U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: Commission file number:
December 31, 1997 0-26614
___________
MVSI, INC.
(Exact Name of Registrant as Specified 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)
___________
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 requirements for past 90 days.
Yes [x] No [ ]
As of December 31, 1997, 16,462,666 shares of the Registrant's Common
Stock, $.01 par value, were outstanding.
<PAGE>
MVSI, INC.
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements. 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. 13
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds. 19
Item 6. Exhibits and Reports on Form 8-K. 19
SIGNATURES 20
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
MVSI, Inc. and Subsidiaries
Contents
- -----------------------------------------------------------------------------
Interim Consolidated Financial Statements
Interim Consolidated Balance Sheets 4
Interim Consolidated Statements of Operations 5
Interim Consolidated Statements of Cash Flows 6
Notes to Interim Consolidated Financial Statements 7
<PAGE>
MVSI, Inc. and Subsidiaries
<TABLE>
Interim Consolidated Balance Sheets
<CAPTION>
December 31, September 30,
1997 1997
- -----------------------------------------------------------------------------
Assets (Unaudited) (Audited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 1,766,275 $ 1,704,724
Investments 18,807,316 2,833,931
Accounts receivable, net of
allowance for doubtful accounts 7,486,666 6,399,507
Inventory 3,955,496 3,619,030
Tax credits and income
tax receivable 268,266 306,283
Prepaid expenses 302,844 219,382
------------ ------------
Total Current Assets 32,586,863 15,082,857
Property and Equipment, net 1,061,322 984,290
Capitalized Software Costs 1,604,983 1,723,138
Goodwill 5,488,116 5,641,582
Investment in Joint Venture 262,413 262,413
Deferred Tax Asset 1,655,471 1,655,471
Other Assets 136,544 141,082
------------ ------------
$ 42,795,712 $ 25,490,833
============ ============
Liabilities and Stockholders' Equity
Current Liabilities
Line of credit and financing
arrangements $ 1,761,008 $ 1,397,943
Accounts payable and
accrued liabilities 5,153,249 5,290,531
Shareholder loans and interest 636,029 737,208
------------ ------------
Total Current Liabilities 7,550,286 7,425,682
Stockholders' Equity
Common stock, $.01 par value,
50,000,000 shares authorized,
17,740,620 and 11,590,000 shares
issued, respectively 177,406 115,900
Stock subscription receivable (150,000) (150,000)
Additional paid-in capital 49,360,390 24,599,441
Treasury stock, at cost (7,625,504) (572,660)
Accumulated deficit (5,929,617) (5,366,056)
Unrealized loss on investments
available for sale (169,231) (205,182)
Cumulative translation adjustment (418,018) (356,292)
------------ ------------
Total Stockholders' Equity 35,245,426 18,065,151
------------ ------------
$ 42,795,712 $ 25,490,833
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
MVSI, Inc. and Subsidiaries
<TABLE>
Interim Consolidated Statements of Operations
<CAPTION>
Three Months ended December 31, 1997 1996
- -----------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Sales $ 13,677,252 $ 8,379,933
Cost of Sales 11,807,692 6,456,011
------------ ------------
Gross Profit 1,869,560 1,923,922
Expenses
Selling 613,480 509,532
Administrative 1,293,919 816,820
Research and development, net
of tax credits 222,601 30,201
Depreciation and amortization 331,573 81,824
------------ ------------
2,461,573 1,438,377
------------ ------------
Earnings (Loss) from Operations (592,013) 485,545
Interest Income 96,553 192,100
Interest and Financing Charges (68,101) (91,296)
------------ ------------
Earnings (Loss) Before Income Taxes (563,561) 586,349
Income Tax (Benefit) Provision
Current - 110,000
Deferred - (123,779)
------------ ------------
- (13,779)
------------ ------------
Net Earnings (Loss) $ (563,561) $ 600,128
============ ============
Earnings (Loss) Per
Common Share - Basic $ (0.04) $ 0.06
============ ============
Earnings (Loss) Per Common and
Common and Common Equivalent-Diluted $ (0.04) $ 0.04
============ ============
Shares Used In Calculation of Earnings
(Loss) Per Common Share - Basic 12,926,606 10,746,625
============ ============
Shares Used In Calculation of Earnings
(Loss) Per Common and Common
Equivalent Share - Diluted 12,926,606 13,692,732
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
MVSI, Inc. and Subsidiaries
<TABLE>
Interim Consolidated Statements of Cash Flows
<CAPTION>
Three Months ended December 31, 1997 1996
- -----------------------------------------------------------------------------
(Unaudited) (Unaudited)
Increase (Decrease) in Cash and
Cash Equivalents
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ (563,561) $ 600,128
Adjustments to reconcile net income
to net cash from operating activities:
Deferred income taxes - (13,779)
Depreciation and amortization 331,573 81,824
Unrealized loss on investments 35,951 -
(Gain) loss on foreign exchange - (31,228)
Changes in operating assets and
liabilities:
Decrease (increase) in accounts
receivable (1,182,914) (636,067)
(Increase) decrease in inventory (391,909) 27,457
(Increase) in tax credits and income
taxes receivable 33,373 (7,898)
Decrease in prepaid expenses 88,083 (58,383)
(Increase) in other assets 4,537 (623)
(Decrease) in accounts payable and
accrued liabilities (137,282) (246,480)
----------- -----------
Net Cash (Used in) Operating Activities (1,782,149) (285,049)
----------- -----------
Cash Flows from Investing Activities
Net investment purchases (18,202,848) -
Borrowings on margin against investments 2,229,463 1,707,268
Property, plant and equipment purchases (131,583) (136,930)
Capitalized software costs - (300,730)
----------- -----------
Net Cash (Used in) Provided by
Investing Activities (16,104,968) 1,269,608
----------- -----------
Cash Flows from Financing Activities
Net increase (decrease) in line of credit 397,565 (77,411)
Proceeds from shareholder loans - 4,242
Payment of shareholder loans (105,329) -
Purchase of treasury stock (7,052,844) -
Proceeds from issuance of common stock - 150
Proceeds from conversion of warrants 24,547,712 59,850
----------- -----------
Net Cash Provided by (Used in)
Financing Activities 17,787,104 (13,169)
----------- -----------
Effect of Exchange Rate Changes on Cash 161,564 (30,977)
----------- -----------
Net Increase in Cash 61,551 940,413
Cash at Beginning of Period 1,704,724 313,890
----------- -----------
Cash at End of Period $ 1,766,275 $ 1,254,303
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
MVSI, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements
- -----------------------------------------------------------------------------
December 31, 1997
- -----------------------------------------------------------------------------
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and
with the instructions to Form 10-Q. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments considered necessary for a fair presentation have been
included. The results of operations for the three months ended December 31,
1997 are not necessarily indicative of the results to be expected for the
full year. For further information, refer to the financial statements and
footnotes included in the Company's audited financial statements for the
fiscal year ended September 30, 1997.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Nature of Operations
- ----------------------------------------------
The accompanying interim consolidated financial statements include the
accounts of MVSI,Inc. (a Delaware corporation), and its five wholly-owned
subsidiaries: Socrates, Inc., a Maryland corporation, integrates, installs,
supports and provides training on high-end computer and communication
equipment and is headquartered in Largo, Maryland; Technet Computer Services,
Inc., a Virginia corporation, provides commercial software systems,
customized software development and software maintenance services, to include
Year 2000 (Y2K) solution services, for corporate and government customers and
is headquartered in Vienna, Virginia; JMR Distributors, Inc., a Virginia
corporation, specializes in the purchase and sale of computer memory chips
and network equipment and is headquartered in Lorton, Virginia; Expert, Inc.,
a New York corporation assembles and markets proprietary and generic computer
system products and services for advanced integration and networking projects
and is headquartered in Fresh Meadows, New York; and MVS Modular Vision
Systems, Inc., a Canadian corporation, engaged in the design and manufacture
of proprietary machine vision products and systems and headquartered in
Montreal, Quebec (collectively referred to as the "Company"). The results of
operations of Expert are included in the accompanying financial statements
since the April 1, 1997 acquisition date and the results of Technet are
included in the accompanying financial statements since the July 1, 1997
acquisition date. 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 either by the Company's warranty or by the warranty of the original
equipment manufacturer in instances where the Company acts as a distributor.
Revenue from services is generally recognized as the services are rendered
using contractual billing rates. 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.
<PAGE>
MVSI, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements--Continued
- -----------------------------------------------------------------------------
December 31, 1997
- -----------------------------------------------------------------------------
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Investments
- -----------
Investments consist of a short-term U.S. treasury mutual fund, which bears
interest at 5.25% and the Company's investment in common stock of e-Net,
Inc., which is accounted for using the cost method. The market value of the
short-term U.S. treasury mutual fund and the Company's investment in the
common stock of e-Net, Inc., at December 31, 1997, was $17,541,566 and
$1,265,750, respectively. In accordance with Statement of Financial
Accounting Standards No. 115, the Company has classified these securities
as available-for-sale, and recorded the securities at fair value, based on
quoted market prices, with the unrealized gains or losses, reported in
stockholders' equity at December 31, 1997.
Investment in Trivision Hi-Tech Joint Venture
- ---------------------------------------------
MVS Modular Vision Systems is party to a joint venture with a distributor of
high technology products in South Korea. The joint venture was formed in
1997 to perform final assembly of MVS products for distribution, along with
third party manufacturer products, to customers in South Korea and other
Asian markets. Each party to the joint venture has a 50% interest in profits
and losses of the venture. The Company accounts for its joint venture
interest using the equity method wherein its investment balance at December
31, 1997 of $262,413 includes its initial investment plus its share of the
joint venture profits. For the three months ended December 31, 1997, the
quarterly profits of the joint venture were negligible and accordingly the
Company recorded no earnings from its interest in the joint venture. The
joint venture's operations were limited as a result of the ongoing financial
crisis in Korea and other Asian markets.
Accounts Receivable
- -------------------
Accounts receivable is 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 December 31, 1997, management has
established an allowance for doubtful accounts of approximately $86,000.
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 either excludes such
inventory from the valuation or provides for a necessary reserve to record
inventory at the lower of cost or market.
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.
<PAGE>
MVSI, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements--Continued
- -----------------------------------------------------------------------------
December 31, 1997
- -----------------------------------------------------------------------------
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Capitalized Software Costs
- --------------------------
Beginning in fiscal year 1995, certain software development costs not
reimbursed by the Canadian government have been capitalized in accordance
with Statement of Financial Accounting Standards No. 86. 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. Amortization
expense related to Canadian operations for the three months ended December
31, 1997 and 1996, was $86,213 and $0.00, respectively. Amortization
expense related to computer software acquired in the July 1, 1997 Technet
acquisition (See Company's audited financial statements for the fiscal year
ended September 30, 1997) was $33,750 for the three months ended December 31,
1997. The Company's policy is to amortize capitalized software costs by the
greater of (a) the ratio that the current gross revenue for a product bears
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 the three months ended December 31, 1997
and 1996, was $153,466 and $68,589, respectively. Management regularly
reviews the carrying value of goodwill against anticipated cash flows of each
business in order to evaluate realizability.
Research and Development Costs
- ------------------------------
Research and development costs are expensed as incurred. The Company,
however, is eligible to receive tax credits for certain research and
development costs incurred from both the Canadian federal government and the
Province of Quebec. Tax credits received or due from the Canadian federal
government for research and development costs incurred can be realized only
as an offset to future taxes payable from income generated in Canada. These
tax credits can be carried forward up to ten years from the date generated.
Tax credits received or due from the Province of Quebec for research and
development costs incurred have been offset against current research and
development expenditures and are 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.
Equipment used in research and development activities which has alternative
future uses is capitalized and depreciated.
<PAGE>
MVSI, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements--Continued
- -----------------------------------------------------------------------------
December 31, 1997
- -----------------------------------------------------------------------------
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Income Taxes
- ------------
Deferred taxes are recognized, subject to valuation allowance, for temporary
differences in the timing of recognition of certain income and expenses
using the liability method.
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 period amounts have been reclassified to conform to the
current period 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.
Stock Options
- -------------
The Company accounts for the value of stock options granted in accordance
with Accounting Principles Board Opinion No.25 (APB 25), whereby if stock
options' exercise prices are set at fair market value or above at the
measurement date, usually the date of grant, no compensation expense is
recognized at that date.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation", effective for fiscal years that begin after
December 15, 1996. The new standard encourages all entities to adopt a fair
value based method of accounting for all employee stock option plans. Under
this method, compensation cost is measured at the grant date based on the
value of the stock option award and is recognized over the service period,
which is usually the vesting period.
Optionally, a Company may continue to use the intrinsic value method, as
described by APB 25, that measures compensation costs only to the extent
that the option price is lower than the quoted market price of the stock at
the date of the award. In fiscal year 1998, the Company will continue the
application of Opinion 25, but will comply with the pro forma disclosures
of net income, and earnings per share, as if the fair value based method of
accounting defined in SFAS 123 had been applied.
<PAGE>
MVSI, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements--Continued
- -----------------------------------------------------------------------------
December 31, 1997
- -----------------------------------------------------------------------------
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Earnings Per Share
- ------------------
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.128 (SFAS 128), "Earnings Per Share",
effective for periods ending after December 15, 1997. This Statement
establishes standards for computing and presenting earnings per share (EPS)
and applies to entities with publicly held common stock or potential common
stock. This Statement simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15, "Earnings Per Share", and makes
them comparable to international EPS standards. The Company has adopted the
provisions of SFAS 128, as required, during its first quarter of fiscal year
1998.
SFAS 128 replaces the presentation of primary EPS with a presentation of
basic EPS. It also requires a dual presentation of basic and diluted EPS on
the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of
the diluted EPS computation. Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock. Diluted
EPS is computed using the weighted-average number of common shares and
dilutive potential common shares outstanding during the period. All earnings
per share amounts for all periods have been presented, and where necessary,
restated to conform to SFAS 128 requirements.
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
For the Three Months Ended
----------------------------
<C> <C>
December 31, December 31,
1997 1996
------------ ------------
Numerator:
Net earnings (loss) $ (563,561) $ 600,128
============ ============
Denominator:
Denominator for basic earnings
(loss) per share--weighted-average
shares outstanding 12,926,606 10,746,625
============ ============
Effect of dilutive
securities--warrants - 2,946,107
Denominator for diluted earnings
per share--adjusted weighted-average
shares and assumed conversions 12,926,606 13,692,732
============ ============
Basic earnings (loss) per share $ (.04) $ .06
============ ============
Diluted earnings (loss) per share $ (.04) $ .04
============ ============
</TABLE>
<PAGE>
MVSI, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements--Continued
- -----------------------------------------------------------------------------
December 31, 1997
- -----------------------------------------------------------------------------
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Translation of Foreign Currency and Concentration of Credit Risk
- ----------------------------------------------------------------
A portion of the Company's operations is 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 generally not concentrated in any specific
geographic region. As a matter of policy, the Company insures its machine
vision-based receivables and requires its larger machine vision-based
customers to furnish letters of credit (and in some instances, advance
deposits) to minimize commercial and 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 C--STOCKHOLDERS' EQUITY
Redemption of Outstanding Class A and Class B Warrants
- ------------------------------------------------------
By notice of redemption, dated November 14, 1997, the Company called all of
its outstanding Class A and Class B Warrants for redemption for cash at 5:00
p.m., local time, on Monday, December 15, 1997 (the "Redemption Date"), at a
redemption price of $.05 per Class A Warrant and $.05 per Class B Warrant
(the "Redemption Price").
In December 1997, the Company completed the redemption of the above warrants
wherein certain Class A warrant holders exercised their warrants into
5,086,928 shares of common stock and the Class B warrant holder exercised
its warrant into 1,000,000 shares of common stock, resulting in proceeds to
the Company of approximately $24.5 million. In connection with the
redemption, the Company purchased and exercised, prior to the deadline,
683,654 warrants for approximately $4.3 million in cash, resulting in net
proceeds to the Company of approximately $20.2 million.
The Company intends to use the net proceeds from the exercise of the warrants
for general working capital purposes, including funding software support and
development; marketing and sales efforts; the acquisition of capital
equipment; stock repurchases; and possible future acquisitions, strategic
alliances and internal expansion, including the growth of management and
employee payroll.
Treasury Stock
- --------------
As of December 31, 1997, the Company had 1,277,954 shares of its common stock
held in treasury. These shares were repurchased as part of two authorized,
and publicly announced, open market stock and warrant repurchase programs
during calendar year 1997 for an aggregate cost of $7,625,504. Subsequent to
the quarter ended December 31, 1997, the Company has repurchased an
additional 601,200 common shares in the open market at a cost of
approximately $3.2 million.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
- -----------------------------------------------------------------------------
The following discussion and analysis of the Company's historical results of
operations and of its liquidity and capital resources should be read in
conjunction with the Company's consolidated financial statements and
accompanying notes.
Moreover, this Management's Discussion and Analysis of Financial Condition
and Results of Operations may contain forward-looking statements concerning
the Company's business and operations. Except for the historical information
herein, certain matters discussed in this Report include forward-looking
statements that may involve a number of risks and uncertainties, which
projections and statements are made pursuant to the "Safe Harbor" provisions
of the Private Securities Litigation Reform Act of 1995. Actual risks and
results may vary significantly based on a number of factors, including, but
not limited to: risks in products and technology development; market
acceptance of new products and continuing product demand, the impact of
competitive products and pricing, and other factors mentioned in the
Company's current and future filings with the Securities and Exchange
Commission.
Overview
- --------
The Company recorded record revenues of $13.7 million during the first
quarter of fiscal year 1998, a 63% increase over revenues of approximately
$8.4 million for the comparable period in fiscal year 1997. Despite the
record sales growth, however, the Company suffered a net loss of $563,561 of
$(.04) for the first quarter ended December 31, 1997, in large part due to
the continued operating losses at its Canadian subsidiary, MVS Modular
Vision Systems, Inc.
These losses stem from declining sales of MVS' machine vision scanners in
the Far East and the capital-intensive nature of the MVS operations (e.g.
research and development efforts). Operating losses at MVS accounted for 88%
of the Company's loss in the first quarter ended December 31, 1997 and 64% of
the Company's loss in the fourth quarter of fiscal year 1997. The Company
has determined that the restructuring programs previously undertaken to boost
sales and cut costs may not be adequate to achieve consistent profitability
in the immediate or near future and that substantial additional steps may be
necessary. The Company has further concluded that its resources would be
more profitably used in expanding its growing software development and
maintenance business line, including Year 2000 (Y2K) remediation work, and
supporting its Information Technology (IT) businesses, than in supporting
the capital-intensive machine vision operations at MVS, especially in light
of the ongoing financial crisis in the Far East and the negative impact of
that crisis on MVS' sales of computer chip inspection systems to its main
customer base in Asia, mainly Korea, coupled with the long sales cycle being
experienced by MVS for all of its machine vision products. As a result, the
Company is currently exploring possible solutions to MVS' ongoing, negative
impact on the Company's earnings. Notwithstanding these solutions,
management has reviewed the carrying value of the assets and liabilities
related to these operations and believe they are appropriately stated.
Management of the Company expects to make a determination, with respect to
such solutions for MVS' operations, prior to the end of the Company's second
quarter of the current fiscal year.
<PAGE>
Results of Operations
- ---------------------
Quarter Ended December 31, 1997 Compared to Quarter Ended December 31, 1996
- -----------------------------------------------------------------------------
The Company reported sales of $13,677,252 for the three-month period ended
December 31, 1997, as compared to $8,379,933 for the same period in fiscal
year 1996. The increase in sales of $5,297,319 or 63% is primarily
attributable to the acquisitions of Expert, Inc., effective April 1, 1997
and the acquisition of Technet Computer Services, Inc. ("Technet"), effective
July 1, 1997. Sales at the Company's machine vision subsidiary continued to
be impacted by the decline in its machine vision scanner sales to Korea and
other Asian markets as a result of that region's economic and financial
turmoil.
The gross margin of the Company decreased to 14% for the three months ended
December 31, 1997, as compared to 23% for the three-month period ended
December 31, 1996. The decrease in margins is principally a result of
relatively lower gross profit margins in the Company's computer distribution
and reselling businesses and the continued decline in margins in the
Company's machine vision business primarily as a result of rises in product
costs, market price pressures and product mix.
For the three months ended December 31, 1997, selling expenses increased by
$103,948 (20%). The increase in selling expenses, over those of the prior
year, are primarily a result of the Company's continued focus and commitment
to its sales and marketing efforts and the Company's acquisition of Expert
and Technet. Administrative expenses increased $477,099 (58%) to $1,293,919
for the three months ended December 31, 1997, as a result of an increase in
the Company's overall level of operations and the acquisitions of Expert and
Technet.
Research and development expenditures, shown net of Canadian tax credits,
increased by $192,400 to $222,601 for the three months ended December 31,
1997, as a result of the Company's increased efforts in developing new and
improved products and a reduction in the amount of software development
expenditures eligible to be capitalized subsequent to the Company achieving
technological feasibility on certain software development efforts.
Management began amortizing certain capitalized software costs in fiscal
year 1997 upon the release of certain of the associated products.
Depreciation and amortization expense for the three months ended December 31,
1997 increased by $249,749 to $331,573, as a direct result of an increase in
depreciable assets from the Company's acquisitions of Expert and Technet,
the resulting goodwill amortization recorded subsequent to the acquisitions,
and the amortization of certain capitalized software costs.
Interest income, net of interest expense and financing charges, decreased by
$72,352 from $100,804 to $28,452 for the three-months ended December 31,
1997. The decrease is primarily attributable to a reduction in interest
income due to a decreasing balance in the Company's short-term U.S. Treasury
mutual fund investments coupled with a related increase in margin loan
interest. The Company did not receive much of its net proceeds from the
redemption of the Company's Class A and Class B Warrants until late in the
month of December. Both periods reflect interest on line of credit
borrowings, and shareholder loans.
The Company has net operating loss and research expenditure carryforwards
available to offset future taxable income generated in Canada totaling
approximately $8,000,000 at December 31, 1997, expiring in 2010, and
investment tax credits of approximately $1.5 million available as a direct
offset to taxes payable in the future. In addition, the Company has net
operating loss carry forwards available to offset U.S. taxable income of
approximately $600,000 at December 31, 1997, expiring in 2011. Future use
of these net operating loss carryforwards was not affected by the Company's
acquisitions during fiscal years 1996 and 1997. 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. The Company does not believe that the
December 1997 warrant redemption will materially affect the ability to use
U.S. carryforwards in the future.
<PAGE>
As of December 31, 1997, the Company has recorded net deferred tax assets
totaling approximately $1,655,000 consisting of $889,000 relating to tax
benefits derived from the Company's operations based in Canada and $766,000
relating to tax benefit derived from the Company's operation in the United
States. Recoverability of this asset is dependent upon the Company generated
future taxable income in both Canada and the United States. The Company will
review the valuation allowance quarterly to determine the future
realizability of these deferred tax assets.
The Company experienced a net loss of $(563,561) or $(.04) per share for the
three months ended December 31, 1997, as compared to net income of $600,128
or $0.04 per share (diluted) for the three months ended December 31, 1996.
Quarter Ended December 31, 1996 Compared to Quarter Ended December 31, 1995
- -----------------------------------------------------------------------------
The Company reported sales of $8,379,933 for the three-month period ended
December 31, 1996 as compared to $3,570,142 for the same period ended
December 31, 1995. The increase in sales of $4,809,791 or 135% is
attributable to the acquisition of Socrates, Inc. and continued growth in
the Company's computer memory chip contract manufacture and distribution
business, as well as the Company's laser machine vision products and systems.
The gross margin of the Company decreased to 20% for the three months ended
December 31, 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 December 31, 1995.
For the three months ended December 31, 1996, selling expenses increased by
$413,695 (432%) to $509,532, primarily as a result of the hiring of
additional sales staff at MVS and the Company's acquisition of Socrates, Inc.
Administrative expenses increased $284,943 (54%) to $816,820 for the three
months ended December 31, 1996, as a result of an increase in the Company's
overall level of operations and the acquisition of Socrates.
Research and development expenditures, shown net of Canadian tax credits and
capitalized software costs, decreased by $46,415 to $30,201 for the three
months ended December 31, 1996, in part due to the Company's products
maturing necessitating less research and development. Additionally,
subsequent to the Company achieving technological feasibility on several
software development efforts late in fiscal year 1995, the Company continues
to capitalize, in accordance with Statement of Financial Accounting Standards
No. 86, labor costs associated with these research and development efforts.
Management expects to begin amortizing such costs in fiscal year 1997 upon
release of the associated products. Depreciation and amortization expenses
for the three months ended December 31, 1996 increased by $66,293 to $81,824
as a direct result of an increase in depreciable assets from the Company's
acquisition of Socrates, Inc. and the resulting goodwill amortization
recorded subsequent to the acquisition.
<PAGE>
Interest income and expense and financing charges decreased by $25,515 from
$126,319 for the three-month period ended December 31, 1996. The decrease is
primarily attributable to an increase in interest income from an outstanding
note receivable, as well as an increase in other income, offset by an
increase in margin loan interest expense.
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 December 31, 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 the fiscal year. 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.
The provision for income taxes in the accompanying December 31, 1996
Statement of Operations was based upon the estimated annualized effective
tax rate and was largely determined by management's estimate as of the
interim date of projected taxable income for the entire fiscal year. The
Company was able to offset the current income tax expense at December 31,
1996, by realizing available deferred tax benefits.
Net income for the three months ended December 31, 1996 was $600,128 or $0.06
per share, as compared to net income of $330,359 or $0.03 per share for the
three months ended December 31, 1995.
Capital Resources, Liquidity and Backlog
- ----------------------------------------
As of December 31, 1997, the Company had working capital of $25,036,577
compared to $8,640,669 as of December 31, 1996. The Company's fiscal year
1996 (JMR Distributors and Socrates) and 1997 (Expert and Technet)
acquisitions and the general future expansion of the Company's primary
business lines will require sufficient working capital to finance increases
in inventory and accounts receivable comparable to or greater than the
increase experienced in the three-months ended December 31, 1997 (see
Consolidated Statements of Cash Flows). With the enhanced liquidity of the
Company as a result of the December 1997 Warrant Redemption (See Note C to
the Interim Consolidated Financial Statements) which netted the Company
approximately $20.2 million in cash, the Company believes that existing cash
and cash equivalents on hand and investments will be sufficient to meet the
Company's working capital and other financing requirements for the
foreseeable future. The Company has no significant long-term debt
outstanding as of December 31, 1997.
The Company has a bank line of credit with a Canadian bank for support of
its Canadian operations temporary cash flow requirements, with interest
payable monthly at the prime rate plus .75% (prime was 5.50% on December 31,
1997). At December 31, 1997 and 1996, borrowings outstanding on the line of
credit amounted to $1,377,690 and $554,745, respectively. Borrowings under
the line are subject maintaining a borrowing base consisting of a qualifying
portion of accounts receivable, investment tax credits and inventories. The
line of credit is collateralized by all present and future accounts
receivable, Canadian tax credits receivable and inventory and is guaranteed
by MVSI, Inc.
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 December 31, 1997 and 1996, amounted to $364,437 and $465,805,
respectively. The agreement is subject to annual renewal and is
collateralized by all present and future accounts receivable and inventory
of the Company's subsidiary and is guaranteed by MVSI, Inc.
<PAGE>
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. No repayments were made during fiscal year 1997. Total loans and
accrued interest outstanding at December 31, 1997 and 1996, total $243,239 and
$226,637, respectively.
Additionally, two other officers loaned subsidiaries, for which they are
employed, amounts on an interest bearing, demand basis prior to being
acquired by the Company. During the three months ended December 31, 1997,
approximately $105,000 was repaid to these officers. At December 31, 1997,
the balance on these loans, including interest, was $392,790.
In October 1996, the Company filed a Post-Effective Amendment Number 1 to the
Company's Form SB-2 on 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 Number 1 filing. Additionally, the
Company filed a Post-Effective Amendment Number 2 to the Form SB-2 on Form
S-3 Registration Statement in November 1997 to update the Company's original
initial public offering (IPO) Prospectus. By notice of redemption, dated
November 14, 1997, the Company called all of its outstanding Class A and
Class B Warrants for redemption for cash at 5:00 p.m., local time, on Monday,
December 15, 1997 (the "Redemption Date"), at a redemption price of $.05 per
Class A Warrant and $.05 per Class B Warrant (the "Redemption Price"). For
further details, see Note C to the Interim Consolidated Financial Statements,
incorporated herein by reference.
In February 1997, the Company converted a $1.25 million note with e-Net, Inc.
to 250,000 shares of e-Net, Inc. common stock. The 250,000 shares of e-Net
common stock owned by MVSI (classified as investments in the accompanying
balance sheet) were registered as part of e-Net's initial public offering
(IPO) and are restricted from sale for a 12-month period from the date of
e-Net's IPO (April 1997), but may be released for sale during the 12-month
period with the consent of the lead underwriter of the IPO.
As of December 31, 1997, the Company had 1,277,954 shares of its common stock
held in treasury, of which 1,098,454 shares were purchased during the three
months ending December 31, 1997. The shares held in treasury were
repurchased as part of two authorized, and publicly announced, open market
stock and warrant repurchase programs during calendar year 1997. Subsequent
to the quarter ended December 31, 1997, the Company has repurchased an
additional 601,200 common shares in the open market at a cost of
approximately $3.2 million. The Company may, from time-to-time, continue to
buy back additional MVSI securities in open market or block transactions in
compliance with U.S. Securities and Exchange Commission regulations.
<PAGE>
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 U.S. 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.
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.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
- -----------------------------------------------------------------------------
By notice of redemption, dated November 14, 1997, the Company called all of
its outstanding Class A and Class B Warrants for redemption for cash at 5:00
p.m., local time, on Monday, December 15, 1997 (the "Redemption Date"), at a
redemption price of $.05 per Class A Warrant and $.05 per Class B Warrant
(the "Redemption Price").
For further details, see Note C to the Interim Consolidated Financial
Statements, incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits.
---------
Exhibit 27, Article 5 - Financial Data Schedule
b. Reports on Form 8-K.
--------------------
Form 8-K, dated October 30, 1997.
Form 8-K, dated December 1, 1997.
<PAGE>
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.
February 13, 1998
By: EDWARD RATKOVICH
----------------
Edward Ratkovich
Chairman of the Board
<TABLE> <S> <C>
<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-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-START> OCT-01-1997
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 1,766,275
<SECURITIES> 18,807,316
<RECEIVABLES> 7,572,582
<ALLOWANCES> 85,916
<INVENTORY> 3,955,496
<CURRENT-ASSETS> 32,586,863
<PP&E> 1,683,560
<DEPRECIATION> 622,238
<TOTAL-ASSETS> 42,788,372
<CURRENT-LIABILITIES> 7,550,286
<BONDS> 0
0
0
<COMMON> 177,406
<OTHER-SE> 35,060,680
<TOTAL-LIABILITY-AND-EQUITY> 42,788,372
<SALES> 13,677,252
<TOTAL-REVENUES> 13,677,252
<CGS> 11,807,692
<TOTAL-COSTS> 11,807,692
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 15,000
<INTEREST-EXPENSE> (28,452)
<INCOME-PRETAX> (563,561)
<INCOME-TAX> 0
<INCOME-CONTINUING> (563,561)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (563,561)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
<FN>
</FN>
</TABLE>
