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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year Commission file
ended: number:
SEPTEMBER 30, 1996 0-26614
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MVSI, INC.
(Name of Small Business Issuer in Its Charter)
DELAWARE 52-1707718
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8133 LEESBURG PIKE, SUITE 750, VIENNA, VA 22182
(Address of principal executive offices) (Zip code)
(703) 356-5353
(Company's telephone number, including area code)
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Securities registered under Section 12(b) of the Exchange Act:
TITLE OF EACH NAME OF EACH
CLASS EXCHANGE
ON WHICH REGISTERED
Not Applicable Not Applicable
Securities registered pursuant to Section 12(g) of the Exchange Act:
TITLE OF CLASS
Common Stock, $.01 Par Value
Class A Warrants
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Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing
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requirements for past 90 days. Yes X No
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. / X /
The issuer's revenues for its most recent fiscal year: $15,987,636.
The total market value of the voting stock was $45,708,750, of which
$33,631,865 was held by nonaffiliates of the registrant, based upon the closing
price of the common stock on December 27, 1996, as quoted by the Nasdaq SmallCap
Market System.
The number of outstanding shares of the registrant's common stock on
December 27, 1996 was 10,755,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the S-3 Registration Statement, and related Prospectus,
Registration File No. 33-89194, declared effective with the Securities and
Exchange Commission ("Commission") on October 16, 1996, are incorporated
herein by reference into Part III of this report. Portions of the Proxy
Statement of the registrant to be filed with the Commission pursuant to
Regulation 14A of the Securities Exchange Act of 1934 on or prior to January
31, 1997, are incorporated herein by reference into Part III of this report.
Transitional Small Business Disclosure Format: Yes No X
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MVSI, INC.
INDEX
PART I PAGE
Item 1. Description of Business. 3
Item 2. Description of Properties. 11
Item 3. Legal Proceedings. 12
Item 4. Submission of Matters to a Vote of Security Holders. 12
PART II
Item 5. Market for Common Equity and Related Stockholder 12
Matters.
Item 6. Management's Discussion and Analysis or Plan of 13
Operations.
Item 7. Financial Statements. 18
Item 8. Changes in and Disagreements with Accountants on 19
Accounting and Financial Disclosure.
PART III
Item 9. Directors, Executive Officers, Promoters and Control 19
Persons; Compliance with 16(a) of the Exchange Act.
Item 10. Executive Compensation. 19
Item 11. Security Ownership of Certain Beneficial Owners and 19
Management.
Item 12. Certain Relationships and Related Transactions. 19
Item 13. Exhibits, List and Reports on Form 8-K. 19
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ITEM 1. DESCRIPTION OF BUSINESS.
OVERVIEW
MVSI, Inc. ("Company"), headquartered in Vienna, Virginia, is a publicly
traded (NASDAQ: "MVSI") high technology company. Founded in 1994, the Company
has three wholly-owned subsidiaries: MVS Modular Vision Systems, Inc. (MVS), a
Montreal, Quebec-based corporation engaged in the design and manufacture of
proprietary machine vision products and systems; Socrates, Inc.(Socrates), a
Gaithersburg, Maryland-based corporation, which integrates, installs and
supports high-end computer and communication equipment; and JMR Distributors,
Inc. (JMR), a Lorton, Virginia-based corporation specializing in the purchase
and sale of computer memory chips and network equipment. Unless stated
otherwise, any reference to the company shall include in its meaning the
aforementioned subsidiaries.
MVS MODULAR VISION SYSTEMS, INC.
The Company acquired MVS Modular Vision Systems, Inc., a Canadian
corporation, on November 1, 1994, in an exchange of securities, whereby the
latter corporation became a wholly-owned subsidiary of the Company.
The primary component of MVS's products and systems is the Company's
three-dimensional vision technology, which is in the early stages of development
with no brand name recognition. This technology utilizes specialized cameras,
lasers, optics and custom-designed high-speed processing hardware and software.
The Company currently markets and sells one principal scanner product and
system: the MVS LaserVision FP Lead Scanner, and also markets and sells two
principal sensor products and systems: the MVS LaserVision Welding Sensor and a
MVS Portable LaserVision Welding Inspection System. The Company's products and
systems are marketed worldwide, but principally to major corporate customers in
North America, Europe and the Pacific Rim.
The Company believes that companies that produce vision-based scanner and
welding sensor products and systems have evolved over the past ten years into a
more consolidated and intensely competitive industry. Although the Company is
not aware of any other entity having a three-dimensional vision system
capability as sophisticated, comprehensive and highly automated as that achieved
by the Company, no assurances can be made that the Company's products and
systems will maintain any technological advances or will be competitive in the
marketplace.
MVS PRODUCTS AND MARKETS
SEMICONDUCTOR MARKET
MVS LASERVISION FP LEAD SCANNER
In 1990, IBM selected the Company to develop, on a non-exclusive basis, a
non-contact lead scanner system for QFP ("Quad Flat Packs") chips, placing their
first order in May 1990. This agreement and the cooperation between IBM and the
Company resulted in development of the MVS LaserVision FP (fine pitch) Lead
Inspection Scanner, a technology for the inspection of the leads
(or connectors) of flat-pack computer chips. IBM retained no rights in the
technology developed by the Company under its agreement. It has the ability
to perform complete chip lead inspection such as co-planarity, lead
shape, angle, width and spacing as well as overall geometry with chips laying in
the standard shipping tray. This method of inspection (i.e. no manipulation of
the chips) ensures a high degree of confidence that all shipped devices are
within specifications.
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In addition to the individual chip qualification, the system performs a
full complement of meaningful statistical analysis allowing for monitoring and
fine-tuning of the upstream packaging equipment (a must for a high quality
assurance program). The present FP lead scanner technology is accurate to a few
micrometers at a speed of 4000 units per hour for TSOP Type II devices.
Today, Intray Quality Assurance process must deal with pin counts as high
as 500 leads and line spacings down to .004 inches. In addition, manufacturers
are seeing demands for quality levels as high as three or four failures per
million. Unlike the front end, the height dimension is also critical in assuring
proper lead contact when mounted. Therefore, at this end of the process, vision
solutions must be "three dimensional" or "3-D." The Company believes that this
technology has created a significant market opportunity for the
Company's 3-D FP lead scanner, which has a purchase price of approximately
$250,000 each depending on configuration.
SCANNER MARKET
The scanner market includes almost all computer memory chip manufacturers
(e.g. Intel, Motorola, National Semiconductor, Samsung, Fujitsu, ET CETERA.)
worldwide. As computer chips decrease in size and increase in complexity, an
ever increasing demand is expected for machine vision based products to assure
effective inspection as well as feedback to the production equipment.
The Company's principal competitors on the worldwide market are Robotic
Vision Systems, Inc. ("RVSI"), View Engineering, Inc. ("View") and ICOS. By use
of a patented combination of 2-D and 3-D techniques, the Company believes that
its scanner is more accurate in measuring lead width, spacing and relative
position. The Company also believes that its product features such as throughput
rates (speed), set-up times, ease of maintenance and serviceability contribute
to its products being competitive in the marketplace.
CMM MARKET
In April 1994, the Company entered into an agreement with Possehl Hong
Kong Precision Machining Ltd. ("Possehl"), a Hong Kong-based high technology
products manufacturer and distributor and a wholly-owned subsidiary of
Possehl AG, a German conglomerate, that provides Possehl with exclusive
worldwide rights to manufacture and distribute to the semiconductor industry
a leadframe inspection scanner, which has been specially designed, developed
and manufactured to Possehl's specifications by the Company. The Company has
retained the rights to the CMM in North America. The CMM is used in the
quality assurance department of chip manufacturers to inspect semiconductor
leads on a random basis and enables manufactures to identify flaws in the
manufacturing process. The CMM inspects the dimensions of leadframes used in
the semiconductor industry. The CMM is still in the development stage, with
a projected market launch for second quarter FY 1997. The machine will sell
from $80,000 to $120,000 each depending on configuration. There are at least
a dozen competitors who have launched comparable CMM products during 1996
into a market that is both rapidly expanding and highly competitive.
INDUSTRIAL MARKET
WELDING SENSOR MARKET
The Company believes that its MVS LaserVision Welding Sensor is in the
forefront of adaptive arc welding and gluing technology, automating welding
machines, guiding robots and improving both quality and productivity. The
Company's sensors are successfully inspecting weld joint geometry, weld and glue
beads, as well as guiding the welding machines for the manufacturing of a wide
variety of parts
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from simple water heating tanks to jet engines and applications on NASA's
Space Station Freedom. The Company offers its sensor products and systems for
approximately $80,000 to $140,000 each depending on the complexity and
configuration of the system.
The Company believes that its laser vision products have made
significant improvements in the production capabilities and quality standards
of the welding industry. Some welding intensive manufacturing companies have
placed repeat orders for MVS LaserVision products. Proficient welders are
growing older and the new, health conscious generation is not as interested
in this industry as the previous generation. As labor costs have continued
to rise, and as global competition has required increased quality assurance,
such as ISO 9000, and control, the incentives for manufacturers to adopt
machine automation into their manufacturing processes have increased. The
welding industry is still a very traditional industry and the promotion of
LaserVision technology requires significant customer education, however the
financial incentives caused by a shifting competitive environment are forcing
manufacturers to seriously consider automation, including the retrofit of
their existing processes with vision control systems.
While the United States and Canada remain important welding sensor
markets for the Company due to the proximity of customers to the Company, the
Company has also successfully sold its welding sensor systems in Europe and
the Pacific Rim. In these markets, the Company intends to concentrate in
producing products and systems for:
- Cylindrical containers such as water heating tanks, pumps,
compressors, commercial beverage containers, gas and
propane bottles, mufflers, catalytic converters, gasoline
tanks, oil tanks, ET CETERA.
- Pipes, seam welded longitudinal or spiral.
- Naval applications.
- Aerospace applications.
The Company's principal competitors in the welding sensor market include
Servo-Robot, Inc. (Canada), Odelft AB (Holland) and Selcom AB (Sweden). It is
likely that other competitors will emerge in the future.
Japan has a continuous problem with manpower and space limitations.
Japan is resolving both problems by seeking to achieve the highest level of
automation in the world (which includes 75% of the world robot population).
Japan is potentially the biggest and most important market for the Company's
products and systems but also the toughest to penetrate. It is essential
that adequate MVS resources are available and committed to satisfy the most
demanding customers in the world. The Company believes that if it is able to
successfully penetrate the Japanese market, certainly the premier market in
the Pacific Rim, it will establish significant credibility for the Company's
products and systems throughout the Pacific Rim.
South Korea is also an especially fast growing market for machine vision
sensor equipment. South Korea expects to double its GNP in five years. Korea is
second to Japan in shipbuilding. Besides shipbuilding, South Korea has a strong
automobile and truck manufacturing industry and a growing aerospace industry.
MVS PORTABLE LASERVISION WELDING INSPECTION SYSTEM
The Company recently developed and sold its MVS Portable LaserVision
Inspection Scanner to the Edison Welding Institute of the U.S. Navy Joining
Center. The product is portable, making it much
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more versatile in its applications, such that it has been designed and
developed to be used in the field by the shipbuilding, aerospace and other
heavy manufacturing industries to inspect joint geometry and flag defects in
welding and manufacturing such as undercuts, porosity, concavity, convexity,
ET CETERA, in accordance with commercial such as ISO 9000 or military
specifications and standards. A flexible user interface of the system will
also allow for custom (user programmable) criteria. The system can be used in
three modes: a general inspection mode, a statistical process control mode
and a data collection mode. The portable inspection scanner incorporates a
significant part of the technology of the welding sensor but on a
miniaturized basis. The portable inspection system was designed and developed
with a state-of-the-art, high sensitivity miniature camera, wide angle lens
and a laser system, combined with highly proprietary software to drive the
system. Following a positive review of the technology by the Edison Welding
Institute, the Company decided to push ahead with the commercialization of
the portable inspection system. The Company now offers the portable
inspection scanner for sale to welding research labs for prototype evaluation
at a cost of $30,000 each, and will launch a commercial version that is
ruggedized once the existing product upgrade has been completed.
SOCRATES, INC.
The Company acquired Socrates, Inc. effective July 1, 1996. MVSI
exchanged 350,000 shares of its restricted common stock for all the shares of
common stock held by Socrates' sole stockholder.
Founded in 1989, Socrates is an integrator and marketer of proprietary
and generic computer system products and services for advanced systems
integration, telecommunications integration, Internet connectivity, and wide
and local area networking.
Socrates technicians evaluate and optimize a customer's existing computer
network system before installing new hardware and software to enhance the
productivity of the system. Once the system is operational to the customer's
satisfaction, Socrates technicians follow-up with training for the customer's
staff members in the operation and application of the newly installed system.
The customer's current computing environment is used to set the framework for
all product and service recommendations made by Socrates to the customer for
systems sales and installation. To take advantage of the rapid growth of the
Internet and provide its customers with complete Internet connectivity, Socrates
has created a special in-house networking group. The Company anticipates
significant growth in Socrates' networking group business in 1997.
SOCRATES PRODUCTS AND MARKETS
Socrates offers a variety of products and services ranging from
laptops, desktops, printers, and file servers, to application and networking
software. The Socrates sales staff educates itself on the latest technology
offered by its vendor partners. Socrates technicians strive to configure
systems that optimize a customers information technology investment. The
company is an authorized sales representative for most leading computer
companies, including AST, COMPAQ, Hewlett Packard, IBM, Sun Microsystems,
Toshiba, and many other top-tier computer manufacturers.
Socrates has delivered computing solutions to a wide range of
customers including Fortune 500 companies and government agencies. Many of
the products sold by Socrates can be purchased from Socrates off of the GSA
(US Government) schedule. In 1997, Socrates will seek to significantly
expand its computer maintenance services for Fortune 500 companies.
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Additionally, Socrates is expected to enhance the Company's capability to
provide software and hardware support to MVS, whose product line includes
computer oriented proprietary laser vision-based products and systems.
JMR DISTRIBUTORS, INC.
MVSI, Inc. acquired all the outstanding stock of JMR, effective
October 1, 1995, whereby MVSI, Inc. exchanged 100,000 restricted shares of
MVSI, Inc. common stock for all outstanding shares of JMR.
Founded in 1990, JMR is a contract manufacturer and distributor of
proprietary and generic memory module products for computers, plotters, laser
printers, process controllers and other computer related industry devices using
memory modules. In 1997, JMR will be expanding its computer related product
line to accomodate its customers increased use of the rapidly growing
Internet and intranet communication and information systems.
JMR PRODUCTS AND MARKETS
JMR's products are marketed nationally to major computer distributors
and corporate customers. The acquisition of JMR has enabled the Company to
expand into the computer memory market and take advantage of the projected
demand by computer users for increased memory capabilities to cope with the
new hardware and software developments. Although memory prices and profit
margins declined dramatically during the year, JMR was able to maintain its
revenue rate compared with 1995. This was accomplished by JMR increasing its
customer base and number of sales through sales performance and emphasis on
products and customer service. JMR is the first step in the Company's efforts
to participate in this market. The Company believes that its experience with
laser vision-based quality control of the memory microchip manufacturing
process will continue to prove to be beneficial in its future manufacture and
distribution of high quality memory modules. JMR is currently expanding its
computer products line to take advantage of perceived opportunities in the
commercial, government and personal market for computer products to be used
on the Internet and intranets.
MANUFACTURING
The Company's principal production facilities relate to MVS and its
Canadian manufacturing operations. MVS's existing facilities are capable of
fabricating and assembling total electronic and electromechanical systems and
subsystems. Facilities include an assembly and wiring department that has the
capability of producing complex wiring harnesses, as well as intricate
electronic subassemblies. The Company maintains a comprehensive test and
inspection program to ensure that all systems meet customer requirements for
performance and quality workmanship. To support its internal operation and to
extend its overall capacity, the Company purchases a wide variety of
components, assemblies and services from proven outside manufacturers,
machine shops, sheet metal fabricators, distributors and service
organizations. The Company's purchases of the various components, assemblies
and sub-assemblies represents approximately 40 percent of the cost of
producing the Company's vision-based products and systems.
MARKETING AND SALES
MVS's marketing strategy is to focus on its core vision business and
expand the number of vision applications and templates that it is able to
support and to aggressively expand its marketing and sales presence in the
market. In 1996, MVS established regional direct sales offices in Ohio and
North Carolina. In 1997, MVS plans to establish two more U.S. based sales
offices and to seek out and enter into agreements with at least two
additional distributors. It also plans to expand its worldwide distribution
network through the development of relationships with foreign distributors.
There is no guarantee that these relationships will in fact be established or
that they will be successful.
As a result of its limited and focused target market, the Company's
marketing efforts rely heavily on direct sales methods. The relatively high
dollar value of each lead scanner unit sold, combined with the technically
complex nature of the system, results in an in-depth and complex purchase
decision process for the product. It also requires that sales representatives
be trained extensively and have a thorough industry knowledge before they can
become effective. As a result, the selling cycle for the Company's products and
systems is generally between six to nine months from initial customer contact. A
lengthy purchase process is often the case in the purchase of the initial unit
of a particular product or system sold by the Company. Subsequent purchases
require less time and may result in multiple orders. Typically,
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potential purchasers visit the Company's manufacturing facility in Montreal,
Canada to receive a full demonstration of the product and system and to
discuss the merits of the product and system with the Company's engineers
before making a purchase decision. Starting in late 1996, demonstration
equipment was provided to regional offices to provide potential clients with
a demonstration venue that is closer to their manufacturing facility.
Sales activities in the domestic market are handled by a combination of
direct sales personnel. Due to the depth of analysis involved in the customer's
purchase decision, management emphasizes active interaction between the direct
sales staff, the Company's engineers, its independent sales representatives and
the buyer throughout the selling process.
The Company has established distribution capabilities with independent
distributors in both Europe and the Pacific Rim, which has provided access to
major markets for its products and systems.
Socrates and JMR each utilize an in-house direct sales force. Both
companies intend to aggressively expand their marketing and sales presence in
the market during 1997.
INDUSTRY SEGMENT INFORMATION AND MAJOR CUSTOMERS
For purposes of segment reporting for the year ended September 30, 1996,
management considers the Company to operate in two industry segments: the
machine vision industry and the computer distribution and reseller industry.
For the year ended September 30, 1995, management considered the Company to
operate in only one industry segment, the machine vision industry.
For the year ended September 30, 1996, the Company had one customer which
accounted for approximately 10 percent of its total revenue. For the year ended
September 30, 1995, the Company derived 40 percent of its sales from three
customers. In addition, approximately, 19% and 67% of the Company's sales in
fiscal years 1996 and 1995, respectively, were to customers outside North
America.
The Company believes that none of its business segments is dependent
upon a single customer or a few customers, the loss of which would have a
material adverse effect on the Company's results of operations.
Financial information relating to the Company's industry segments and a
breakdown of the Company's sales by geographic region is detailed in Note L in
the accompanying consolidated financial statements and is incorporated herein.
SOURCES OF SUPPLY AND BACKLOG
The raw materials and components used in the development and
manufacture of MVS's products and systems are generally available from
domestic suppliers at competitive prices; fabrication of certain major
components is subcontracted for on an as-needed basis. MVS has not
experienced any significant difficulty in obtaining adequate supplies and
equipment to perform under its purchase orders and agreements.
MVS also purchases certain computer components, used in their products
and systems, from both Socrates and JMR. Furthermore, Socrates purchases
certain memory modules used in its computer systems directly from JMR.
All materials and components used by Socrates and JMR are available
from numerous sources of supply. The Company does not foresee any shortage of
these materials.
For the year ended September 30, 1996, the Company's backlog was
approximately $5 million. The Company does not believe that its backlog at
any specific time is necessarily indicative of its future business.
CUSTOMER SERVICE AND SUPPORT
The Company warranties certain products and systems for 12 months and
provides technical personnel on-site, if required, during the warranty period.
The Company, however, endeavors to complete warranty service repairs at its own
facilities in order to minimize costs. To date, warranty costs, which are
accrued by the Company at the time of sale, have not been material.
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PATENT, TRADEMARK, COPYRIGHT AND PROPRIETARY RIGHTS
This section relates principally to the Company's Canadian operations.
The Company is a non-exclusive worldwide licensee of the patented welding
sensor technology owned by the National Research Council of Canada ("NRC"). The
welding sensor is patented (16 claims) in Canada and the U.S. (U.S. Patent
No. 4,859,829, August 22, 1989) and patents are pending in Japan and Western
Europe. The Company entered into the license agreement with NRC in June 1987 and
the agreement expires upon the expiration of the patent in August 2006. The
license agreement requires a minimum annual royalty payment to NRC of $20,000
per year and three percent of sales of products incorporating the patent.
On April 11, 1995, the Company was issued a patent (U.S. Patent
No. 5,406,372) for its lead inspection system for inspecting parameters of leads
on quad flat-pack (QFP) computer chip packages. The Company's lead inspection
system comprises a lead scanner assembly including a sensor head arrangement, a
carriage means for moving the sensor head, a support table and a tray means for
holding at least one QFP package. The lead inspection system permits the
thorough inspection of such lead qualities as clearances, bent lead conditions,
overall lead geometry and coplanarity of the leads of a flat-pack device without
removing it from a standard tray. Such an approach provides that there is no
possibility of further lead damage by the inspection system since there is no
device manipulation. The Company believes that this patented invention
simplifies the handling of complete trays instead of individual devices. The
Company can make no assurances that its patented invention will prove to be
financially beneficial.
U.S. and international patents are pending for the 17 claims on the
robotic guidance technology applicable to the articulated arm robot invented
by a research team at the University of Waterloo. The exclusive worldwide
licensee of the technology is Manufacturing Research Corporation of Ontario
("MRCO") and the Company is the worldwide sub-licensee of the technology. The
Company entered into the sub-license agreement with MRCO in February 1994 and
the agreement expires in February 2004. The sub-license agreement requires a
minimum annual royalty of $20,000 per year and five percent of sales of
products incorporating the technology, plus a two percent royalty on any
sales under OEM (original equipment manufacturer) contracts.
As a general policy, the Company does not patent its vision processing
technology as a result of the fast evolution of the relevant electronic
circuitry. Properly packaged with software kernel, imaging routines and user
manuals, these processors are a product in themselves. The Company may decide,
at a later stage, to market these high performance processors to the general
machine vision market. In this case, some of the key technology may be patented.
Failure of the Company's proposed patents, trademark and copyright applications
may have a material adverse impact on the Company's business. Except as may be
required by the filing of patent, trademark and copyright applications, the
Company will attempt to keep all other proprietary information secret and to
take such actions as may be necessary to insure the results of its development
activities are not disclosed and are protected under the common law concerning
trade secrets. Such steps will include the execution of nondisclosure agreements
by key Company personnel and may also include the imposition of restrictive
agreements on purchasers of the Company's products and systems. There is no
assurance that the execution of such agreements will be effective to protect the
Company, that the Company will be able to enforce the provisions of such
nondisclosure agreements or that technology and other information acquired by
the Company pursuant to its development activities will be deemed to constitute
trade secrets by any court of competent jurisdiction.
In a letter dated March 16, 1995, Robotic Vision Systems, Inc.
("RVSI"), a competitor of the Company in the lead scanning equipment market,
made a charge of patent infringement and threatened litigation against the
Company based on a patent that it allegedly owns. On February 27, 1992, RVSI
sent the Company a similar notice of its claim that the Company's scanning
equipment infringed RVSI's patent rights. The Company believes that its lead
scanning products and systems do not infringe RVSI's patent
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rights and that RVSI's asserted patent is invalid. The Company so informed
RVSI in 1992 and again on March 30, 1995. The Company has been informed that
RVSI has made similar claims to the Company's present and prospective
customers in the past and believes that the Company has lost United States
customers as a result of those claims. The Company believes that RVSI's
claims are without merit and is considering its legal options with respect to
RVSI's conduct in this matter.
COMPETITION
The Company believes that companies that produce vision-based robotic and
welding sensor products and systems have evolved over the past ten years into a
more consolidated and intensely competitive industry. The Company is aware that
a substantial number of companies entered the industry in the years 1984 through
1996 and that most of these were relatively new privately held firms. In the
past five years, however, the number of competitors has narrowed to less than an
estimated 25 firms, which the Company believes is attributable to a large extent
to a consolidation within the industry.
The Company believes that there are other companies, some of which are
substantially larger and have substantially greater assets and resources than
the Company, engaged in the development of technology and products which may be
highly competitive with those of the Company, within each industry the
Company competes in. Almost all of the companies with which the Company
intends to compete are substantially larger and have substantially greater
resources than the Company. It is also likely that other competitors will
emerge in the future. The Company will compete with companies that have
greater market recognition and broader capabilities than the Company. As a
consequence, there is no assurance that the Company will be able to
successfully compete in the marketplace.
EMPLOYEES
At the year ended September 30, 1996, the Company employed approximately
90 persons, all of whom were full-time employees. Of these full-time employees,
approximately 18 were engaged in management, administration and finance, 57 in
development and manufacturing and 15 in marketing and sales.
The Company believes that its future success will depend in large part
upon its continued ability to recruit and retain highly qualified technical
personnel. Competition for highly qualified technical personnel is
significant, particularly in the geographic area in which the Company's
operations are located. The Company has never experienced a work stoppage and
none of its employees is represented by a labor organization. Management of
the Company considers its relationship with its employees to be good.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
The Company and its representatives may from time to time make written or
oral forward-looking statements, including statements contained in the Company's
filings with the Securities and Exchange Commission and in its reports to
stockholders. In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company is hereby identifying
important factors that could cause actual results to differ materially from
those contained in any forward-looking statement made by or on behalf of the
Company; any such statement is qualified by reference to the following
cautionary statements.
The Company's operating results could be affected by a number of
factors. They include the availability and cost of components, an unexpected
inability to manage expenses relative to sales growth, and an inability to
anticipate downward price pressures by customers using our products and
services. Also, there is the potential problem of competing with companies
having significantly greater financial, technical, and market resources than
the Company.
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A significant percentage of the Company's sales to major customers
historically has occurred in the last month of a quarter. Changes in purchasing
patterns by one or more of the Company's major customers, and the inability of
the Company to anticipate in advance the mix of customer orders and its ability
to ship the necessary quantities of product near the end of a fiscal quarter,
could result in material fluctuations in quarterly operating results.
The Company participates in competitive industries marked by changing
technology, which could result in volatility of the Company's common stock
price. Additionally, any shortfall in revenue or earnings from the levels
expected by securities analysts could have an immediate and significant effect
on the trading price of the Company's common stock in any given period.
Moreover, it is possible the Company may not learn of such shortfalls until late
in the fiscal quarter, which could result in an even more immediate and adverse
effect on the trading price of the Company's stock.
SUBSEQUENT EVENTS
On October 16, 1996, the Company signed an agreement with e-Net, Inc.,
under which MVSI intends to acquire e-Net, as a wholly-owned subsidiary of MVSI,
subject to obtaining a fairness opinion and the ratification by a majority of
MVSI shareholders at a 1997 shareholders meeting. Under the agreement, the
Company has the right to waive obtaining a fairness opinion and ratification by
the stockholders, if so decided by its board of directors. e-Net, a
development stage Washington, D.C. area based telecommunications company,
produces proprietary telecommunications products and software which allow
individuals and organizations to execute secure, private voice communications
across the Internet and intranets, through the use of authentication
technology, for local, national and international telephone communications,
information exchange and commerce.
Among the principal terms and conditions of the proposed acquisition,
the Company intends to exchange, on a proposed tax-free basis, 4,000,000
shares of its common stock, for all of e-Net's 8,000,000 shares of common
stock. In addition, e-Net's 2,000,000 Class A Warrants and 2,000,000 Class B
Warrants may be exercisable into a total of 2,000,000 shares of the Company's
Common Stock. The newly issued MVSI securities in the acquisition may not be
sold for a 24 month period. The chairman and chief executive officer of MVSI
is a principal stockholder and warrantholder of e-Net; a director of MVSI is
also a director and a stockholder of e-Net. Subject to consummation of the
acquisition, which requires satisfaction of the aforementioned conditions
precedent, MVSI intends to provide at least $5.3 million to e-Net over a
24-month period ending in September 1998 in order to finance its business
operations. The acquisition agreement contains terms and other conditions
which are customary and usual to such acquisitions. As of September 30,
1996, MVSI has provided e-Net $500,000 in working capital (see Notes
Receivable in accompanying balance sheet) and on November 1, 1996, provided
e-Net an additional $500,000 in working capital, pursuant to a promissory
note. Terms of the promissory note include the payment of interest at 9% per
annum and repayment due no later than September 6, 1997. Management intends
to collect such amounts when due.
The Company received a letter, dated December 23, 1996, from outside
legal counsel to e-NET, Inc. (the "December 23, 1996 Letter"). The December
23, 1996 Letter, which was written on behalf of e-NET, Inc., alleges that the
Company has breached certain provisions of the October 16, 1996 Acquisition
Agreement by and among the Company, e-NET, Inc. and e-NET, Inc.'s
shareholders (the "Acquisition Agreement"). The December 23, 1996 Letter
demands that the Company cure the alleged breaches of the Acquisition
Agreement within any applicable cure period and states that the failure to do
so will allow e-NET, Inc. to unilaterally terminate the Acquisition Agreement
in accordance with its terms. The Company believes that it is not in breach
of any provision of the Acquisition Agreement and that all of the allegations
of breach of the Acquisition Agreement by the Company in the December 23,
1996 Letter are without merit. The Company is preparing a written response to
the December 23, 1996 Letter and intends to request a meeting with e-NET,
Inc.'s management in early January, 1997 to seek to resolve any disputes over
the Acquisition Agreement. As of the date of this report, the Company is
unable to determine the effects of this recent development on the
consummation of the transactions contemplated by the Acquisition Agreement.
On December 5, 1996, the National Association of Securities Dealers
("NASD") expelled Stratton Oakmont Inc., the Company's former underwriter and
former principal market maker in the Company's securities, from the
securities industry. The expulsion of Stratton Oakmont materially and
negatively impacted the price and trading volume of the Company's securities.
The Company is uncertain as to the long-term effect that the Stratton
Oakmont expulsion will have on the price and trading volume of its
securities. As of December 27, 1996, the Company had approximately 16 market
makers, and is striving to enlist an established or major securities firm to
be its principal market maker and investment banker. The Company believes
that the listing of the Company's securities on the National Market System
(NMS) of Nasdaq will assist the Company's efforts to obtain a new principal
market maker and investment banker. The Company currently has a pending
application to have its securities listed on the NMS. The Company can make no
assurances as to the outcome of its pending NMS application. The Company can
make not assurances as to the outcome of its pending NMS application.
ITEM 2. DESCRIPTION OF PROPERTIES.
The Company leases approximately 1,600 square feet for its principal
executive offices located at 8133 Leesburg Pike, Suite 750, Vienna, VA 22182.
11
<PAGE>
Base rental for the office space is approximately $2,200 per month.
The Company leases approximately 14,000 square feet for its MVS Canadian
development and manufacturing facilities located at 4830 Cousens, Montreal,
Quebec, Canada H4S 1X7, under a lease which extends through May 1999. The
Company operates at approximately 60 percent of capacity. Base rental for the
premises is approximately $5,000 per month. The lease requires the Company to
pay certain property taxes and certain operating expenses.
The Company leases approximately 1,800 square feet for its JMR memory chip
distribution facilities located at 7000A Newington Road, Lorton, VA 22079.
Base rental for the premises is approximately $1,000 per month.
The Company also leases approximately 3,800 square feet of space for its
Socrates computer integration and reselling facilities located at 800 S.
Frederick Avenue, Gaithersburg, MD 20877. Base rent for the space is
approximately $5,600 per month. The lease agreement, which expires in
December, 2000, includes rent escalations and requires the Company to pay
certain operating expenses.
The Company believes that its current and anticipated facilities are
suitable and adequate for its operations.
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of conducting business, the Company is subject,
from time to time, to certain legal proceedings concerning the Company's
business. Management does not believe that any current legal proceedings will
have a material impact on the Company's business or its financial statements.
In a letter dated March 16, 1995, Robotic Vision Systems, Inc.
("RVSI"), a competitor of the Company in the lead scanning equipment market, has
made a charge of patent infringement and threatened litigation against the
Company based on a patent that it allegedly owns. On February 27, 1992, RVSI
sent the Company a similar notice of its claim that the Company's scanning
equipment infringed RVSI's patent rights. The Company believes that its lead
scanning products and systems do not infringe RVSI's patent rights and that
RVSI's asserted patent is invalid. The Company so informed RVSI in 1992 and
again on March 30, 1995. The Company has been informed that RVSI has made
similar claims to the Company's present and prospective customers in the past
and believes that the Company has lost United States customers as a result of
those claims. The Company believes that RVSI's claims are without merit and is
considering its legal options with respect to RVSI's conduct in this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock has traded on the Nasdaq Small Cap Market System since
August 14, 1995, under the symbol "MVSI." On December 27, 1996, the closing
price of the Common Stock was $4.25 per share. There are approximately
1,600 shareholders of the Company's Common Stock, as last reported. The
following table sets forth the range of high and low trading prices for the
Common Stock, as reported on Nasdaq, for the period from August 14, 1995, the
date of the Company's initial public offering of securities, through December
27, 1996.
HIGH LOW
Fiscal Year 1995
Fourth fiscal quarter......................................$7.75 $3.50(1)
Fiscal Year 1996
First fiscal quarter......................................$8.38 $3.88
Second fiscal quarter.....................................$7.38 $4.00
Third fiscal quarter......................................$9.75 $6.88
12
<PAGE>
Fourth Fiscal quarter.......................................$15.63 $8.00
Fiscal Year 1997
First fiscal quarter, through December 27, 1996.............$10.75 $2.75
- - ----------------------
(1) Represents the initial public offering price per share on August 14, 1995.
Holders of the Company's Common Stock are entitled to dividends when, as
and if declared by the Board of Directors out of funds legally available
therefor. The Company does not anticipate the declaration or payment of any
dividends in the foreseeable future. The Company intends to retain earnings, if
any, to finance the development and expansion of its business. Future dividend
policy will be subject to the discretion of the Board of Directors and will be
contingent upon future earnings, if any, the Company's financial condition,
capital requirements, general business conditions and other factors. Therefore,
there can be no assurance that any dividends of any kind will ever be paid by
the Company.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO YEAR ENDED SEPTEMBER 30, 1995
The Company reported an increase in sales of $13,649,839 or 584% to
$15,987,636 for the year ended September 30, 1996 as compared to the same period
in fiscal 1995. The increase in sales is attributable to the Company's two
acquisitions (JMR Distributors and Socrates) in the computer distribution and
reselling business, as well as an almost doubling of revenue of the Company's
laser machine vision products and systems.
The gross margin of the Company decreased to 22% for the year ended
September 30, 1996, principally as a result of relatively lower gross profit
margins in the Company's computer distribution and reselling businesses. These
lower profit margins have also been impacted by a decrease in excess of 75% in
worldwide memory chip prices since September 30, 1995.
For the year ended September 30, 1996, selling expenses increased by
$367,582 (76%) to $853,577, primarily as a result of additional sales staff
hired at MVS and the Company's acquisitions of JMR and Socrates. Administrative
expenses increased $1,417,042 (127%) to $2,532,337 for the fiscal year 1996, as
a result of increased salary expenses associated with employment agreements for
three officers which became effective February 1, 1995, as well as an increase
in the Company's overall level of operations and the acquisitions of JMR and
Socrates.
Research and development expenditures, shown net of Canadian tax
credits, decreased by $1,069,876 to $116,176 for the year ended September 30,
1996, primarily due to the Company's products maturing necessitating less
research and development. In addition, subsequent to the Company achieving
technological feasibility on several software development efforts late in
fiscal 1995, the Company began capitalizing labor costs associates with these
efforts. Management expects to begin amortizing such costs in fiscal 1997
upon release of the associated products. Depreciation and amortization
expenses for the year ended September 30, 1996, increased by $176,976 to
$197,814 as a direct result of an increase in depreciable assets from the
Company's acquisitions of JMR and Socrates and the resulting goodwill
amortization recorded subsequent to the acquisitions.
13
<PAGE>
Interest income and expense and financing charges decreased by $3,927,001
from $3,504,162 for the year ended September 30, 1996. The decrease is
primarily attributable to a reduction of $3,500,000 in interest expense from the
previous fiscal year relating to the issuance of bridge units as additional
consideration for a $500,000 bridge loan originating in June 1995.
Additionally, the 1996 year includes interest income (net of margin loan
interest) resulting from the Company investing the proceeds from its initial
public offering in August 1995. Both periods reflect interest on line of credit
borrowings.
The Company has net operating loss carryforwards and tax credit
carryforwards to offset future taxable income and taxes payable. Although the
Company, has recognized income before income taxes through September 30,
1996, this has not resulted in the recognition of income tax expense due to
the existence of available net operating loss carryforwards. Future use of
these net operating loss carryforwards was not affected by the Company's
acquisitions during fiscal year 1996. However, in the event a change in
control occurs in the future, use of all or a portion of the U.S.
carryforwards could be affected. Moreover, as a result of the Company's
anticipation of increasing levels of profitability, the Company may be
required to begin paying income taxes during fiscal year 1997.
As of September 30, 1995, the Company had established a 100% valuation
allowance against the tax benefits related to these carryforwards due to the
realizability of the tax benefits being uncertain. During fiscal year 1996,
management reevaluated the valuation allowance resulting in the recording of a
deferred tax asset (benefit) of $786,430. Additionally, in connection with the
acquisition of Socrates, Inc., a $372,000 deferred tax asset (benefit) was
recorded as a reduction of goodwill. Factors considered by the
14
<PAGE>
Company in this reevaluation included the Company's year-to-date earnings,
exclusive of non-recurring expenses and adjustments, as well as anticipated
future earnings based on increased product demand, primarily attributable to
the awarding of significant new contracts and orders which will be completed
in fiscal year 1997. After recording the deferred tax asset (benefit), the
Company continues to carry a valuation allowance approximating 67% of the
deferred tax assets. The Company will review the valuation allowance
quarterly to determine the future realizability of these deferred tax assets.
The Company's fourth quarter 1996 operations were negatively impacted by
charges incurred in restructuring the Company's Canadian operations. Management
determined the organizational restructuring to be necessary in order for the
Company to further strengthen its position in the worldwide market of
laser-based machine vision products, and to ensure continued profitability in
the future. The restructuring included the hiring of a new management team in
operations, finance and sales and marketing, and the implementation of a revised
business plan. Management's objective is to improve product quality, expand
product lines, increase sales and marketing efforts and revise existing cost
structures. The Company believes these efforts will further enhance the
Company's state-of-the-art proprietary laser technology and allow the Company to
better capitalize on the rapidly growing machine vision market. The impact of
the changes incurred, in addition to certain fourth-quarter adjustments made to
establish an accounts receivable reserve and write-off non-recoverable travel
and installation costs, can be seen in the accompanying statement of operations
as an increase in operating expenses and a sizable reduction in sales growth
during the quarter. The effect of these items was to reduce net income for the
fourth quarter by approximately $650,000 ($0.05 per share).
Net income for the year ended September 30, 1996 was $1,012,764 or $0.11
per share (primary EPS) and $0.09 per share (fully diluted EPS), as compared to
a net loss of $(5,481,453) or $(1.10) per share for the year ended September 30,
1995.
YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO YEAR ENDED SEPTEMBER 30, 1994
The Company reported a decrease in sales of $37,000 or 2% to
$2,338,000 for the year ended September 30, 1995 as compared to same period
in fiscal 1994. Of the 9 units sold in the 1995 period, 5 were manually
operated systems and carried a unit sales price of $58,000. The gross margin
on sales for each period was comparable due to a relatively stable sales mix
between scanner and welding products.
For the years ended September 30, 1995 and 1994, the Company derived
40% and 43%, respectively, of its total sales from 3 and 1 customers,
respectively. In addition, approximately 67% and 58% of the Company's sales
in fiscal 1995 and 1994, respectively, were to customers outside the United
States. The reduced percentage of international sales in fiscal 1995 was
primarily attributable to sales to Texas Instruments in Dallas, Texas in
fiscal 1995. Substantially all of such sales are transacted in U.S. dollars.
Selling expenses increased by $235,000 (93%) to $486,000 in the 1995
period principally as a result of additional sales staff hired in late 1994.
Selling expenses in the 1994 period were curtailed by the Company due to cash
flow constraints at the time. Administrative expenses increased by $676,000
or 154% to $1,115,000 in the 1995 period due principally to increased salary
expenses associated with new employment agreements with three officers which
became effective February 1, 1995. Research and development expenditures,
shown net of tax credits, increased by $899,000 to $1,186,000, an increase of
313%, primarily as a result of lower tax credits recognized by the Company as
an offset to development expenses and development costs for the BGA chip
scanner. The Company has not recorded an asset for tax credits realizable
only as an offset against future taxable income.
Interest and financing charges increased by $3,458,000 to $3,555,000
in the 1995 period principally as a result of an interest charge of
$3,500,000 associated with the issuance of bridge units as additional
consideration for a $500,000 bridge loan originating in June 1995 and
interest on loans from a
15
<PAGE>
stockholder/officer and $276,000 bank loan collateralized by research and
development tax credits. The interest expense charge of $3,500,000 from the
issuance of bridge units resulted in a corresponding credit to additional
paid-in-capital. Both periods reflect interest on line of credit borrowings.
CAPITAL RESOURCES, LIQUIDITY AND BACKLOG
As of September 30, 1996, the Company had working capital of $9,562,778
compared to $10,090,717 as of September 30, 1995. The fiscal year 1996
acquisitions of JMR Distributors, Inc. and Socrates, Inc. and future expansion
of the Company's laser vision business, including continual software
development, may require increased working capital to finance increases in
inventory and accounts receivable comparable to or greater than the increase
experienced in the year ended September 30, 1996 (see Consolidated Statements of
Cash Flows). However, with the enhanced liquidity of the Company from its 1995
public offering of securities and a June 1996 private placement transaction in
which the Company netted $600,000, the Company believes that existing cash and
cash equivalents on hand and investments will be sufficient to fund these
requirements for the foreseeable future. The Company has no significant
short-term or long-term debt outstanding as of September 30, 1996.
In the event that the Company consummates the acquisition of e-Net,
the Company believes that it may have to obtain additional funding or
financing to satisfy the long-term capital needs of the Company's subsidiary
operations and to provide for adequate working capital reserves.
The Company increased its bank line of credit with a Canadian bank, from
$151,000 to $360,000 for support of its Canadian operations temporary cash flow
requirements, with interest payable monthly at the prime rate plus 2% (prime was
5.75% on September 30, 1996). At September 30, 1996 and 1995, borrowings
outstanding on the line of credit amounted to $275,735 and $150,342,
respectively. The line of credit is collateralized by all present and future
accounts receivable, Canadian tax credits receivable and inventory.
The Company also maintains a credit agreement with a local finance
company for inventory financing for one of its subsidiaries. The agreement
provides the Company with the ability to pay certain inventory balances
(purchases) in scheduled interest-free installments. Borrowings outstanding
under the agreement, at September 30, 1996, amounted to $824,238. The
agreement is subject to annual renewal and is collateralized by all present
and future accounts receivable and inventory of the Company's subsidiary.
In October 1996, the Company filed a Post-Effective Amendment to the
Company's Form S-3 Registration Statement. The Post-Effective Amendment
related to the continuing resale and conversion of the Company's Class A
Warrants previously issued in connection with the Company's initial public
offering. The Class A Warrants became exercisable on the effective date of
the Post-Effective Amendment filing. Should all 5,140,000 Class A Warrants
and 1,000,000 Class B Warrants, plus the underwriters' purchase option for
360,000 shares and 360,000 Class A Warrants, be exercised, the Company will
receive the proceeds therefrom, aggregating up to $29,215,000. As of December
27, 1996, 15,000 Class A Warrants have been exercised. The Company can make
no assurances that any of the remaining warrants or underwriters' purchase
option shares will be exercised.
Through September 30, 1995, the Company had borrowed $667,000 from a
principal stockholder/officer (Edward Ratkovich) to enable the Company to meet
its on-going cash flow requirements. These loans bear interest at 9% and are due
on demand. During fiscal year 1996, the Company repaid $524,000 on the loans to
the stockholder from operating cash flow to partially repay these loans. Total
loans and accrued interest outstanding at September 30, 1996 and 1995, total
$222,395 and $724,556, respectively.
While no assurances can be given, the Company believes that cash
generated from operations, along with the Company's existing resources and
available credit are sufficient to meet the Company's working capital and
other financing requirements for fiscal 1997. As noted above, if the Company
consummates the e-Net acquisition, the Company believes that it may have to
obtain additional funding or financing to meet the long-term capital needs of
its subsidiaries and to make proper provision for working capital.
At September 30, 1996, the Company's backlog was approximately $5
million. The Company does not believe that its backlog at any specific time
is necessarily indicative of its future business.
16
<PAGE>
IMPACT OF INFLATION AND FOREIGN CURRENCY EXCHANGE RATES
The Company does not believe that inflation has had a material adverse
effect on sales or income during the past several years. Increases in
supplies or other operating costs may adversely affect the Company's
operations; however, the Company believes it may increase prices of its
products and systems to offset increases in costs of goods sold or other
operating costs.
A portion of the Company's operations through its Canadian subsidiary
is transacted in Canadian dollars. The Company, however, reports its
financial position, results of operations and cash flows in U.S. dollars. As
a result, the Company believes that its exposure to foreign currency
fluctuations or deterioration is limited.
SEASONALITY
Based on its experience to date, the Company believes that its future
operating results may be subject to quarterly variations based on a variety of
factors, including seasonal changes in the weather, especially in its Canadian
operations. Such effects may not be apparent in the Company's operating results
during a period of expansion. However, the Company can make no assurances that
its business can be significantly expanded under any circumstances.
17
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
MVSI, INC. AND SUBSIDIARIES
CONTENTS
Report of Independent Certified Public Accountants 23
Consolidated Financial Statements
Consolidated Balance Sheets 24
Consolidated Statements of Operations 25
Consolidated Statements of Stockholders' (Deficit) Equity 26
Consolidated Statements of Cash Flows 27
Notes to Consolidated Financial Statements 28-43
18
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH 16(a) OF THE EXCHANGE ACT.
Item 9 is hereby incorporated by reference to the registrant's S-3
Registration Statement, and related Prospectus, Registration File No.
33-89194, declared effective with the Securities and Exchange Commission
("Commission") on October 16, 1996, and the registrant's Proxy Statement to
be filed with the Commission on or prior to January 31, 1997.
ITEM 10. EXECUTIVE COMPENSATION.
Item 10 is hereby incorporated by reference to the registrant's S-3
Registration Statement, and related Prospectus, Registration File No.
33-89194, declared effective with the Securities and Exchange Commission
("Commission") on October 16, 1996, and the registrant's Proxy Statement to
be filed with the Commission on or prior to January 31, 1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Item 11 is hereby incorporated by reference to the registrant's S-3
Registration Statement, and related Prospectus, Registration File No.
33-89194, declared effective with the Securities and Exchange Commission
("Commission") on October 16, 1996, and the registrant's Proxy Statement to
be filed with the Commission on or prior to January 31, 1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Item 12 is hereby incorporated by reference to the registrant's S-3
Registration Statement, and related Prospectus, Registration File No.
33-89194, declared effective with the Securities and Exchange Commission
("Commission") on October 16, 1996, and the registrant's Proxy Statement to
be filed with the Commission on or prior to January 31, 1997.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
A. Exhibits.
The following is a list of exhibits incorporated by reference to the
registrant's S-3 Registration Statement, and related Prospectus, Registration
File No. 33-89194, declared effective with the Securities and Exchange
Commission ("Commission") on October 16, 1996, and the registrant's SB-2
Registration Statement, Registration No. 33-89194, as declared effective by
the Commission on August 14, 1995:
1.0 Form of Underwriting Agreement.
1.1 Selected Dealers Agreement.
1.2 Form of Agreement Among Underwriters.
3.0 Certificate of Incorporation, filed April 12, 1994.
3.1 By-laws, as amended.
4.0 Specimen Copy of Common Stock Certificate.
4.1 Form of Class A Warrant Certificate.
4.2 Form of Class B Warrant Certificate.
4.3 Form of Underwriter's Purchase Option.
4.4 Form of Warrant Agreement.
5.0 Opinion of Thomas T. Prousalis, Jr., Esq. for Registrant.
10.0 Stock Purchase Agreement and Plan of Reorganization, dated November 1,
1994.
10.1 Employment Agreement, Edward Ratkovich.
10.2 Employment Agreement, Louis K. Lukanovich.
10.3 Employment Agreement, Bojko D. Vodanovic.
10.4 Texas Instruments Incorporated Agreement, dated April 1, 1994.
10.5 Possehl Hong Kong Precision Machining Ltd. Agreement, dated April 28,
1994
10.6 NJC Technical Letter, dated July 21, 1994.
10.7 NRC License Agreement, dated September 12, 1986.
10.8 MRCO License Agreement, dated February 25, 1994.
10.9 United States Patent, Number 5,406,372, dated April 11, 1995.
10.10 Consent and Waiver, dated June 30, 1995.
24.0 Consent of Thomas T. Prousalis, Jr., Esq. is contained on page II-7 of
the
19
<PAGE>
Registration Statement.
24.1 Consent of Grant Thornton LLP is contained on page II-8 of the
Registration Statement.
25.0 Power of Attorney appointing Edward Ratkovich is contained on page II-6
of the Registration Statement.
B. Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter ending
September 30, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
MVSI, INC.
December 30, 1996
By: EDWARD RATKOVICH
------------------
Edward Ratkovich
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report is signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
EDWARD RATKOVICH Chairman of the Board, President, December 30,
------------------- Chief Executive Officer 1996
Edward Ratkovich [Principal Executive Officer]
BARRY J. HATFIELD Vice President, Assistant December 30,
-------------------- Secretary, Director 1996
Barry J. Hatfield
MARK J. MCKNIGHT Chief Financial Officer, December 30
-------------------- Controller, Assistant Secretary 1996
Mark J. McKnight [Principal Financial Officer]
Vice President, Secretary, December 30,
------------------- Director 1996
Boyko D. Vodanovic
EDWARD P. ROBERTS Director December 30,
------------------- 1996
Edward P. Roberts
CLIVE G. WHITTENBURY, PH.D. Director December 30,
--------------------------- 1996
Clive G. Whittenbury, Ph.D.
20
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MVSI, INC. AND SUBSIDIARIES EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
Primary Fully Diluted
Earnings Earnings
Year ended September 30, 1996 Per Share Per Share
- - -------------------------------- ----------- -------------
Weighted Average Shares Outstanding for the period 10,285,754 10,285,754
Common stock equivalents arising from assumed
exercise of warrants 4,442,849 4,442,849
----------- -------------
14,728,603 14,728,603
----------- -------------
----------- -------------
Net earnings for the period, as presented $ 1,012,764 $ 1,012,764
Add: Interest revenue from the assumed purchase of
government securities, net of tax (A) 587,036 368,567
----------- -------------
Adjusted net earnings $ 1,599,800 $ 1,381,331
----------- -------------
----------- -------------
Earnings per share $ 0.11 $ 0.09
----------- -------------
----------- -------------
(A) Results from the 20% limitation on the number of
shares repurchased upon exercise of warrants under
the modified treasury stock method
<PAGE>
MVSI, INC., AND SUBSIDIARIES
Consolidated Financial Statements and Report of
Independent Certified Public Accountants
September 30, 1996 and 1995
- - --------------------------------------------------
- - --------------------------------------------------
21
<PAGE>
ITEM 7: FINANCIAL STATEMENTS
MVSI, INC., AND SUBSIDIARIES
Contents
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 23
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets 24
Consolidated Statements of Operations 25
Consolidated Statements of Stockholders' (Deficit) Equity 26
Consolidated Statements of Cash Flows 27
Notes to Consolidated Financial Statements 28-43
22
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
MVSI, Inc., and Subsidiaries
We have audited the accompanying consolidated balance sheets of MVSI, Inc., and
Subsidiaries as of September 30, 1996 and 1995, and the related consolidated
statements of operations, stockholders' (deficit) equity and cash flows for the
years then ended. 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 MVSI, Inc., and
Subsidiaries as of September 30, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
Vienna, Virginia
November 22, 1996
23
<PAGE>
MVSI, INC., AND SUBSIDIARIES
Consolidated Balance Sheets
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 1995
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 313,890 $ 2,343,036
Investments 5,881,202 8,001,304
Accounts receivable, net of allowance for doubtful accounts 4,555,259 708,991
Note receivable 500,000 200,000
Inventory 2,612,539 696,606
Tax credits and income tax receivable 405,717 273,479
Prepaid expenses 348,302 221,389
--------------------------------
TOTAL CURRENT ASSETS 14,616,909 12,444,805
PROPERTY AND EQUIPMENT, net 383,518 174,451
CAPITALIZED SOFTWARE COSTS 1,164,182 271,496
GOODWILL 2,735,638 --
DEFERRED TAX ASSET 1,158,430 --
OTHER ASSETS 101,692 68,146
--------------------------------
$20,160,369 $12,958,898
- - ----------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit and financing arrangement $ 1,099,973 $ 150,342
Accounts payable and accrued liabilities 3,731,002 1,312,056
Notes payable -- 12,134
Shareholder loans and interest 222,395 724,556
Advance deposits 761 155,000
--------------------------------
TOTAL CURRENT LIABILITIES 5,054,131 2,354,088
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 50,000,000 shares authorized,
10,740,000 and 10,140,000 shares issued and outstanding,
respectively 107,400 101,400
Stock subscription receivable (150,000) (150,000)
Additional paid-in capital 20,577,566 17,085,475
Accumulated deficit (5,475,602) (6,488,366)
Unrealized loss on investments available for sale (59,786) --
Cumulative translation adjustment 106,660 56,301
--------------------------------
TOTAL STOCKHOLDERS' EQUITY 15,106,238 10,604,810
--------------------------------
$ 20,160,369 $ 12,958,898
- - ----------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
24
<PAGE>
MVSI, INC., AND SUBSIDIARIES
Consolidated Statements of Operations
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, 1996 1995
- - ------------------------------------------------------------------------------------------
<S> <C> <C>
SALES $ 15,987,636 $ 2,337,797
COST OF SALES 12,484,237 1,506,908
--------------------------------
GROSS PROFIT 3,503,399 830,889
EXPENSES
Selling 853,577 485,995
Administrative 2,532,337 1,115,295
Research and development, net of tax credits 116,176 1,186,052
Depreciation and amortization 197,814 20,838
--------------------------------
3,699,904 2,808,180
--------------------------------
LOSS FROM OPERATIONS (196,505) (1,977,291)
INTEREST INCOME 540,345 51,120
INTEREST AND FINANCING CHARGES (117,506) (55,282)
INTEREST EXPENSE FROM BRIDGE FINANCING -- (3,500,000)
--------------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES 226,334 (5,481,453)
INCOME TAX (BENEFIT) PROVISION
Current -- --
Deferred (786,430) --
--------------------------------
(786,430) --
--------------------------------
NET EARNINGS (LOSS) $ 1,012,764 $ (5,481,453)
- - -------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE
Primary $ 0.11 $ (1.10)
- - -------------------------------------------------------------------------------------------
Fully diluted $ 0.09 $ (1.10)
- - -------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
25
<PAGE>
MVSI, INC., AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30, 1996 AND 1995
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK STOCK ADDITIONAL
-------------------------- SUBSCRIPTION PAID-IN ACCUMULATED
SHARES AMOUNT RECEIVABLE CAPITAL (DEFICIT)
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1994 3,600,000 $ 36,000 $ -- 1,236,252 $ (1,006,913)
NET LOSS -- -- -- -- (5,481,453)
INITIAL PUBLIC OFFERING OF COMMON STOCK,
NET OF OFFERING COSTS 4,140,000 41,400 -- 11,673,223 --
PRIVATE PLACEMENT TRANSACTIONS 2,400,000 24,000 (150,000) 676,000 --
ADDITIONAL CAPITAL ASSOCIATED WITH INTEREST FROM
ISSUANCE OF BRIDGE UNITS -- -- -- 3,500,000 --
CHANGE IN CUMULATIVE TRANSLATION ADJUSTMENT -- -- -- -- --
---------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1995 10,140,000 101,400 (150,000) 17,085,475 (6,488,366)
ACQUISITION--JMR DISTRIBUTORS 100,000 1,000 -- 508,161 --
ACQUISITION--SOCRATES, INC. 350,000 3,500 -- 2,385,250 --
NET EARNINGS -- -- -- -- 1,012,764
WARRANT PURCHASE -- -- -- 180 --
PRIVATE PLACEMENT TRANSACTIONS 150,000 1,500 -- 598,500 --
CHANGE IN CUMULATIVE TRANSLATION ADJUSTMENT -- -- -- -- --
UNREALIZED GAIN (LOSS) FROM INVESTMENTS -- -- -- -- --
---------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1996 10,740,000 $ 107,400 $ (150,000) $ 20,577,566 $ (5,475,602)
- - -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED CUMULATIVE
GAIN (LOSS) ON TRANSLATION
INVESTMENTS ADJUSTMENT TOTAL
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE, OCTOBER 1, 1994 $ -- $ 106,443 $ 371,782
NET LOSS -- -- (5,481,453)
INITIAL PUBLIC OFFERING OF COMMON STOCK,
NET OF OFFERING COSTS -- -- 11,714,623
PRIVATE PLACEMENT TRANSACTIONS -- -- 550,000
ADDITIONAL CAPITAL ASSOCIATED WITH INTEREST FROM
ISSUANCE OF BRIDGE UNITS -- -- 3,500,000
CHANGE IN CUMULATIVE TRANSLATION ADJUSTMENT -- (50,142) (50,142)
---------------------------------------------
BALANCE, SEPTEMBER 30, 1995 -- 56,301 10,604,810
ACQUISITION--JMR DISTRIBUTORS -- -- 510,161
ACQUISITION--SOCRATES, INC. -- -- 2,388,750
NET EARNINGS -- -- 1,012,764
WARRANT PURCHASE -- -- 180
PRIVATE PLACEMENT TRANSACTIONS -- -- 600,000
CHANGE IN CUMULATIVE TRANSLATION ADJUSTMENT -- 50,359 50,359
UNREALIZED GAIN (LOSS) FROM INVESTMENTS (59,786) -- (59,786)
---------------------------------------------
BALANCE, SEPTEMBER 30, 1996 $ (59,786) $ 106,660 $ 15,106,238
- - -------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
MVSI, INC., AND SUBSIDIARIES
Consolidated Statements of Cash Flows
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, 1996 1995
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $1,012,764 $(5,481,453)
------------------------------
Adjustments to reconcile net income (loss) to net cash
from operating activities
Non-cash interest expense from bridge units -- 3,500,000
Deferred income taxes (786,430) --
Depreciation and amortization 197,814 36,259
(Gain) loss on foreign exchange (50,359) 86,291
Unrealized loss on investments 59,786 7,999
Changes in operating assets and liabilities, net of
effects of acquisitions
(Increase) in accounts receivable (1,112,781) (413,892)
(Increase) in inventory (1,526,431) (327,280)
(Increase decrease in tax credits and income taxes
receivable (95,952) 345,172
(Increase) in prepaid expenses (115,414) (206,164)
Decrease (increase) in other assets (16,964) 2,993
(Decrease) in advance deposits (150,854) (19,717)
Increase (decrease) in accounts payable and accrued
liabilities (894,482) 702,425
----------- -----------
NET CASH (USED IN) OPERATING ACTIVITIES (3,479,303) (1,767,367)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment purchases -- (8,009,303)
Borrowings on margin against investments 2,120,102 --
Property, plant and equipment purchases (223,857) (425,735)
Capitalized software costs (892,687) --
Loan to acquired company and other (300,000) (200,000)
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 703,558 (8,635,038)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in line of credit 609,374 (7,517)
Proceeds from shareholder loans -- 1,079,594
Payment of shareholder loans (497,269) (500,000)
Payment of debt (19,725) (31,214)
Proceeds from issuance of bridge notes payable -- 500,000
Proceeds from issuance of common stock 600,000 12,421,221
Proceeds from issuance of warrants 180 --
Initial public offering costs -- (587,132)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES
692,560 12,874,952
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 54,039 (124,090)
----------- -----------
NET (DECREASE) INCREASE IN CASH (2,029,146) 2,348,457
CASH (CASH OVERDRAFT) AT BEGINNING OF YEAR 2,343,036 (5,421)
----------- -----------
CASH AT END OF YEAR $ 313,890 $ 2,343,036
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES:
INCOME TAXES PAID $ -- $ --
----------- -----------
----------- -----------
INTEREST PAID $ 80,220 $ 55,282
----------- -----------
----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
27
<PAGE>
MVSI, INC., AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1996 AND 1995
- - --------------------------------------------------------------------------------
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND REORGANIZATION
The accompanying consolidated financial statements include the accounts of
MVSI, Inc. (a Delaware corporation), and its three wholly owned
subsidiaries, MVS Modular Vision Systems, Inc. (MVS-Canada), a Montreal,
Quebec-based corporation engaged in the design and manufacture of
proprietary machine vision products and systems; Socrates, Inc. (Socrates),
a Gaithersburg, Maryland-based corporation, which integrates, installs and
supports high-end computer and communication equipment; and JMR
Distributors, Inc. (JMR), a Lorton, Virginia-based corporation specializing
in the purchase and sale of computer memory chips and network equipment
(collectively referred to as the "Company"). Significant intercompany
accounts and transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Sales are recognized upon shipment of a finished product when title to the
product transfers to the customer. Typical terms of sale do not provide
the customer with the right of return except for defective products, which
are covered by the Company's warranty. Revenue billed in advance of
customer acceptance is deferred until such time as acceptance occurs.
Amounts received from customers prior to shipment are recorded as deposit
liabilities.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and money market accounts.
INVESTMENTS
Investments consist of short-term U.S. treasury notes, net of margin
loans of $2,463,875, which bear interest at 7 1/2%. In accordance with
Statement of Financial Accounting Standards No. 115, the Company has
classified these investments as available for sale, and recorded the
investments at market value at September 30, 1996 and 1995. The Company
has not realized any proceeds from the sale of securities during the years
ended September 30, 1996 and 1995. The unrealized loss from investments
available for sale was $59,786 for the year ended September 30, 1996.
Investment market value approximates cost at September 30, 1996.
ACCOUNTS RECEIVABLE
Accounts receivable are stated at the unpaid balances, less allowance on
collectible accounts. Management periodically reviews its outstanding
accounts receivable to assess collectibility of balances based on past
experience and evaluation of current adverse situations which may affect
collectibility of receivables. As of September 30, 1996 and 1995,
management has established an allowance for doubtful accounts of
approximately $140,000 and $-0-.
28
<PAGE>
MVSI, INC., AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1996 AND 1995
- - --------------------------------------------------------------------------------
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
INVENTORY VALUATION
Inventory is valued at the lower of cost and market. Cost is determined on
a first-in, first-out (FIFO) basis.
Management evaluates obsolete and slow-moving inventory at each reporting
date and excludes such inventory from the valuation. No reserve to record
inventory at lower of cost or market was deemed necessary at September 30,
1996 and 1995. The value of inventories written off because of
obsolescence or slow movement has not been material to date.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost, net of an allowance for
accumulated depreciation and amortization. Depreciation is computed on
equipment and furniture, principally using the double-declining balance
method over estimated lives ranging from five to seven years.
Demonstration and research equipment is depreciated on a straight-line
basis over a four-year period. Leasehold improvements are amortized on a
straight-line basis over the shorter of the lease term or estimated useful
lives of the related assets.
CAPITALIZED SOFTWARE COSTS
Beginning in fiscal year 1995, certain software development costs not
reimbursed by the Canadian government have been capitalized. Software
development costs incurred subsequent to achievement of technological
feasibility, and not reimbursed by the Canadian government, were not
material in previous years. Technological feasibility occurs when the
Company has completed all planning and testing activities necessary to
establish that the product can be produced to meet its design
specifications including functions, features and technological performance
requirements. No amortization has been recorded in the accompanying
financial statements pending release of the associated products.
Management believes that these products will be available for sale during
fiscal year 1997. When these products are ready for sale, the Company's
policy will be to amortize capitalized software costs by the greater of (a)
the ratio the current gross revenue for a product bear to the total current
and anticipated future gross revenue for that product or (b) the
straight-line method over the remaining economic life of the product
including the period being reported on. It is reasonably possible that
those estimates of anticipated future gross revenue, the remaining
estimated economic life of the product, or both will be reduced
significantly in the near term. As a result, the carrying amount of the
capitalized software costs may be reduced materially in the near term.
GOODWILL
Goodwill represents the excess of cost over the fair value of net assets
acquired in business combinations accounted for as purchases. Goodwill is
being amortized on the straight-line method over ten years. Amortization
expense charged to operations for 1996 was $107,939. No goodwill existed
prior to 1996.
29
<PAGE>
MVSI, INC., AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1996 AND 1995
- - --------------------------------------------------------------------------------
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Through
October 31, 1994, tax credits received or due from the Canadian government
for research and development costs incurred have been offset against these
expenditures and included as a receivable in the accompanying balance
sheet, as such amounts are currently refundable in cash in the year
following the year in which they are incurred. Effective November 1, 1994,
the date of the acquisition disclosed in Note A, the rate used in computing
such tax credits decreased. Prior to the acquisition, the Company
qualified for tax credits equal to 35% of qualified research and
development salaries from the Canadian federal government and 40% of
research and development salaries from the Province of Quebec.
Substantially all such credits were refundable currently from each
government upon the submission of tax credit filings. Effective
November 1, 1994, the rate applied in computing tax credits for Canadian
federal government purposes is 20%, and the resulting tax credit can be
realized only as an offset to future taxes payable from income generated in
Canada. Tax credits can be carried forward up to ten years from the date
generated. In addition, the rate applied in computing the Quebec tax
credit is 20%, effective November 1, 1994, although the Quebec tax credits
continue to be refundable currently. Equipment used in research and
development activities which has alternative future uses is capitalized and
depreciated.
INCOME TAXES
The Company has net operating loss carryforwards and tax credit
carryforwards to offset future taxable income and taxes payable. Although
the Company, has recognized income before income taxes through September
30, 1996, this has not resulted in the recognition of income tax expense
due to the existence of available net operating loss carryforwards.
Deferred taxes are recognized, subject to a valuation allowance, for
temporary differences in the timing of recognition of certain income and
expenses.
EARNINGS PER SHARE
Earnings per share (EPS), both primary and fully diluted, are computed
based on the weighted average number of shares actually outstanding plus
the shares that would be outstanding assuming conversion, at the beginning
of the year, of the Company's Class A and Class B warrants which are
considered to be common stock equivalents. Using the modified treasury
stock method, the number of shares that would be issued from the assumed
exercise of the warrants has been reduced by the number of shares that
could have been purchased from the proceeds, at the average market price
(primary EPS) and at the closing market price (fully diluted EPS) of the
Company's stock for the year ended September 30, 1996, subject to a 20%
limitation.
Once the proceeds have been applied to purchase common stock up to 20% of
the outstanding common stock, the balance of the proceeds is assumed to be
invested in government securities. Accordingly, net earnings (for both
primary and fully diluted EPS) have been adjusted for interest revenue,
net of taxes from the assumed purchase of government securities with the
excess proceeds. The weighted average number of common and common
equivalent shares used in the primary and fully diluted EPS computations
was 14,728,603 for the year ended September 30, 1996. Primary and fully
diluted earnings per share amounts had not been shown previously for the
year ended September 30, 1995, because they were anti-dilutive. Earnings
per share for the year ended September 30, 1995, was based on 5,000,833
weighted average shares outstanding.
30
<PAGE>
MVSI, INC., AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1996 AND 1995
- - --------------------------------------------------------------------------------
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
USING ESTIMATES IN PREPARING FINANCIAL STATEMENTS
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and revenue and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate the value:
The carrying amount approximates fair value for cash and cash equivalents,
accounts receivable, notes receivable, accounts payable, line of credit and
other accrued liabilities.
Investment securities classified as current assets are based on quoted
market price.
TRANSLATION OF FOREIGN CURRENCY AND CONCENTRATION OF CREDIT RISK
A portion of the Company's operations are transacted in
Canadian dollars. The balance sheet of Canadian operations is translated
into U.S. dollars at the year-end rate of exchange, and all statement of
operations items are translated at the weighted average exchange rates for
the year. The resulting translation adjustments are made directly to a
separate component of stockholders' equity.
The Company's customers are not concentrated in any specific geographic
region. As a matter of policy, the Company requires its larger customers
to furnish letters of credit (and in some instances, advance deposits) to
minimize credit risk to the Company after shipment of the products. For
other customers, the Company reviews a customer's credit history before
extending credit.
- - --------------------------------------------------------------------------------
NOTE B--ACQUISITIONS
On October 12, 1995, MVSI, Inc., acquired all the outstanding stock of JMR,
effective October 1, 1995, whereby MVSI, Inc., exchanged 100,000 restricted
shares of MVSI, Inc., common stock for all outstanding shares of JMR. In
addition, MVSI, Inc., loaned JMR $200,000 to fund compensation due to an
officer/stockholder of JMR for services rendered prior to the acquisition.
The acquisition of JMR was accounted for as a purchase. The results of
operations of JMR are included in the accompanying financial statements
since the date of acquisition. The cost in excess of the fair value of net
assets acquired (goodwill) of approximately $450,000 will be amortized
using an estimated life of ten years.
31
<PAGE>
MVSI, INC., AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1996 AND 1995
- - --------------------------------------------------------------------------------
NOTE B--ACQUISITIONS--CONTINUED
The Company acquired Socrates, effective July 1, 1996. MVSI exchanged
350,000 shares of its restricted common stock for all the shares of common
stock held by Socrates' stockholder. The acquisition of Socrates was
accounted for as a purchase. The cost in excess of the fair value of net
assets acquired (goodwill) of approximately $2,323,000 will be amortized
using an estimated life of ten years. The results of operations of Socrates
are included in the accompanying financial statements since the date of
acquisition.
Following is a pro forma consolidated income statement for the years
ended September 30, 1996 and 1995, reflecting the acquisitions as if they
were consummated on October 1, 1994, accounted for as a purchase business
combination. The pro forma information is not necessarily indicative of
the financial position which would have resulted had the acquisitions
occurred on October 1, 1994. The pro forma information should be read in
conjunction with these historical financial statements.
32
<PAGE>
MVSI, INC., AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1996 AND 1995
- - --------------------------------------------------------------------------------
NOTE B--ACQUISITIONS--CONTINUED
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED SEPTEMBER 30, 1996
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
- - ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 15,987,638 $ 9,376,121 $ 25,363,757
Cost of sales 12,484,237 8,430,373 20,914,610
--------------------------------------------
Gross profit 3,503,399 945,748 4,449,147
Operating expenses* 3,699,904 1,269,587 4,969,491
--------------------------------------------
Loss from operations (196,505) (323,839) (520,344)
Interest and financing charges (422,839) -- (422,839)
--------------------------------------------
Income (loss) before taxes 226,334 (323,839) (97,505)
Income tax provision (benefit) (786,430) (372,000) (1,158,430)
--------------------------------------------
Net income (loss) $ 1,012,764 $ 48,161 $ 1,060,925
--------------------------------------------
Net (loss) income per share $ 0.11 $ -- $ 0.11
--------------------------------------------
</TABLE>
* The pro forma adjustments reflect the operations of each company acquired,
adjusted for goodwill amortization. These operations include a non-recurring
$600,000 bonus payment to a stockholder.
33
<PAGE>
MVSI, INC., AND SUBSIDIARY
Notes to Consolidated Financial Statements--Continued
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1996 AND 1995
- - --------------------------------------------------------------------------------
NOTE B--ACQUISITIONS--CONTINUED
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED SEPTEMBER 30, 1995
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 2,337,797 $ 17,554,705 $ 19,892,502
Cost of sales 1,506,908 15,834,757 17,341,665
--------------------------------------------
Gross profit 830,889 1,719,948 2,550,837
Operating expenses 2,808,180 1,728,184 4,536,364
--------------------------------------------
(Loss) from operations (1,977,291) (8,236) (1,985,527)
Interest and financing charges (3,504,162) (22,730) (3,526,892)
--------------------------------------------
Loss before taxes (5,481,453) (30,966) (5,512,419)
Income tax provision -- -- --
--------------------------------------------
Net loss $ (5,481,453) $ (30,966) $ (5,512,419)
--------------------------------------------
Net loss per share $ (1.10) $ -- $ (1.10)
--------------------------------------------
</TABLE>
- - --------------------------------------------------------------------------------
NOTE C--SIGNIFICANT TRANSACTIONS
PRIVATE PLACEMENT TRANSACTIONS
In November 1994, the Company issued 400,000 shares of common stock to one
nonaffiliated person in a private placement transaction for aggregate
consideration of $200,000, represented by one promissory note, and for
legal services rendered valued at $50,000. The securities are pledged as
collateral for the payment of the note.
In January 1995, in a transaction arranged by the underwriter of the
Company's initial public offering, the Company issued 1,000,000 shares of
common stock to six nonaffiliated persons in a private placement
transaction for aggregate consideration of $500,000 or $.50 per share.
34
<PAGE>
MVSI, INC., AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1996 AND 1995
- - --------------------------------------------------------------------------------
NOTE C--SIGNIFICANT TRANSACTIONS--CONTINUED
Also in January 1995, the Company borrowed $500,000 in a bridge loan
from six nonaffiliated persons (lenders) at the rate of 8% simple annual
interest, which was repaid at the closing of the initial public offering
of the Company's securities. In further consideration of the bridge
loan, the Company issued 1,000,000 shares of common stock, 1,000,000
Class A warrants and 1,000,000 Class B warrants to the lenders. The
shares of common stock and Class A warrants issued to the lenders were
registered in the initial public offering. The Class A warrants issued
to the lenders are identical to the Class A warrants included in the
units offered by the Company. The Class B warrants, which were not
registered in the offering, are identical to the Class A warrants
included in the units being offered by the Company, except that the
exercise price is $4.20. The registered securities held by the
lenders may be sold commencing 13 months from the date of the
prospectus, subject to earlier release at the sole discretion of the
representative, and such securities include a legend with such
restrictions. The Company believes, to the best of its knowledge, that
the registered securities held by the lenders were released by said
representive and were sold after the date of the Prospectus and are
reflected in the Company's number of outstanding shares as of September
30, 1996. Interest expense related to the issuance of these securities
of $3,500,000 was charged to the statement of operations for the year
ended September 30, 1995, with a corresponding credit to paid-in
capital.
In June 1996, the Company issued 150,000 shares of restricted common stock
to two accredited and nonaffiliated persons in a private placement
transaction for aggregate consideration of $600,000, or $4.00 per share.
INITIAL PUBLIC OFFERING
On August 15, 1995, the Company completed an initial public offering of
2,070,000 units at a price of $7.00 per share. Each unit consists of two
shares of common stock and two redeemable Class A warrants. Each Class A
warrant entitles the holder to purchase one share of common stock at $4.00
per share during the four-year period commencing August 15, 1996. In
addition, the underwriter exercised the over-allotment option provided in
the underwriting agreement, resulting in total outstanding shares following
the offering of 10,140,000.
Accounting, legal and other costs incurred in connection with the offering
were capitalized and deferred until completion of the offering, at which
time the costs were charged against additional paid-in capital.
- - --------------------------------------------------------------------------------
NOTE D--FOURTH QUARTER ADJUSTMENTS
The Company's fourth quarter 1996 operations were negatively impacted by
charges incurred in restructuring the Company's Canadian operations.
Management determined the organizational restructuring to be necessary in
order for the Company to further strengthen its position in the worldwide
market of laser-based machine vision products, and to ensure continued
profitability in the future. The restructuring included the hiring of a
new management team in operations, finance, and sales and marketing, and
the implementation of a revised business plan. Management's objective is
to improve product quality, expand product lines, increase sales and
marketing efforts, and revise existing cost structures. The Company
believes these efforts will further enhance the Company's state-of-the-art
proprietary laser technology, and allow the Company to better capitalize on
the rapidly growing machine vision market.
35
<PAGE>
MVSI, INC., AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1996 AND 1995
- - --------------------------------------------------------------------------------
NOTE D--FOURTH QUARTER ADJUSTMENTS--CONTINUED
The impact of the changes incurred, in addition to certain fourth-quarter
adjustments made to establish an accounts receivable reserve and
write-off non-recoverable travel and installation costs, can be seen in
the accompanying statement of operations as an increase in operating
expenses and a sizable reduction in sales growth during the quarter.
The effect of these items was to reduce net income for the fourth quarter
by approximately $650,000 ($0.05 per share).
- - --------------------------------------------------------------------------------
NOTE E--INVENTORY
Inventory consists of the following at September 30:
1996 1995
---------------------------------------------------------------------------
Raw materials $ 623,415 $ 442,409
Work in progress 595,224 130,105
Finished goods 1,393,900 124,092
-------------------------------------
$ 2,612,539 $ 696,606
-------------------------------------
- - --------------------------------------------------------------------------------
NOTE F--PROPERTY AND EQUIPMENT
Property, plant and equipment consist of the following at September 30:
1996 1995
---------------------------------------------------------------------------
Autos and trucks $ 52,372 $ --
Furniture and office equipment 277,834 36,731
Manufacturing equipment 9,850 8,273
Research and development equipment 239,012 231,913
Purchased software 43,270 2,880
Leasehold improvements 23,340 6,155
---------------------------------
645,678 285,952
Less accumulated depreciation (262,160) (111,501)
---------------------------------
$ 383,518 $ 174,451
---------------------------------
36
<PAGE>
MVSI, INC., AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1996 AND 1995
- - --------------------------------------------------------------------------------
NOTE G--LINE OF CREDIT
The Company maintains a $365,000 line of credit with a Canadian bank to
support the short-term cash needs of the Company's Canadian operations.
Borrowings bear interest at the bank's prime rate plus 2% (prime was 5.75%
at September 30, 1996). At September 30, 1996 and 1995, borrowings
outstanding on the line of credit amounted to $275,735 and $150,342,
respectively. The line of credit is collateralized by all present and
future accounts receivable and inventory of the Company's Canadian
subsidiary. Under terms of the line-of-credit agreement, which is subject
to annual review, the Company must also comply with certain financial and
reporting covenants. As of September 30, 1996, the Company was in
compliance with these covenants.
The Company also maintains a credit agreement with a local Finance Company
for inventory financing for one of its subsidiaries. The agreement provides
the Company with the ability to pay certain inventory balances (purchases)
in scheduled interest-free installments. Borrowings outstanding under
the agreement, at September 30, 1996, amounted to $824,238. The agreement
is subject to annual renewal and is collateralized by all present and
future accounts receivable and inventory of the Company's subsidiary.
The Company must also comply with certain financial and reporting
covenants. As of September 30, 1996, the Company was in compliance with
these covenants.
- - --------------------------------------------------------------------------------
NOTE H--ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following at
September 30:
1996 1995
---------------------------------------------------------------------------
Vendor trade payables $ 1,942,283 $ 589,576
Salaries and commissions payable 1,331,134 483,670
Other accrued liabilities 457,585 238,810
-----------------------------------
$ 3,731,002 $ 1,312,056
-----------------------------------
37
<PAGE>
MVSI, INC., AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1996 AND 1995
- - --------------------------------------------------------------------------------
NOTE I--INCOME TAXES
The income tax (benefit) provision consists of the following at September 30:
1996 1995
---------------------------------------------------------------------------
Current
United States $ -- $ --
Foreign -- --
--------------------------------
-- --
Deferred
United States 77,085 (1,454,000)
Foreign (183,201) (243,000)
--------------------------------
(106,116) (1,697,000)
Valuation allowance--deferred tax
asset (680,314) 1,697,000
--------------------------------
Net provision $ (786,430) $ --
--------------------------------
The effective tax rates for the years ended September 30, 1996 and 1995,
were -0-%. Reconciliations between the U.S. federal statutory rate and the
effective tax rates follow as of September 30:
1996 1995
---------------------------------------------------------------------------
Tax (benefit) at U.S. federal
statutory rates $ 76,954 $ (1,863,694)
Increase (decrease) resulting from:
State tax (benefit) -- (255,436)
Foreign income (loss) impact of
taxation at different rates (4,365) 404,330
Valuation allowance against
deferred tax asset (680,314) 1,697,000
Other permanent differences (178,705) 17,800
--------------------------------
Income tax provision $ (786,430) $ --
--------------------------------
38
<PAGE>
MVSI, INC., AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1996 AND 1995
- - --------------------------------------------------------------------------------
NOTE I--INCOME TAXES--CONTINUED
The tax effect of temporary differences between the financial statement
amounts and tax bases of assets and liabilities which give rise to a
deferred tax asset are as follows at September 30:
1996 1995
---------------------------------------------------------------------------
Research and development tax credits $ 766,864 $ 700,000
Net operating losses and unclaimed
R&D expenses 2,515,060 2,384,684
Accrued bonus payable 232,200 --
Other (54,017) (2,693)
Valuation allowance (2,301,677) (3,081,991)
--------------------------------
Net deferred tax asset $ 1,158,430 $ --
--------------------------------
The Company has net operating loss carryforwards available to offset future
taxable income generated in Canada totaling approximately $730,000 at
September 30, 1996, expiring in 2010. In addition, the Company has net
operating loss carryforwards available to offset U.S. taxable income of
approximately $1,761,000 at September 30, 1996, expiring in 2011. In the
event a change of control occurs in the future, use of all or a portion of
U.S. carryforwards could be affected.
As of September 30, 1995, the Company had established a 100% valuation
allowance against the tax benefits relating to these carryforwards because
of the uncertain realizability of the tax benefits. In the third and
fourth quarters of fiscal year 1996, management re-evaluated the valuation
allowance, resulting in the recording of a deferred tax asset (benefit) of
$224,265 in the third quarter and $562,165 in the fourth quarter. In
connection with the acquisition of Socrates, Inc., a $372,000 deferred tax
asset (benefit) was recorded as a reduction of goodwill. Factors
considered by the Company in the re-evaluation included the Company's
year-to-date earnings, exclusive of non-recurring expenses and
adjustments, as well as anticipated future earnings based on
increased product demand, primarily attributable to the awarding of
significant new contracts and orders which will be completed in fiscal year
1997. After recording the deferred tax asset (benefit), the Company
continues to carry a valuation allowance approximating 67% of the
deferred tax assets. The Company will review the valuation allowance
quarterly to determine the future realizability of the deferred tax
assets.
- - --------------------------------------------------------------------------------
NOTE J--STOCK WARRANTS
At September 30, 1996, the Company has outstanding, 5,140,000 Class A
Warrants and 1,000,000 Class B Warrants to purchase common stock. The
Class A Warrants and Class B Warrants are exercisable at $4.00 and $4.20,
respectively, and expire in the year 2000.
39
<PAGE>
MVSI, INC., AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1996 AND 1995
- - --------------------------------------------------------------------------------
NOTE K--COMMITMENTS AND CONTINGENT LIABILITIES
LEASES
The minimum rental payments payable under a long-term lease for premises,
exclusive of certain operating costs determined annually, and for the lease
of equipment at September 30, 1996, are approximately as follows:
YEAR ENDING SEPTEMBER 30,
---------------------------------------------------------------------------
1997 $ 160,821
1998 147,920
1999 119,085
2000 74,916
2001 18,866
-------------------
$ 521,608
-------------------
EMPLOYMENT AGREEMENTS
40
<PAGE>
MVSI, INC., AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1996 AND 1995
- - --------------------------------------------------------------------------------
NOTE K--COMMITMENTS AND CONTINGENT LIABILITIES--CONTINUED
The Company has entered into separate employment agreements with three of
its officers, which are subject to certain termination rights by both the
Company and the officers. In addition to minimum salary and bonus
commitments by the Company, these officers are eligible to receive all
employee benefits which may from time to time be awarded or be made
available. During the fourth quarter, one of the officers gave notice of
resignation in accordance with the terms of his employment agreement.
This officer has resigned from his position as a director of the Company
but will remain with the Company on a consulting basis. Another officer
retains his employment agreement while negotiations continue to convert it
to a consulting agreement. This officer remains an officer and director
of the Company.
LEGAL MATTERS
In the ordinary course of conducting business, the Company is subject,
from time to time, to certain legal proceedings concerning the Company's
business. Management does not believe that any current legal
proceedings will have a material impact on the Company's business or its
financial statements.
LOANS FROM STOCKHOLDERS
From July 1994 through August 1995, the Company borrowed funds from a
stockholder. Such loans bear interest at 9% and are due on demand. At
September 30, 1996 and 1995, loans and accrued interest outstanding totaled
$222,395 and $724,556, respectively.
OTHER TRANSACTIONS
A certain director who is a stockholder was paid consulting fees totaling
$100,000 and $50,000 in fiscal years 1995 and 1994, respectively. In 1996
and 1995, the Company paid $161,000 and $100,000, respectively, in legal
fees to an attorney who is also a stockholder of the Company.
- - --------------------------------------------------------------------------------
NOTE L--SEGMENT INFORMATION
For purposes of segment reporting for the year ended September 30, 1996,
management considers the Company to operate in two industry segments; the
machine vision industry and the computer distribution and reseller
industry. For the year ended September 30, 1995, management considered the
Company to operate in only one segment, the machine vision industry.
For the year ended September 30, 1996, the Company had one customer which
accounted for approximately 10 percent of its total revenue. For the year
ended September 30, 1995, the Company derived 40% of its sales from three
customers. In addition, approximately, 19% and 67% of the Company's sales
in fiscal years 1996 and 1995, respectively, were to customers outside
North America.
41
<PAGE>
MVSI, INC., AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1996 AND 1995
- - --------------------------------------------------------------------------------
NOTE L--SEGMENT INFORMATION--CONTINUED
Financial information relating to
the Company's industry segments for
the years ended September 30, 1996
and 1995, is as follows:
<TABLE>
<CAPTION>
1996
----------------------------------------------------------------------
COMPUTER
DISTRIBUTION
MACHINE AND RESELLER GENERAL
VISION SEGMENT SEGMENT CORPORATE TOTAL
--------------------------------------------------------------------------------------------------
Sales to unaffiliated
customers $ 4,566,341 $ 11,421,295 $ -- $ 15,987,636
Operating profit (loss) 498,648 380,965 (1,076,118) (196,505)
Net income 555,094 215,609 242,061 1,012,764
Identifiable assets 5,670,201 7,439,956 7,050,212 20,160,369
1995
----------------------------------------------------------------------
COMPUTER
DISTRIBUTION
MACHINE AND RESELLER GENERAL
VISION SEGMENT SEGMENT CORPORATE TOTAL
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 2,337,797 $ -- $ -- $ 2,337,797
Operating profit (loss) (1,609,534) -- (367,757) (1,977,291)
Net income (1,722,482) -- (3,758,971) (5,481,453)
Identifiable assets 2,189,281 -- 10,769,617 12,958,898
</TABLE>
The following is a breakdown of the Company's sales by geographic region
for the years ended September 30, 1996 and 1995:
SALES TO UNAFFILIATED CUSTOMERS:
1996 1995
---------------------------------------------------------------------------
North America* $ 12,970,563 $ 1,094,025
Far East 1,810,054 974,141
Europe 1,207,019 269,631
--------------------------------
$ 15,987,636 $ 2,337,797
--------------------------------
* principally the United States
42
<PAGE>
MVSI, INC., AND SUBSIDIARIES
Notes to Consolidated Financial Statements--Continued
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SEPTEMBER 30, 1996 AND 1995
- - --------------------------------------------------------------------------------
NOTE M--SUBSEQUENT EVENTS
ACQUISITION OF e-NET, INC.
On October 16, 1996, the Company signed an agreement with e-Net, Inc.
(e-Net), under which MVSI intends to acquire e-Net, as a wholly owned
subsidiary of MVSI, subject to obtaining a fairness opinion and the
ratification by a majority of MVSI shareholders at a 1997 shareholders
meeting. Under the agreement, the Company has the right to waive
obtaining a fairness opinion and ratification by the shareholders, if so
decided by its board of directors. e-Net, a development stage Washington,
D.C., area-based telecommunications company, produces proprietary
telecommunications products and software which allow individuals and
organizations to execute secure, private voice communications across the
Internet and intranets, through the use of authentication technology, for
local, national and international telephone communications, information
exchange and commerce.
Among the principal terms and conditions of the proposed acquisition, the
Company intends to exchange, on a proposed tax-free basis, 4,000,000 shares
of its common stock, for all e-Net's 8,000,000 shares of common stock. In
addition, e-Net's 2,000,000 Class A Warrants and 2,000,000 Class B Warrants
may be exercisable into a total of 2,000,000 shares of the Company's common
stock. The newly issued MVSI securities in the acquisition may not be sold
for a 24-month period. The chairman and chief executive officer of MVSI
is a principal stockholder and warrantholder of e-Net; a director of MVSI
is also a director and a stockholder of e-Net. Subject to
consummation of the acquisition, which requires satisfaction
of the aforementioned conditions precedent, MVSI intends provide at least
$5.3 million to e-Net over a 24-month period ending in September 1998 in
order to finance its business operations. The acquisition agreement
contains terms and other conditions which are customary and usual to
such acquisitions. As of September 30, 1996, MVSI has provided e-Net
$500,000 in working capital (see notes receivable in accompanying balance
sheet) and has on November 1, 1996, provided e-Net an
additional $500,000 in working capital, pursuant to a promissory note.
Terms of the promissory note include the payment of interest at 9% per
annum and repayment due no later than September 6, 1997. Management
intends to collect such amounts when due.
The Company received a letter, dated December 23, 1996, from
outside legal counsel to e-NET, Inc. (the "December 23, 1996
Letter"). The December 23, 1996 Letter, which was written on behalf
of e-NET, Inc., alleges that the Company has breached certain
provisions of the October 16, 1996 Acquisition Agreement by and
among the Company, e-NET, Inc. and e-NET, Inc.'s shareholders (the
"Acquisition Agreement"). The December 23, 1996 Letter demands that
the Company cure the alleged breaches of the Acquisition Agreement
within any applicable cure period and states that the failure to do
so will allow e-NET, Inc. to unilaterally terminate the Acquisition
Agreement in accordance with its terms. The Company believes that it
is not in breach of any provision of the Acquisition Agreement and that
all of the allegations of breach of the Acquisition Agreement by the
Company in the December 23, 1996 Letter are without merit. The Company is
preparing a written response to the December 23, 1996 Letter and intends to
request a meeting with e-NET, Inc.'s management in early January, 1997 to
seek to resolve any disputes over the Acquisition Agreement. As of
the date of this report, the Company is unable to determine the
effects of this recent development on the consummation of the
transactions contemplated by the Acquisition Agreement.
43
<PAGE>
MVSI, INC. AND SUBSIDIARIES EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The following lists all subsidiaries of MVSI, Inc. as required by Exhibit 21.
Name State/Country of Incorporation
- - ----------------------------------- ----------------------------------------
1. MVS Modular Vision Systems, Inc. Quebec, Canada
2. JMR Distributors, Inc. Virginia
3. Socrates, Inc. Maryland
<PAGE>
EXHIBIT 23
MVSI, INC. AND SUBSIDIARIES
Consent of Independent Certified Public Accountants [LOGO]
We have issued our reports dated November 22, 1996, accompanying the
consolidated financial statements incorporated by reference or included in
the Annual Report of MVSI, Inc., on Form 10-KSB for the year ended September
30, 1996. We hereby consent to the incorporation by reference of said reports
in the Registration Statements of MVSI, Inc., on Form S-3 (File No. 33-89194,
effective October 11, 1996).
Grant Thornton LLP
Vienna, Virginia
December 30, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF
OPERATIONS FROM THE COMPANY'S FORM 10-KSB FOR THE YEAR ENDED
SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 313,890
<SECURITIES> 5,881,202
<RECEIVABLES> 5,195,259
<ALLOWANCES> 140,000
<INVENTORY> 2,612,539
<CURRENT-ASSETS> 14,616,909
<PP&E> 645,678
<DEPRECIATION> 262,160
<TOTAL-ASSETS> 20,160,369
<CURRENT-LIABILITIES> 5,054,131
<BONDS> 0
0
0
<COMMON> 107,400
<OTHER-SE> 14,998,838
<TOTAL-LIABILITY-AND-EQUITY> 20,160,369
<SALES> 15,987,636
<TOTAL-REVENUES> 15,987,636
<CGS> 12,484,237
<TOTAL-COSTS> 12,484,237
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 115,000
<INTEREST-EXPENSE> (422,839)
<INCOME-PRETAX> 226,334
<INCOME-TAX> (786,430)
<INCOME-CONTINUING> 1,012,764
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,012,764
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.09
</TABLE>
