant. The slowdown in product sales
is attributable to the extension by the European Civil Aviation
Conference from 2000 to 2002 for all member states to implement
100% screening of international checked luggage, the continuing
economic troubles in Asia and the anticipated availability of
second generation systems. During the first quarter of fiscal
1999 the Company shipped three VIS checked baggage systems and
six APS hand baggage units, compared to 19 checked baggage
systems shipped in the first quarter of fiscal 1998.
Gross Margin. Gross margin decreased as a percentage of
sales to 26% in the current quarter from 59% in the first
quarter of fiscal 1998. The decrease in gross margin in fiscal
1999 was primarily attributable to the lower volume of system
sales. The decrease in gross margin as a percentage of sales
is due to significant fixed manufacturing labor and overhead
costs applied to a lower volume of shipments, as well as
service related charges.
Research and Development Expenses. Research and
development expenses increased 32% to $1,841,910 in the current
quarter from $1,390,496 in the first quarter of fiscal 1998.
The increase in research and development expenses was primarily
due to the addition of engineering personnel and outside
consultants working on the development of a next generation
system, and enhancements to existing products, including the
Model APS.
Selling and Marketing Expenses. Selling and marketing
expenses decreased 11% to $1,159,600 in the current quarter
from $1,295,822 in the first quarter of fiscal 1998. The
decrease in selling and marketing expenses was primarily due to
a decrease in commissions and consulting costs, slightly offset
by an increase in public relations costs.
General and Administrative Expenses. General and
administrative expenses increased 5% to $1,156,795 in the
current quarter from $1,098,648 in the first quarter of fiscal
1998. The increase in general and administrative expenses was
primarily attributable to an overall increase in personnel and
related costs, legal expenses and license fees.
Other Income. The Company recognized net interest income
of $308,000 in the current quarter compared to $252,000 in the
first quarter of fiscal 1998. The increase was primarily
attributable to higher average cash balances available for
investment during the current quarter. During the three months
ended December 31, 1997, the Company recognized a gain of
approximately $139,900 on foreign currency transactions.
Provision for Income Taxes. During the first quarter of
fiscal 1999 the Company recognized a tax benefit of
approximately $867,000 based on an effective tax rate of 30%.
The Company's effective tax rate for the first three months of
fiscal 1998 was also 30%. The Company expects that its
effective tax rate will continue to be slightly 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 corporation.
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 December 31, 1998, the
Company had working capital of $33.1 million including $19.1
million in cash and cash equivalents and short-term
investments. The Company also has an unsecured $5.0 million
bank line of credit which expires February 28, 1999. The
Company is currently in negotiations with the bank to renew the
credit facility. The Company's bank line of credit bears
interest at the bank's prime rate (7.75% as of December 31,
1998). At December 31, 1998, the Company had no amounts
outstanding under this line of credit.
During the first three months of fiscal 1999, the
Company's net cash used in operating activities was
approximately $5.5 million and was comprised of net loss
adjusted for non-cash expenses including depreciation and
amortization totaling $1.9 million, a $2.7 million increase of
inventories and $1.3 million increase in other current assets
and a $522,000 decrease in accrued expenses and $148,000
decrease in customer deposits that were partially offset by an
increase of $1.2 million in accounts payable. The increase in
inventories and accounts payable in the first quarter of fiscal
1999 reflects increased inventory purchases associated with the
production of the Model MVT next generation system and
anticipated sales of the Model APS.
The Company's capital expenditures for the first three
months of fiscal 1999 were approximately $200,000. While the
Company does not have any significant commitments for capital
expenditures for the remainder of fiscal 1999, the Company
anticipates that it will continue to purchase equipment to
support its anticipated growth.
During the first three months of fiscal 1999, net cash
provided by investing activities was approximately $578,000
that was primarily attributable to the net decrease in
investment activity of $900,000 offset by an increase in other
assets of approximately $114,000.
During the first three months of fiscal 1999, net cash
provided by financing activities was $7,800 that was
attributable to the receipt of net proceeds from the exercise
of stock options.
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.
The Company believes that existing sources of liquidity,
funds expected to be generated from operations and its line of
credit will provide adequate 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.
Year 2000 Readiness Disclosure
The year 2000 issue is the potential for system and
processing failure of date-related data and the result of
computer-controlled systems using two digits rather than four
to define the applicable year. For example, computer programs
that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could
result in system failure or miscalculations causing disruptions
of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in
similar normal business activities.
The Company may be affected by year 2000 issues related to
non-compliant information technology ("IT") systems or non-IT
systems operated or sold by the Company or by third parties.
The Company has substantially completed assessment of its
internal IT systems and non-IT systems. The Company has tested
all products internally and has adopted a Year 2000
Qualification Test Procedure to ensure that all products
operate properly through the year 2000 and beyond. In
addition to internal testing the Company has received
compliance certificates from the FAA and BAA confirming that
the Company's existing products are year 2000 compliant. The
Company has also submitted a survey to all vendors subject to
year 2000 compliance. In addition to the survey, the Company
has internally tested components supplied by outside vendors.
The Company has also performed an internal review of in-house
computers, network, operating system and financial reporting
package confirming year 2000 compliance. At this point in its
assessment, the Company is not currently aware of any year 2000
problems relating to systems operated or sold by the Company
that would have a material adverse effect on the Company's
business, results of operations or financial condition.
Although the Company believes that its systems are year
2000 compliant, the Company utilizes third-party equipment and
software that may not be year 2000 compliant. In addition, the
Company's products and software are often sold to be integrated
into or interface with third party equipment or software.
Failure of third-party equipment or software to operate
properly with regard to the year 2000 and thereafter could
require the Company to incur unanticipated expenses to remedy
any problems, which could have a material adverse effect on the
Company business, results of operations and financial
condition. The Company may also be vulnerable to any failures
by its major suppliers, service providers and customers to
remedy their own internal IT and non-IT system year 2000 issues
which could, among other things, have a material and adverse
affect on the Company's supplies and orders. The Company is
unable to estimate the nature or extent of any potential
adverse impact resulting from the failure of third parties,
such as its suppliers, service providers and customers, to
achieve year 2000 compliance. Moreover, such third parties,
even if year 2000 compliant, could experience difficulties
resulting from year 2000 issues that may affect their
suppliers, service providers and customers. As a result,
although the Company does not currently anticipate that it will
experience any material shipment delays from their major
product suppliers or any material sales delays from its major
customers due to year 2000 issues, these third parties may
experience year 2000 problems. Any such problems could have a
material adverse effect on the Company's business, results of
operations and financial condition.
Other than its activities described above, the Company
does not have and does not plan to develop a contingency plan
to address year 2000 issues. Should any unanticipated
significant year 2000 issues arise, the Company's failure to
implement such a contingency plan could have a material adverse
affect on its business, financial condition and results of
operations.
To the extent that the Company does not identify any
material non-compliant IT systems or non-IT systems operated by
the Company or by third parties, such as the Company's
suppliers, service providers and customers, the most reasonably
likely worst case year 2000 scenario is a systemic failure
beyond the control of the Company, such as a prolonged
telecommunications or electrical failure, or a general
disruption in United States or global business activities that
could result in a significant economic downturn. The Company
believes that the primary business risks, in the event of such
failure or other disruption, would include but not be limited
to, loss of customers or orders, increased operating costs,
inability to obtain inventory on a timely basis, disruptions in
product shipments, or other business interruptions of a
material nature, as well as claims of mismanagement,
misrepresentation, or breach of contract, any of which could
have a material adverse effect on the Company's business,
results of operations and financial condition.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Foreign Exchange Hedging. The accounts of the foreign
subsidiary, Vivid Technologies UK Ltd., 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 quarter-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 transaction
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.
During the first quarter of fiscal 1999, no sales were
denominated in foreign currencies. As of December 31, 1998,
the Company had approximately $414,000 in accounts receivable
denominated in foreign currencies which had been marked to
market. The net gain (loss) was not material.
Investment Portfolio. The Company does not use derivative
financial instruments that meet high credit quality standards,
as specified in the Company's investment policy guidelines; the
policy also limits the amount of credit exposure to any one
issue, issuer, and type of instrument.
PART II - OTHER INFORMATION
VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES
Item 1. Legal Proceedings.
No material developments.
Item 2. Changes in Securities and Use of Proceeds.
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 December 31,
1998:
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 $845,000
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 $63,300
Purchase and installation of
machinery and equipment $800,000
Purchase of real estate --
Acquisition of technology/license $1,750,000
Repayment of indebtedness --
Redemption of redeemable preferred
stock (1) $5,780,650
Working capital $9,996,645
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 __
Investment-grade commercial
paper, with an average
maturity period of 15 months
Total investments $6,432,405
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 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)
February 16, 1999 /s/ S. David Ellenbogen
Date S. David Ellenbogen
Chief Executive Officer
February 16, 1999 /s/ William J. Frain
Date William J. Frain
Chief Financial Officer and Treasurer
(Principal Financial and Chief Accounting
Officer)
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