U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: Commission file number:
September 30, 1997 0-26614
MVSI, INC.
(Name of Small Business Issuer in Its Charter)
Delaware 54-1707718
(State or other jurisdiction of (IRS 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)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each 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
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 the past 90 days. Yes X No
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 the 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. ______
The issuer's revenues for its most recent fiscal year: $39,885,840.
The total market value of the voting stock was $100,032,262,
of which $72,058,557 was held by nonaffiliates of the
registrant, based upon the closing price of the common stock on
December 29, 1997, as quoted by the Nasdaq National Market System.
The number of outstanding shares of the registrant's common stock
on December 29, 1997 was 16,506,974.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Post-Effective Amendment Number 2 to Form SB-2 on
Form S-3 Registration Statement, and related Prospectus,
Registration File No. 33-89194, declared effective with the
Securities and Exchange Commission ("Commission") on November 14,
1997, are incorporated herein by reference into Part III of
this report. Portions of the Proxy Statement of the registrant
to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A of the Securities Exchange Act of 1934 on or prior
to January 31, 1998, are incorporated herein by reference into
Part III of this report.
Transitional Small Business Disclosure Format: Yes No X
INDEX
Part I Page
- ------- ----
Item 1. Description of Business. 3
Item 2. Description of Properties. 16
Item 3. Legal Proceedings. 17
Item 4. Submission of Matters to
a Vote of Security Holders. 17
Part II
- -------
Item 5. Market for Common Equity and Related
Stockholder Matters. 18
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. 18
Item 7. Financial Statements. 26
Item 8. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure. 53
Part III
- --------
Item 9. Directors, Executive Officers,
Promoters and Control Persons;
Compliance with 16(a) of
the Exchange Act. 53
Item 10. Executive Compensation. 54
Item 11. Security Ownership of Certain
Beneficial Owners and Management. 54
Item 12. Certain Relationships and
Related Transactions. 54
Item 13. Exhibits, List and Reports
on Form 8-K. 54
PART I
Item 1. Description of Business.
Overview
MVSI, Inc. ("Company"), a Delaware corporation, was incorporated
in the State of Delaware on April 12, 1994. The principal executive
offices of the Company are in Vienna, Virginia.
The Company is a broad-based technology company with five wholly-owned,
operating subsidiaries: Socrates, Inc., a Maryland corporation,
headquartered in Largo, Maryland; Technet Computer Services, Inc.,
a Virginia corporation, headquartered in Vienna, Virginia.
JMR Distributors, Inc., a Virginia corporation, headquartered in
Lorton, Virginia; Expert, Inc., a New York corporation,
headquartered in Fresh Meadows, New York; and MVS Modular Vision
Systems, Inc., a Canadian corporation, headquartered in Montreal,
Quebec, Canada.
The Company's Common Stock, $.01 par value, ("Common Stock") and
Class A Warrants were quoted on the Nasdaq SmallCap Market from
August 14, 1995 until May 1, 1997. Since May 2, 1997, the
Common Stock and Class A Warrants have been quoted on the Nasdaq
National Market System under the trading symbols "MVSI"
and "MVSIW", respectively. Pursuant to a November 14, 1997
call for the redemption of the outstanding Class A Warrants and
Class B Warrants (collectively, the "Warrants"), the Company
redeemed all of its outstanding Warrants as of 5:00 p.m.,
local New York City time, on Monday, December 15, 1997.
Each Class A Warrant entitled the holder to purchase one (1)
share of the Common Stock at an exercise price of $4.00 and
each Class B Warrant entitled the holder to purchase
one (1) share of Common Stock at an exercise price of $4.20.
The Class A Warrants were traded on the Nasdaq National Market
System until 4:00 p.m., local New York City time, on Monday,
December 15, 1997. The Class B Warrants were not publicly
traded. The Company is in the process of desisting its Class
A Warrants. See "Subsequent Events" below for additional
information on the redemption of the Warrants.
Unless the context otherwise indicates, the terms "Company"
and "MVSI" as used in this Report refer to MVSI, Inc.
COMPANY'S WHOLLY-OWNED OPERATING SUBSIDIARIES
Socrates, Inc. The Company acquired Socrates, Inc., effective
July 1, 1996. MVSI exchanged 350,000 shares of its Common
Stock for all the shares of common stock held by Socrates' sole
stockholder. The shares of Common Stock issued to acquire
Socrates were "restricted" securities under Rule 144 of the
Securities Act of 1933, as amended. Socrates is engaged
in the assembly, integration and marketing of proprietary
and generic computer system products and services; computer
systems integration, telecommunications integration,
Internet connectivity, and wide and local area networking;
and providing training on the use of computer software
programs to individuals, corporations and the government.
Socrates' computer product systems and services are marketed
nationally to major computer distributors, corporate and
government customers. Socrates was incorporated in
Maryland in 1989.
In September 1997, Socrates moved to a new 35,000 square foot office,
manufacturing and warehouse space in Largo, Maryland, a suburb of
Washington, D.C. This new center will serve as Socrates' principal
executive offices, primary manufacturing and engineering center,
corporate training center and primary warehouse facility.
Socrates has a sales office in West Chester, Pennsylvania
and Hampton, Virginia. Socrates has one computer sales
and service center in Virginia Beach, Virginia, which sells
to individual and corporate clients. As of the date of this
Report, Socrates is preparing to open in December 1997
or January 1998 two additional computer sales and service
centers in the Newport News-Virginia Beach, Virginia area.
One of the Newport News-Virginia Beach, Virginia area
stores will sell computer hardware and software on a dedicated
basis to Newport News Shipbuilding, Inc. and its employees,
and the other computer sales and service center will sell to
the general public of the Newport News-Virginia Beach,
Virginia area.
On November 6, 1997, Socrates, Inc. entered into an agreement
with the Washington Sports & Entertainment, Inc. ("WSE") whereby
Socrates, Inc. would provide computer hardware, software and
training services to WSE; the Washington Wizards National
Basketball Association Professional Basketball Team and Washington
Capitals National Hockey League Professional Hockey Team,
which WSE owns; and two major sports and entertainment complexes
in the greater Washington, D.C. metropolitan area in which WSE
has an ownership interest: the new MCI Center in Washington,
D.C. and US Airways Arena in Largo, Maryland. The agreement has
a three year term and also entitles Socrates, Inc. to advertise
at the MCI Center and US Airways Arena and in television
and cable shows and in print publications sponsored or produced
by WSE or its affiliates.
In September 1997, Socrates initiated an effort to establish
as a separate business line the training of corporate and
government employees and information technology professionals
in the greater Washington, D.C. metropolitan area in the use
of popular computer programs and network systems. Socrates
conducted its first training classes in December 1997. Socrates intends
to continue its efforts in Fiscal Year 1998 to expand the scope and
market of its training business, which expansion could include establishing
training centers in other metropolitan areas along the East Coast of the
United States and expanding the program of study to qualify individuals to
become certified software or network systems engineers or obtain other
software or network systems certifications.
To take advantage of the rapid growth of the Internet and
intranets and to 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 and computer training business in
fiscal year 1998. The Company makes no assurances that Socrates
will be able to successfully penetrate this market or to
attain the anticipated significant growth.
The Company intends to continue its financial and other
support of Socrates' expansion of business lines and supporting
resources as a central part of the Company's strategic goal to
establish one-stop information technology capabilities for large
corporate and government customers in fiscal year 1998.
Technet Computer Services, Inc. ("Technet"). The Company acquired
Technet as a wholly owned subsidiary, effective on July 1, 1997,
through an exchange of securities. Technet was incorporated in
Virginia in 1989. Technet is engaged in the business of providing
customized software development, including turnkey system
development and product development, and maintenance services
to corporate and government customers.
Technet has software development centers in New Jersey and at its
principal executive offices in Vienna, Virginia. Technet also
utilizes the software development center of an affiliated
company in Madras, India. Technet was acquired by the exchange of
400,000 shares of Common Stock for all of the outstanding shares
of Technet common stock. The shares of Common Stock issued to
acquire Technet were "restricted securities" under Rule 144
of the Securities Act of 1933, as amended.
Technet's core competency and expertise lies in systems design and
development of relational databases, network applications, imaging
and multimedia applications. Technet's custom software development
work centers on developing and maintaining sales, logistics, finance,
research and other major application areas of information management
systems.
Technet has also designed, developed and implemented turnkey systems
for market research and analysis, consumer relations, help desk, customer
service and support, and multimedia expert systems for market research
and presentations. Technet's product development has been focused
on pre-packaged, easily customized software solutions for warehouse
management, order processing, document management, human resource
management and medical office management. Technet has initiated
the marketing and enhancement of its capabilities to provide Year
2000 conversion solutions, which remedies the inability of many computer
programs and systems to properly recognize the new millenium
as the Year 2000 and the possible malfunctions resulting from
that recognition error. Technet intends to aggressively market
its Year 2000 capabilities in Fiscal Year 1998.
Technet's principal customers include several major international
cosmetics and fragrance companies, a major U.S. insurance company,
an international computer systems manufacturer and a domestic long-distance
telephone carrier.
Expert, Inc. The Company acquired privately owned Expert, Inc. ("Expert"),
effective April 1, 1997. Expert is a contract assembler and marketer of
proprietary and generic computer system products and services for advanced
computer systems integration and networking.
Expert operates from a single 4,000 square foot facility in Fresh Meadows,
New York. Expert markets its products internationally. Expert is
currently planning to move its operations to a new, larger facility in
order to increase its production and warehouse space and to be
positioned to exploit any information technologies work resulting from the
Company's efforts to develop information technologies capabilities
and businesses among its computer system subsidiaries.
The Company exchanged 300,000 shares of Common Stock for all of the
outstanding shares of Expert common stock. The shares of Common Stock
issued to acquire Expert were "restricted securities" under Rule 144
of the Securities Act of 1933, as amended.
JMR Distributors, Inc. The Company acquired all of the outstanding
common stock of JMR Distributors, Inc. in October 1995 in an exchange for
100,000 shares of Common Stock, which were "restricted securities"
under Rule 144 of the Securities Act of 1933, as amended.
JMR Distributors operates out of a single 1,800 square foot facility
in Lorton, Virginia and is a contract manufacturer and wholesale
distributor of proprietary and generic memory products for computers,
plotters, laser printers, process controllers and other computer related
industry devices; an assembler and seller of custom computer
workstations and servers. JMR Distributors also sells network
products and accessories manufactured by Linksys Group. JMR
Distributor's products are marketed in North America to computer
resellers and dealers.
Although memory prices and profit margins have declined
Dramatically over the past two years, JMR Distributors
was able to increase its revenue rate compared with fiscal
year 1996. This was accomplished by JMR Distributors increasing
its customer base and emphasizing quality products and
customer service.
JMR Distributors will move to a larger facility in the first quarter
of calendar year 1998 to accommodate the expansion of its production
capabilities for memory modules and custom computer workstations
and servers. As of the date of this Report, JMR Distributors has an
agreement in principle to move its operations to an office, production
and warehouse facility of approximately 18,000 square feet in
Sterling, Virginia, a suburb of Washington, D.C.
MVS Modular Vision Systems, Inc. ("MVS"), a Canadian
corporation, was acquired on November 1, 1994 by the Company
through an exchange of securities. The shares of Common
Stock issued in the exchange were "restricted securities"
under Rule 144 of the Securities Act of 1933, as amended.
MVS designs, develops, manufactures and markets state-of-
the-art, proprietary vision-based robotic and sensor products
and systems for productivity improvement and quality control
applications in the manufacturing workplace. MVS is based
in a single facility of approximately 14,000 square feet in
Montreal, Quebec, Canada.
The primary component of MVS' products and systems is its
three-dimensional camera and laser vision inspection technology.
This technology utilizes specialized cameras, lasers, optics and
custom-designed high-speed processing hardware and software for
inspection, measurement and motion control in industrial or
manufacturing applications. MVS currently markets and
sells one principal computer chip inspection scanner product
and system: the MVS LaserVision QFP Lead Scanner (the "QFP Scanner"),
and also markets and sells one principal sensor product and system:
the MVS LaserVision Welding Sensor ("MVS Welding System"), which
is used for weld inspection or ensuring that the welding device
properly tracks the weld joint or seam.
The QFP Scanner inspects Quad Flat Pack computer chips and
during Fiscal Year 1997 was only purchased by a single corporate
semiconductor manufacturer in Korea. MVS is seeking other customers
for the QFP Scanner in the Far East and North America, but
there can be no assurances that MVS will be able to broaden
its customer base for the QFP Scanner. Further, MVS believes that
the product life for the QFP Scanner has peaked and that
demand for the QFP Scanner will decrease over the next
12 to 18 months.
MVS is currently evaluating possible designs for a new
inspection scanner that is capable of inspecting the new generation
of computer chips that are being produced by semiconductor
manufacturers, but there can be no assurances that MVS will attempt
to, or will be able to, develop such a new inspection scanner,
or that MVS will be able to successfully market and sell any such
new generation of inspection scanners. MVS has not to produce a market
ready version of an inspection scanner capable of inspecting the new
generation of computer memory chips. There can be no assurances that
MVS will develop and sell a new generation of scanners or that any
new generation of MVS scanners would be competitive with or successful
in the marketplace. In light of MVS' reliance on scanner sales to
customers in Korea and Taiwan, and the possible effects of the current
financial crisis in the Far East on future purchases of new equipment
by Far East companies, MVS may be unable, even if it develops and
sells a new generation of MVS scanners, to successfully establish
a market for its new scanner in Fiscal Year 1998. Traditionally,
MVS has relied on both scanner and welding system sales to support
its overhead and product development. The potential loss of any
scanner sales in Fiscal Year 1998 could have an adverse impact on
MVS' financial condition and long-term business prospects. The
Company is monitoring this situation closely to curtail any
further impact on MVS' financial performance in fiscal year
1998.
The Company believes that its MVS LaserVision Welding Sensor is
in the forefront of adaptive arc welding and gluing technology,
automating welding machines, guiding robotic devices and improving
quality and productivity. MVS' 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
from simple water heating tanks to jet engines and applications
involving the welding of door and roof components for automobiles.
The Company offers its sensor products and systems for approximately
$50,000 and $140,000, each depending on the complexity and
configuration of the system.
The Company believes that MVS' 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 Welding System. As labor costs have continued
to rise, and as global competition has required increased
quality assurance (such as ISO 9000) and levels of productivity,
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 the MVS LaserVision Welding System requires significant
customer education. The financial incentives are, in the
Company's opinion, motivating manufacturers to seriously
consider automation, including the retrofit of their existing
processes with vision control systems like the MVS LaserVision
Welding System, if they are to remain competitive.
MVS initiated an effort in Fiscal Year 1997 to increase
sales of its MVS LaserVision Welding Systems to the North
American and European automobile industry and to their
robotic and welding suppliers. The Company believes that
such an effort will require an ongoing marketing and
sales campaign to result in significant sales to this
market segment. In the fourth quarter of Fiscal Year 1997,
MVS received an order from and delivered to Honda Engineering
North America, Inc. for a MVS LaserVision post-weld
inspection system, and MVS entered into an agreement
with Automated Welding Systems, Inc.(AWS) to purchase a minimum of
$1 million in MVS LaserVision seam tracking systems over the course
of Fiscal Years 1997 and 1998. AWS produces tailor welded blanks used in
making car door inner panels, body door openings and
other automotive components. While the Company is
encouraged by these orders in the automobile industry,
but there can be no assurances that MVS will be able to
successfully establish a market in the automobile industry
for the MVS LaserVision Welding System.
MVS successfully demonstrated an MVS LaserVision Welding
System for Ford Motor Company in Fiscal Year 1997. The
purchase order from Ford Motor Company for a MVS LaserVision
Welding System is still pending.
Markets. The scanner market includes almost all computer
memory chip manufacturers (e.g. Intel, Motorola,
National Semiconductor, Hyundai, Samsung, Fujitsu)
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 scanner market are Robotic
Vision Systems, Inc. ("RVSI"), and View Engineering, Inc.
("View"), a subsidiary of Graphic Scanning Corporation. RVSI
and View possess significantly greater resources than MVS and
have a significantly larger share of the worldwide
market than MVS. Further, RVSI and View have introduced new
scanner models, which are designed to inspect the new generation
of computer memory chips, namely computer chips, which use ball
grid arrays of solder balls ("BGA") to connect to the computer
board. The introduction of BGA-capable inspection scanners in
the market provides RVSI and View with a significant marketing
advantage over MVS.
MVS LaserVision Welding System is marketed worldwide, but
principally to corporate customers in North America and Europe.
Since May 1997, MVS has focused its sales effort for the MVS
LaserVision Welding System by relying on direct sales by in-
house salespersons for the North American market and relying
on local distributors for sales in Europe.
Product Development. MVS is developing a marketable leadframe
inspection scanner for a customer in Hong Kong. In Fiscal
Year 1997, MVS identified a new measuring device, which
appeared capable of providing the speeds and accuracy required
for a marketable leadframe inspection scanner. As of the date
of this Report, MVS has not produced a market-ready leadframe
inspection scanner or "CMM", but, subject to the approval of
the customer, MVS intends to pursue the development of a
marketable leadframe inspection scanner in Fiscal Year 1998.
There are at least a dozen competitors who have launched
comparable CMM products during 1996 and 1997 into a market
that is both rapidly expanding and highly competitive.
MVS has developed a prototype of the portable, hand-held
version of the MVS LaserVision Welding Inspection System. As
of the date of this Report, MVS does not have a market-ready
version of this product. There can be no assurances
that MVS will be able to produce a marketable leadframe
inspection scanner or a portable LaserVision Welding
Inspection System, or that either of these potential
products would be successful in the marketplace.
Manufacturing
The Company's principal production facilities relate
to Socrates assembly of computer systems at its Largo,
Maryland facility, MVS' production facilities in Montreal,
Canada and JMR Distributors' assembly facilities at its
Lorton, Virginia facility.
Since May 1997, MVS has increasingly contracted the production
of its components and assembly of the subsystems of its welding
systems and inspection scanners to a subcontractor in the
Montreal area. MVS believes that this subcontractor is capable
of producing quality components and at a lower cost than MVS'
in-house production operation. MVS still assembles and tests
the vision components of each inspection scanner and welding
system in its Montreal facility.
Marketing and Sales
Socrates, Expert, and JMR Distributors rely heavily on an in-
house direct sales force to sell their products. In the fourth
quarter of Fiscal Year 1997, Socrates commenced an advertising
campaign in the local media for the greater Washington, D.C.
metropolitan area. Socrates intends to continue and expand
its use of various forms of print and electronic advertising
in Fiscal Year 1998 to complement its direct sales force.
Socrates is unsure at this time about the impact of such
additional advertising, if any, on its sales.
Technet relies heavily on the sales efforts of its key
personnel to market and sell its services. MVSI personnel
started to assist Technet in the direct marketing of its Year
2000 conversion capabilities in the fourth quarter of Fiscal
Year 1997. MVSI intends to continue such assistance in Fiscal
Year 1998.
As a result of its limited and focused target market, MVS'
marketing efforts rely heavily on direct sales methods by in-
house salespersons and distributors. 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 MVS' 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 MVS. Subsequent purchases require
less time and may result in multiple orders. MVS uses live
demonstrations of its products at prospective customers'
facilities or at MVS' Montreal facilities as part of its
sales effort.
Industry Segment Information and Major Customers
For purposes of segment reporting for the year ended
September 30, 1997, management considers the Company to
operate in three industry segments: the computer product
integration and distribution industry, the software development
industry and the machine vision industry. For the year ended
September 30, 1996, management considered the Company to operate
in only two industry segments, the machine vision industry and
the computer product integration and distribution business.
For the year ended September 30, 1997, the Company had one
customer, which accounted for approximately 21% of its total
revenue. For the year ended September 30, 1996, the Company
had one customer, which accounted for approximately 10 percent
of its total revenue. In addition, approximately, 15% and 19%
of the Company's sales in fiscal years 1997 and 1996, respectively,
were to customers outside North America. A substantial portion
of the Company's sales outside North America were to customers in
Asia, principally Korea. The financial crisis currently being
experienced in this region has had and may have in the future a
negative impact on the Company's ability to obtain orders from
customers in this region. However, this impact cannot be
estimated at this time.
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 are
detailed in Note K in the accompanying consolidated
financial statements and are incorporated herein.
Sources of Supply and Backlog
The raw materials and components used in the development and
manufacture of MVS' 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. In 1997, MVS entered into an agreement with a third
party contract manufacturer whereby the third party will
manufacture certain products for the Company. The same
company had previously manufactured certain sub-components
for MVS. 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 Distributors.
Furthermore, Socrates purchases certain memory modules used
in its computer systems directly from JMR Distributors and
Expert.
All materials and components used by Socrates, Expert and JMR
Distributors are available from numerous sources of supply.
The Company does not foresee any shortage of these materials.
For the year ended September 30, 1997, the Company's backlog
was approximately $1 million. The Company's computer integration
and distribution businesses have historically operated with limited
backlog as products are typically shipped shortly after orders are
received. 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 warrants 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.
Patent, Trademark, Copyright and Proprietary Rights
Neither Socrates, Expert, JMR Distributors nor Technet has
Filed any patents or possesses any technologies or other intellectual
property which they believe require or qualify for patent protection.
MVS 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. MVS 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.
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, MVS 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.
MVS 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. The rejection by
regulatory authorities of MVS' proposed patents, trademark and
copyright applications may have a material adverse impact on
MVS' 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 that 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.
Competition
The Company believes that there are other companies, many of
which are substantially larger and have substantially greater
assets and resources than the Company, engaged in the development
of technology, products and services and 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. Since
the Company will compete with companies that have greater market
recognition and broader capabilities than the Company, there
can be no assurance that the Company or its operating subsidiaries will
be able to successfully compete in the marketplace or will be able to achieve
success in any of the business endeavors described herein.
Employees
At the year ended September 30, 1997, the Company employed
approximately 120 persons, all of whom were full-time employees.
Of these full-time employees, approximately 25 were engaged in
management, administration and finance, 55 in development, production
and manufacturing and 40 in marketing, training 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
areas 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 Company 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. The Company's
business lines are subject to a variety of additional risks that could
materially adversely affect quarterly and annual operating results, including
market acceptance of new or existing products, services or technologies.
A significant percentage of the Company's sales to major customers
historically have 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
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 Warrants 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").
After 5:00 p.m., local New York City time, on the Redemption Date,
the only right of any holders of a Class A Warrant or Class B Warrant
who did not timely exercise, or, in the case of the Class A Warrant
holder, timely trade the warrant, was to receive the Redemption Price
for each warrant properly tendered to American Stock Transfer &
Trust Company, the Warrant Agent for the warrants.
The following table summarizes the results of the exercise of
warrants and the redemption of warrants pursuant to the Company's
call for the redemption of all outstanding warrants for $.05
cash per warrant. The following information was provided to
the Company by its Warrant Agent.
WARRANTS AVAILABLE WARRANTS PROCEEDS
FOR EXERCISE EXERCISED TO COMPANY
5,125,000 Class A Warrants 5,086,928 $20,347,712
1,000,000 Class B Warrants 1,000,000 4,200,000
-----------
Gross Proceeds to Company: $24,547,712
Less Company open market repurchases
and exercise 683,654 Class A Warrants ($ 4,333,437)
-----------
Net Proceeds to Company from exercise of
Class A and Class B Warrants $20,214,275 (1)
(1) Net proceeds does not reflect $2,011,427 spent by the
Company to purchase 306,800 shares of Common Stock in open
market repurchases during the warrant redemption period and
pursuant to the Company's previously announced stock repurchase
program. If this expenditure was reflected above, Net
Proceeds to the Company would be $18,202,848.
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.
Status of Underwriters' Purchase Option. Pursuant to the
Company's initial public offering in August 1995, the
lead underwriter, Stratton Oakmont, Inc. of Lake Success,
New York (the "IPO Underwriter"), was issued an Underwriters'
Purchase Option to purchase 180,000 of the Company's
Units, each Unit consisting of two (2) shares of Common
Stock and two Class A Warrants, which Units have not
been exercised as of the date of this Prospectus.
The IPO Underwriter was expelled from the securities
industry by the National Association of Securities
Dealers, Inc. ("NASD") on December 5, 1996. On or
about January 24, 1997, the IPO Underwriter sought
protection from creditors by filing a petition under
Chapter XI of the U.S. Bankruptcy Code (Case Number 97-40501)
(the "Bankruptcy Case") in the United States Bankruptcy Court
for the Southern District of New York (Manhattan Division)
(the "Bankruptcy Court"). Subsequent to the filing of the
petition, the Bankruptcy Court approved a motion by the
Securities Investor Protection Corporation to appoint a
Trustee for the IPO Underwriter in the Bankruptcy Case to
liquidate certain of the IPO Underwriters' assets under
the Securities Investor Protection Act of 1970 and U.S.
Bankruptcy.
As a result of the aforementioned and pending bankruptcy
proceedings involving the IPO Underwriter, and the assertion
of third party ownership claims to the Underwriters' Purchase
Option, the Company is uncertain about the current ownership
of the Underwriters' Purchase Option and believes that the U.S.
Bankruptcy Code prevents the redemption of the Class A Warrants
underlying the Underwriters' Purchase Option at this time.
Therefore, the Company is uncertain as of the date of this Report
when and if it would be able to redeem the Class A Warrants
underlying the Underwriters' Purchase Option. On November 11,
1997, the Company sent a letter to the Trustee for the Bankruptcy
Case, to notify the Trustee of the existence of the Underwriters'
Purchase Option. In December 1997, the Trustee sent the Company
a written request for surrender of the original Underwriters' Purchase
Option and related documents to the Trustee. The Company intends to
comply with the Trustee's request. Once the legal ownership is
determined, the owner could decide to exercise the Underwriters'
Purchase Option by paying the Company $11.55 per Unit,
aggregating $2,079,000 plus an additional $4.00 per share of
Common Stock that would be issued in lieu of the 360,000 Class
A Warrants underlying the Underwriters' Purchase Option, which
entitlement to purchase would remain effective
until August 14, 2000.
Item 2. Description of Properties.
The Company leases approximately 1,600 square feet for its
principal executive offices located in Vienna, Virginia.
Base rental for the office space is approximately $2,600
per month.
MVS leases approximately 14,000 square feet for its MVS Canadian
development and manufacturing facilities located in Montreal,
Quebec, Canada, under a lease, which extends through May 1999.
MVS 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.
JMR Distributors leases approximately 1,800 square feet for
its distribution facilities located in Lorton, Virginia.
Base rental for the premises is approximately $1,200 per
month.
Socrates leases approximately 35,000 square feet of space
for its computer integration, distribution and training
facilities located in Largo, Maryland. Base rent for the
space is approximately $11,600 per month. The lease agreement,
which expires in 2002, includes rent escalations and requires
Socrates to pay certain operating expenses. In addition,
Socrates also leases approximately 8,000 square feet in the
aggregate of space for its facilities in Gaithersburg,
Maryland; West Chester, Pennsylvania; and Newport News,
Virginia under leases that expire in 1998 and 1999.
Base rent for these facilities is approximately $7,500
per month in the aggregate and requires the Company to
pay certain operating expenses.
Expert leases approximately 4,000 square feet of space
for its computer integration and distribution facilities
located in Fresh Meadows, New York. Base rent for the
space is approximately $2,400 per month. The lease agreement,
which expires in May 1999, includes rent escalations and
requires the Company to pay certain operating expenses.
Technet leases approximately 1,400 square feet of space
for its software development business, located at 8133 Leesburg
Pike, Vienna, Virginia 22182, in space adjacent to the
Company's headquarters office space. Base rent for the
space is approximately $1,600 per month. The lease
agreement, which expires in August 1998, includes rent
escalations and requires Technet to pay certain operating
expenses. Technet also leases approximately 2,000 square
feet of space in Iselin, New Jersey, with a base rent of
$3,000, which lease expires in April 1998.
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.
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 and Class A Warrants were traded on the Nasdaq
SmallCap Market System from August 14, 1995 until May 1, 1997,
under the symbols "MVSI" and "MVSIW", respectively. Since May 2,
1997, the Company's Common Stock has traded on the Nasdaq National
Market System under the symbol "MVSI" and ceased to be traded on the
Nasdaq SmallCap Market. The Class A Warrants were traded on the
Nasdaq National Market System under the symbol "MVSIW" until 4:00
p.m., local New York City time, on December 15, 1997 (See "Subsequent
Events" above for information about the redemption of the Class A
Warrants). On December 29, 1997, the closing price of the Common
Stock was $ 6.06 per share. There are approximately 3,000 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 by The Nasdaq Stock Market, for the fiscal periods
indicated through December 29, 1997.
High Low
Fiscal Year 1996
First fiscal quarter $8.38 $3.88
Second fiscal quarter $7.38 $4.00
Third fiscal quarter $9.75 $6.88
Fourth fiscal quarter $15.63 $8.00
Fiscal year 1997
First fiscal quarter $10.88 $2.75
Second fiscal quarter $6.06 $2.75
Third fiscal quarter $6.13 $2.66
Fourth fiscal quarter $7.69 $4.06
Fiscal year 1998
First fiscal quarter,
through December 29, 1997 $9.06 $5.00
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.
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 contains forward-looking
statements concerning the Company's business and operations.
Such statements involve risks and uncertainties that could
cause actual results to differ due to a variety of risk factors
set forth herein and from time to time in the Company's filings
with the Securities and Exchange Commission.
Overview
Fiscal year 1997 was a year of significant achievement for
MVSI, Inc. The Company was faced with substantial challenges,
both operationally and in the investment community, during
1997, and despite a fourth quarter financial downturn,
emerged a financially stronger company. As a result of the
Company's recently completed warrant redemption program, the
Company received net proceeds of approximately $20.2 million
in cash placing the Company in a strong financial position
entering 1998.
Fiscal year 1997 was also marked by the successful completion of
the Company's move of its securities from the Nasdaq SmallCap
Market to the Nasdaq National Market, the acquisitions of Expert,
Inc. and Technet Computer Services, Inc., and the opening of
Socrates' new 35,000 square foot state-of-the-art information
technology center.
The Company also initiated efforts in the fourth quarter of fiscal
year 1997 to build a coordinated information technologies
capability to capitalize on the expertise of each company and
to better serve the Company's existing and prospective
corporate and government customers. Additionally, the Company
began implementing a strategic plan aimed at returning the
Company's Canadian operations to profitability, to include
reducing indirect staff levels, outsourcing certain manufacturing
operations and redirecting sales and marketing efforts toward
more profitable product lines. As a result of these actions,
substantial investments were made in the Company's expansion,
diversification and upgrading of its products and personnel to
solidly position the Company for its next stage of growth.
The Company's diversification and expansion has also presented
substantial opportunities in software development and application,
to include Year 2000 conversion, training programs in
information technology and new applications for the Company's
proprietary laser vision systems technology. The Company enters
1998 with the resources necessary to leverage these opportunities
and carry out its business plan, although no assurances can be
given as to the Company achieving such success.
Results of Operations
Year ended September 30, 1997 Compared to Year ended
September 30, 1996
The Company reported an increase in sales of $23,898,204 or 149%
to $39,885,840 for the year ended September 30, 1997 as compared
to the same period in fiscal 1996. The increase in sales is
attributable to the Company's current year acquisitions of Expert
(computer integration and distribution) and Technet (software
development), as well as the inclusion of a full year of sales
for Socrates, which was acquired in the fourth quarter of fiscal
1996. Despite the increase in sales, the Company was impacted in
the fourth quarter of Fiscal Year 1997 by the lack of MVS machine
vision scanner sales and the temporary reduction in sales and
increase in expenses due to Socrates' move to its new 35,000
square foot facility in Largo, Maryland.
The gross margins of the Company decreased to 16% from 22%, for
the year ended September 30, 1997, principally as a result of
relatively lower gross profit margins in the Company's computer integration
and distribution businesses. These lower profit margins have also been
impacted by the continued decline in worldwide memory chip prices over
the past two years. Additionally, the gross margins for the Company's laser
machine vision business have declined approximately 15% from the previous
year as a result of a rises in product component costs, market price
pressures and product mix.
For the year ended September 30, 1997, selling expenses increased
by $1,186,700 (139%) to $2,040,277, primarily as a result of
additional sales staff hired at MVS and the Company's current
year acquisitions of Expert (computer integration and
distribution) and Technet (software development), as well
as the inclusion of a full year of selling expenses for
Socrates, which was acquired in the fourth quarter of
fiscal 1996. Administrative expenses increased $938,816
(37%) to $3,471,153 for the fiscal year 1997, as a result
of increased salary expenses associated with the Company's
year acquisitions, as well as an increase in the Company's
overall level of operations.
Research and development expenditures, shown net of Canadian
tax credits, increased by $466,432 to $582,608 for the year
ended September 30, 1997, primarily due to 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 1997 upon
release of certain of the associated products. Depreciation
and amortization expenses for the year ended September 30,
1997, increased by $579,449 to $777,263 as a direct result
of an increase in depreciable assets from the Company's
acquisitions of Expert and Socrates and the resulting goodwill
amortization recorded subsequent to the acquisitions.
For acquisitions completed to date, future annual goodwill
amortization will be approximately $610,000.
Interest income, net of interest expense and financing charges,
decreased by $190,309 from $422,839 to $232,530 for the year
ended September 30, 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. Both periods reflect interest on line
of credit borrowings, and shareholder loans.
The Company has net operating loss carryforwards and research
expenditure available to offset future taxable income generated
in Canada totaling approximately $8,000,000 at September 30, 1997,
expiring in 2010 and investment tax credits of $1,350,000
available as a direct offset to taxes payable in the future.
In addition, the Company has net operating loss carryforwards
available to offset U.S. taxable income of approximately
$600,000 at September 30, 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.
As of September 30, 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. Critical to recovering
the Canadian portion of the deferred tax benefits is the successful
implementation of a plan aimed at returning the Canadian operations
to profitability. Key elements of this plan center on reducing
indirect staff levels, successfully outsourcing certain manufacturing
operations, and redirect sales and marketing efforts toward more
profitable product lines. In the event this plan is unsuccessful
in generating future taxable income, a write down of this asset
may be necessary. The Company will review the valuation allowance
quarterly to determine the future realizability of these deferred
tax assets.
The Company's fourth quarter 1997 operations reflect certain
adjustments to revise prior estimates associated with cost of
sales of the Company's computer integration and distribution
businesses of approximately $200,000, and to revise the provision
for income taxes estimated for each interim period, the result
being an increase in income tax expense by approximately $300,000.
In addition, the Company recorded changes of approximately
$300,000 to adjust inventories of its machine business to
net realizable value. The effect of these items was to reduce
net income for the fourth quarter by $800,000 or $.07 per share.
Net income for the year ended September 30, 1997 was $109,546 or
$0.01 per share, as compared to net income of $1,012,764 or $0.11
per share (primary EPS) and $0.09 per share (fully diluted EPS)
for the year ended September 30, 1996.
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 associated 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.
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.
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 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'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.
Capital Resources, Liquidity and Backlog
As of September 30, 1997, the Company had working capital of
$7,657,175 compared to $9,562,778 as of September 30, 1996.
The Company's fiscal year 1996 (JMR Distributors and Socrates)
and 1997 (Expert and Technet) acquisitions and future expansion
of the Company's laser vision business, including continual
software development, require sufficient working capital to
finance increases in inventory and accounts receivable comparable
to or greater than the increase experienced in the year ended
September 30, 1997 (see Consolidated Statements of Cash Flows).
With the enhanced liquidity of the Company as a result of the
December 1997 Warrant Redemption, which netted the Company
approximately $20,200,000 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 (See
"Subsequent Events - Redemption of Outstanding Class A and
Class B Warrants" above). The Company has no significant
long-term debt outstanding as of September 30, 1997.
The Company increased its bank line of credit with a Canadian
bank, from $365,000 to $1,450,000 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 September 30, 1997). At September 30, 1997 and 1996,
borrowings outstanding on the line of credit amounted to
$1,169,183 and $275,735, 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 September 30, 1997 and 1996, amounted
to $208,082 and $824,238, 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.
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 September 30, 1997 and 1996, total $239,089
and $222,395, 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. At September 30, 1997,
the balance on these loans, including interest, was $50,000 and
$448,119, respectively.
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.
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 marketable securities 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 Underwriter.
During the year ended September 30, 1997, the Company
repurchased 179,500 shares of outstanding MVSI common
stock (reflected as Treasury Stock in the accompanying
balance sheet) in open market and block transactions.
The Company intends to continue to buy back additional
MVSI securities in open market or block transactions in
compliance with U.S. Securities and Exchange Commission
regulations.
At September 30, 1997, the Company's backlog was approximately
$1 million. The Company does not believe that its backlog at
any specific time is necessarily indicative of its future
business.
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.
Year 2000
Certain of the financial information systems used at the Company's
subsidiaries are currently not Year 2000 compliant. The Company
expects to address these issues in 1998 as part of a Company-wide
management information system implementation. Management believes
the Company's operations do not pose complex systems needs and its
financial information system requirements can be satisfied with
"off-the-shelf" software which will not require significant
customization. The costs related to the system implementation
have not yet been quantified but are not believed to be significant.
In addition, with the recent acquisition of Technet Computer Services,
Inc., which possesses significant experience in helping its customers
deal with Year 2000 issues, management believes any Year 2000 issues
can be effectively and efficiently dealt with.
Item 7: Financial Statements
MVSI, Inc., and Subsidiaries
Contents
Report of Independent Certified Public Accountants 20
Consolidated Financial Statements
Consolidated Balance Sheets 21
Consolidated Statements of Earnings 22
Consolidated Statements of Stockholders' Equity 23
Consolidated Statements of Cash Flows 24
Notes to Consolidated Financial Statements 25-39
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, 1997 and 1996,
and the related consolidated statements of earnings,
stockholders' 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,
1997 and 1996, and the results of their operations and their
cash flows for the years then ended, in conformity with generally
accepted accounting principles.
Vienna, Virginia
December 30, 1997
MVSI, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 1997 1996
---------- ----------
Assets
- -------------------------------------
Current Assets
Cash and cash equivalents $1,704,724 $ 313,890
Investments 2,833,931 5,881,202
Accounts receivable,
net of allowance for doubtful
accounts 6,399,507 4,555,259
Note receivable - 500,000
Inventory 3,619,030 2,612,539
Tax credits and income tax receivable 306,283 405,717
Prepaid expenses 219,382 348,302
--------- ----------
Total Current Assets 15,082,857 14,616,909
Property and Equipment, net 984,290 383,518
Capitalized Software Costs 1,723,138 1,164,182
Goodwill 5,641,582 2,735,638
Investment in Joint Venture 262,413 -
Deferred Tax Assets 1,655,471 1,158,430
Other Assets 141,082 101,692
--------- ---------
$25,490,833 $20,160,369
=========== ===========
Liabilities and Stockholders' Equity
- -------------------------------------
Current Liabilities
Line of credit and financing arrangement $ 1,397,943 $1,099,973
Accounts payable and accrued liabilities 5,290,531 3,731,763
Shareholder loans and interest 737,208 222,395
----------- ----------
Total Current Liabilities 7,425,682 5,054,131
Stockholders' Equity
Common stock, $.01 par value,
50,000,000 shares authorized,
11,590,000 and 10,740,000 shares
issued and outstanding, respectively 115,900 107,400
Stock subscription receivable (150,000) (150,000)
Additional paid-in capital 24,599,441 20,577,566
Treasury stock, at cost, 179,500
and 0 shares respectively (572,660) -
Accumulated deficit (5,366,056) (5,475,602)
Unrealized loss on investments
available for sale (205,182) (59,786)
Cumulative translation adjustment (356,292) 106,660
---------- ----------
Total Stockholders' Equity 18,065,151 15,106,238
---------- ----------
$25,490,833 $20,160,369
=========== ===========
The accompanying notes are an integral part of these statements.
MVSI, Inc. and Subsidiaries
Consolidated Statements of Earnings
Years ended September 30, 1997 1996
Sales $39,885,840 $15,987,636
Cost of Sales 33,377,150 12,484,237
----------- -----------
Gross Profit 6,508,690 3,503,399
Expenses
Selling and Marketing 2,040,277 853,577
Administrative 3,471,153 2,532,337
Research and development,
net of tax credits 582,608 116,176
Depreciation and amortization 777,263 197,814
---------- ---------
6,871,301 3,699,904
Loss from Operations (362,611) (196,505)
Interest Income 510,978 40,345
Interest and Financing Charges (278,448) (7,506)
Equity in earnings of joint venture 49,847 -
--------- ---------
Earnings (Loss) Before Income Taxes (80,234) 226,334
Income Tax (Benefit) Provision
Current 82,649 -
Deferred (272,429) (786,430)
--------- ---------
(189,780) (786,430)
--------- ---------
Net Earnings $109,546 $1,012,764
========= ==========
Earnings per Share $ .01 $ 0.09
========= ==========
The accompanying notes are an integral part of these statements
MVSI, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
Common Stock Stock
Shares Amount Subscription
Receivable
---------- --------- -------------
Balance, October 1, 1995 10,140,000 $101,400 $(150,000)
Acquisition JMR
Distributors 100,000 1,000 -
Acquisition Socrates, Inc. 350,000 3,500 -
Net Earnings - - -
Warrant Purchase - - -
Private Placement
Transactions 150,000 1,500 -
Change in Cumulative
Translation Adjustment - - -
Unrealized Gain (Loss) from
Investments - - -
Balance, September 30,1996 10,740,000 107,400 (150,000)
Acquisition - Expert, Inc. 300,000 3,000 -
Acquisition - Technet
Computer Services, Inc. 400,000 4,000 -
Net Earnings - - -
Warrant Conversion 15,000 150 -
Issuance of Common Stock 135,000 1,350 -
Purchase of Treasury Stock - - -
Change in Cumulative
Transition Adjustment - - -
Unrealized Gain (Loss) from
Investments - - -
---------- -------- ----------
Balance, September 30, 1997 11,590,000 $115,900 $(150,000)
========== ======== ==========
(continued)
Additional Accumulated
Paid In Capital (Deficit)
--------------- -----------
Balance, October 1,1995 17,085,475 (6,488,366)
Acquisition JMR
Distributors 508,161 -
Acquisition Socrates,
Inc. 2,385,250 -
Net Earnings - 1,012,764
Warrant Purchase 180 -
Private Placement
Transactions 598,500 -
Change in Cumulative
Translation Adjustment - -
Unrealized Gain (Loss) from
Investments - -
Balance, September 30,1996 20,577,566 $ (5,475,602)
Acquisition - Expert, Inc. 1,064,475 -
Acquisition - Technet
Computer Services, Inc. 2,376,000 -
Net Earnings - 109,546
Warrant Conversion 59,850 -
Issuance of Common Stock 521,550 -
Purchase of Treasury Stock - -
Change in Cumulative
Transition Adjustment - -
Unrealized Gain (Loss) from
Investments - -
Balance, September 30,1997 24,599,441 $(5,366,056)
(continued)
Unrealized
Treasury Stock Gain (Loss) on
Shares Amount Investments
------------------- --------------
Balance, October 1, 1995 - - -
Acquisition JMR
Distributors - - -
Acquisition Socrates,Inc. - - -
Net Earnings - - -
Warrant Purchase - - -
Private Placement
Transactions - - -
Change in Cumulative
Translation Adjustment - - -
Unrealized Gain (Loss) from
Investments - - (59,786)
Balance, September 30,1996 - $ - $(59,786)
Acquisition - Expert, Inc. - - -
Acquisition - Technet
Computer Services, Inc. - - -
Net Earnings - - -
Warrant Conversion - - -
Issuance of Common Stock - - -
Purchase of Treasury
Stock (179,500) (572,660) -
Change in Cumulative
Transition Adjustment - - -
Unrealized Gain (Loss)from
Investments - - (145,396)
-------- ---------- ---------
Balance, September 30,
1997 (179,500) (572,660) (205,182)
======== ========== =========
(continued)
Cumulative
Translation
Adjustment TOTAL
Balance, October 1, 1995 56,301 10,604,810
Acquisition JMR
Distributors - 509,161
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)
Balance, September 30, 1996 $ 106,660 $15,106,238
Acquisition - Expert, Inc. - 1,067,475
Acquisition - Technet
Computer Services, Inc. - 2,380,000
Net Earnings - 109,546
Warrant Conversion - 60,000
Issuance of Common Stock - 522,900
Purchase of Treasury Stock - (572,660)
Change in Cumulative
Transition Adjustment (462,952) (462,952)
Unrealized Gain (Loss) from
Investments - (145,396)
--------- ---------
Balance, September 30, 1997 $(356,292) $18,065,151
========= ===========
MVSI, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended September 30, 1997 1996
Increase (Decrease) in Cash and Cash Equivalents
Cash Flows from Operating Activities
Net income $109,546 $1,012,764
Adjustments to reconcile net income to net
cash from operating activities
Deferred income taxes (272,429) (786,430)
Depreciation and amortization 777,263 197,814
(Gain) loss on foreign exchange - (50,359)
Unrealized (Gain) loss on investments 145,396) 59,786
Equity in earnings of joint venture (49,847) -
Changes in operating assets and liabilities,
net of effects of acquisitions
(Increase) in accounts receivable (487,807) (1,112,781)
(Increase) in inventory (95,703) (1,526,431)
Decrease (increase) in tax credits and
income taxes receivable 369,004 (95,952)
Decrease (increase) in prepaid expenses 84,355 (115,414)
Increase in other assets (17,528) (16,964)
(Decrease) in advance deposits 131,666 (150,854)
(Decrease) in accounts payable and
accrued liabilities (1,106,514) (894,482)
----------- ---------
Net Cash (Used in) Operating Activities (703,390) (3,479,303)
---------- ---------
Cash Flows from Investing Activities
Investment purchases (989,626) -
Proceeds from sales and Borrowings
on margin against investments 4,536,897 2,120,102
Property, plant and equipment purchases (605,976) (223,857)
Capitalized software costs (548,987) (892,687)
Loan to acquired company and other (300,000) -
Investment in joint venture (216,396) -
--------- ----------
Net Cash Provided by Investing Activities 2,175,912 703,558
--------- ----------
Cash Flows from Financing Activities
Net (decrease) increase in line of credit 317,053 609,374
Proceeds from shareholder loans 78,996 -
Payment of shareholder loans - (497,269)
Payment of debt - (19,725)
Proceeds from issuance of common stock 522,900 600,000
Proceeds from exercise of warrant s 60,000 180
Purchase of treasury stock (572,660) -
--------- ---------
Net Cash Provided by Financing Activities 406,289 692,560
--------- ---------
Effect of Exchange Rate Changes on Cash (487,977) 54,039
--------- ---------
Net Increase (Decrease) in Cash 1,390,834 (2,029,146)
Cash at Beginning of Year 313,890 2,343,036
--------- ---------
Cash at End of Year $1,704,724 $313,890
--------- ---------
Supplemental Disclosures:
Income Taxes Paid $ 85,434 --
Interest Paid 261,754 $80,220
MVSI, Inc., and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
NOTE A-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Nature of Operations
The accompanying consolidated financial statements include the
accounts of MVSI, Inc. (a Delaware corporation), and its five
wholly owned subsidiaries, The Company has five wholly-
owned, operating 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 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. MVS
Modular Vision Systems, Inc., a Canadian corporation, is engaged
in the design and manufacture of proprietary machine vision products
and systems and is headquartered in Montreal, (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 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.
Investments in Marketable Securities
Investments consist of shares of a short-term U.S. treasury mutual
fund, net of margin loans of $1,152,879, which bear interest at
5.26% 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 September 30,
1997, was $1,615,181 and $1,218,750, respectively. 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,
1997 and 1996 and unrealized gains and losses are reported as
an element of stockholders' equity. The unrealized loss from
investments available for sale for the year ended September 30,
1997 and 1996 was $205,182 and $59,786. During the year ended
September 30, 1997, the Company sold shares in the mutual fund,
which generated aggregate proceeds of approximately $4,500,000.
MVSI, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
NOTE A-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued
nvestment in Trivision Joint Venture
MVS is a 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 September 30,
1997 of $262,413 includes its initial investment plus
its share of the joint venture profits.
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, 1997 and 1996, management
has established an allowance for doubtful accounts of
approximately $71,000 and $140,000.
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 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.
MVSI, Inc., and Subsidiaries
Notes to Consolidated Financial Statements-Continued
September 30, 1997 and 1996
NOTE A-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. 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 year ended
September 30, 1997 was $209,213. Amortization expense
related to computer software acquired in the Technet acquisition
(Note B) was $33,750 for the year ended September 30, 1997.
The Company's policy is 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 the fiscal years 1997 and 1996 was $382,511 and $107,889,
respectively. No goodwill existed prior to fiscal year 1996.
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.
MVSI, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-Continued
September 30, 1997 and 1996
NOTE A-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued
Income Taxes
Deferred taxes are recognized, subject to a valuation allowance,
for temporary differences in the timing of recognition of certain
income and expenses using the liability method.
Earnings Per Share
Earnings per share (EPS), both primary and fully diluted,
are computed, using the modified treasury stock method, and
are 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, and the exercise of the Company's
outstanding stock options, both of which are considered to be
common stock equivalents.
The number of shares that would be issued from the assumed
exercise of the warrants and options has been reduced by the
number of shares that could have been purchased from the proceeds,
at the average market price (primary EPS) of the Company's stock for
the years ended September 30, 1997 and 1996, and at the closing
market price (fully diluted EPS) for the years ended September
30, 1997 and 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 are
assumed to be invested in government securities. Accordingly,
net earnings (for both primary and fully diluted EPS) is adjusted
for interest revenue, net of tax, from the assumed purchase of
government securities with the excess proceeds.
As of September 30, 1997, the Company's common stock equivalents
are anti-dilutive. Accordingly, primary and fully diluted earnings
per share are not presented and only the basic earnings per share
computation is disclosed. The weighted average number of common
shares outstanding used in the basic EPS, computed without regard
to common stock equivalents, was 10,799,832.
As of September 30, 1996, the Company's common stock equivalents
were dilutive and accordingly were included in the primary [.11] and
fully diluted [.09] earnings per share computations. 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.
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.
MVSI, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-Continued
September 30, 1997 and 1996
NOTE A-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued
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. The
fair value of notes payable to stockholders is not determinable
because prevailing market rates are not applicable to related
party transactions.
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 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 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.
Stock Options
The company accounts for the value of stock options granted in
accordance with Accounting Principles Board Opinion 25 (APB 25),
whereby if stock options exercise prices are set at fair market
value or above at 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.
MVSI, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-Continued
September 30, 1997 and 1996
NOTE A-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued
Stock Options-Continued
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
1997, 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.
NOTE B-ACQUISITIONS
The Company acquired all the outstanding stock of Expert,
Inc. (Expert), effective April 1, 1997. The Company exchanged
300,000 restricted shares of common stock valued at $1,070,000
for all outstanding shares of Expert. The acquisition of Expert
was accounted for as a purchase. The cost exceeded the fair value
of net assets and liabilities resulting in goodwill of approximately
$995,000. Goodwill will be amortized using an estimated life of
ten years. The results of operations of Expert are included in
the accompanying financial statements since the date of acquisition.
The Company acquired Technet Computer Services, Inc. (Technet),
effective July 1, 1997. The Company exchanged 400,000 restricted
shares of common stock valued at $2,380,000 for all the outstanding
shares of Technet. The acquisition of Technet was accounted for
as a purchase. The cost exceeded the fair value of net tangible
assets and liabilities acquired resulting in $270,000 and
$2,300,000 being allocated to computer software and goodwill,
respectively. The value allocated to computer software and
goodwill will be amortized using estimated lives of two and
ten years. The results of operations of Technet 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, 1997 and 1996, reflecting the
acquisitions as if they were consummated on October 1, 1995,
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, 1995. The pro forma information
should be read in conjunction with these historical
financial statements.
MVSI, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-Continued
September 30, 1997 and 1996
NOTE B-ACQUISITIONS-Continued
Pro forma Consolidated Statement of Operations (Unaudited)
Year ended September 30, 1997
Pro Forma
Historical Adjustments Pro forma
Sales $39,885,840 $13,250,788 $53,136,628
Cost of sales 33,377,150 11,750,759 45,127,909
Gross profit 6,508,690 1,500,029 8,008,719
Operating expenses 6,871,301 2,079,852 8,951,153
Loss from operations (2,611) (579,823) (942,434)
Interest and financing charge (282,377) --- (282,377)
Income (loss) before taxes (80,234) (579,823) (660,057)
Income tax (benefit) (189,780) 4,504 (185,276)
Net income (loss) $ 109,546 (584,327) $(474,781)
Net income (loss) per share $ .01 $ (.04)
The Pro forma adjustments reflect the operations of each company
acquired, adjusted for goodwill amortization. These operations
include aggregate non-recurring bonus payments in the amount of
$1,100,000, payable by the acquired companies to certain stockholders
prior to the acquisition by MVSI.
MVSI, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-Continued
September 30, 1997 and 1996
NOTE B-ACQUISITIONS-Continued
Pro forma Consolidated Statement of Operations (Unaudited)
Year ended September 30, 1996
Pro forma
Historical Adjustments Pro forma
Sales $15,987,636 $22,326,851 $38,314,487
Cost of sales 12,484,237 20,338,133 32,822,370
Gross profit 3,503,399 1,988,718 5,492,117
Operating expenses 3,699,904 1,944,978 5,644,882
Loss from operations (196,505) 43,740 (152,765)
Interest and financing
charges (422,839) - (422,839)
Income before taxes 226,334 270,074
Income tax provision
(benefit) (786,430) 1,742 784,688
Net income $ 1,012,764 41,988 $1,054,762
Net income per share $ .11 $.12
MVSI, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-Continued
September 30, 1997 and 1996
NOTE C-FOURTH QUARTER ADJUSTMENTS
The Company's fourth quarter 1997 operations reflect certain
adjustments to revise prior estimates associated with cost
of sales of the Company's computer integration and distribution
businesses of approximately $200,000, and to revise the provision
for income taxes estimated for each interim period, the result
being an increase in income tax expense by approximately $300,000.
In addition, the Company recorded changes of approximately $300,000
to adjust inventories of its machine vision business
to net realizable value. The effect of these items was to reduce
net income for the fourth quarter by $800,000 or $.07 per
share.
NOTE D-INVENTORY
Inventory consists of the following at September 30:
1997 1996
--------- ---------
Raw material $ 1,464,965 $ 623,415
Work in progress 407,476 595,224
Finished goods 1,746,589 1,393,900
----------- -----------
$3,619,030 $2,612,539
=========== ==========
MVSI, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-Continued
September 30, 1997 and 1996
NOTE E-PROPERTY AND EQUIPMENT
Property, plant and equipment consist of the following
at September 30:
1997 1996
------------ -----------
Autos and trucks $124,384 $52,372
Furniture and office
equipment 863,058 277,834
Manufacturing equipment 11,027 9,850
Research and development
equipment 319,272 239,012
Purchased software 152,640 43,270
Leasehold improvements 81,595 23,340
----------- ----------
1,551,976 645,678
Less accumulated depreciation (567,686) (262,160)
---------- ----------
$984,290 $383,518
========== ===========
NOTE F-LINES OF CREDIT
The Company maintains a $1,450,000 line of credit with Hong Kong
Bank of Canada to support the short-term cash needs of the
Company's Canadian operations. Borrowings bear interest at
the bank's prime rate plus .75% (prime was 5.50% at September
30, 1997). At September 30, 1997, borrowings outstanding on the
line of credit amounted to $1,169,183. Borrowings under the line
are subject to 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 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. Additionally, the line balance
is guaranteed by MVSI, Inc. As of September 30, 1997,
the Company was in compliance with these covenants.
In prior years, the Company maintained a $365,000 line of
credit with a Canadian bank, which was replaced by
the above facility 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). The line of credit was
collateralized by all present and future accounts
receivable and inventory of the Company's Canadian
subsidiary.
MVSI, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-Continued
September 30, 1997 and 1996
NOTE F-LINES OF CREDIT-Continued
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)
scheduled, interest-free installments. Borrowings
outstanding under the agreement, at September 30, 1997
and 1996, amounted to $208,082 and $824,238, 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.
The Company must also comply with certain financial
and reporting covenants. As of September 30, 1997, the
Company was in compliance with these covenants.
A Company subsidiary has available at September 30,
1997 a $100,000 line of credit with Citibank with no
borrowings outstanding as of September 30, 1997. The
line of credit is collateralized by certain assets of
the subsidiary and is guaranteed by an officer of
the subsidiary who is also a stockholder of the Company.
Interest is calculated at the bank's prime rate plus 2%.
NOTE G-ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
1997 1996
---------- ----------
Vendor trade payables $3,054,734 $1,942,283
Salaries and commissions
payable 1,189,211 1,331,134
Other accrued liabilities
and deferred revenue 1,046,586 457,585
---------- ----------
$5,290,531 $3,731,002
========== ==========
MVSI, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-Continued
September 30, 1997 and 1996
NOTE H-INCOME TAXES
The income tax (benefit) provision consists of
the following at September 30:
1997 1996
----------- -----------
Current
United States $82,649 $ -
Foreign - -
----------- -----------
82,649 -
Deferred
United States 392,398 77,085
Foreign (369,988) (183,201)
----------- -----------
22,410 (106,116)
Decrease in valuation allowance
- -deferred tax
Asset (294,839) (680,314)
---------- ----------
Net provision $(189,780) $(786,430)
---------- ----------
The effective tax rates for the years ended September 30,1997 and 1996,
were (347)% and (217)% respectively. Reconciliations between the U.S.
federal statutory rate and the effective tax rates follow as of
September 30:
1997 1996
----------- ------------
Tax at U.S. federal
statutory rates $ (29,627) 76,954
Increase (decrease)
resulting from:
State tax (benefit) 90,061 -
Foreign income (loss)
impact of taxation at
different rates 35,805 (4,365)
Change in valuation allowance
against deferred tax asset (294,839) (680,314)
Other permanent differences 8,820 (178,705)
---------- ------------
Income tax benefit $(189,780) $(786,430)
---------- ------------
Notes to Consolidated Financial Statements-Continued
September 30, 1997 and 1996
NOTE H-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:
1997 1996
------------ ----------
Research and development
tax credits $ 983,880 $766,864
Net operating losses and
unclaimed R&D expenses 2,049,752 2,515,060
Accrued compensation 658,905 232,200
Other (61,386) (54,017)
Valuation allowance (1,975,680) (2,301,677)
------------ ------------
Net deferred tax asset $1,655,471 $1,158,430
------------ ------------
The Company has net operating and research expenditure loss
carryforwards available to offset future taxable income generated
in Canada totaling approximately $8,000,000 at September 30, 1997,
expiring in 2010 and investment tax credits of $1,350,000 available in
the future. In addition, the Company has net operating loss carryforwards
available to offset U.S. taxable income of approximately
$600,000 at September 30, 1997, expiring in 2011.
In the event a change of control occurs in the future,
use of all or a portion of the U.S. carryforwards could be
affected.
As of September 30, 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 benefits derived from the Company's operation
in the United States. Recoverability of this asset is dependent
upon the Company generating future taxable income in both Canada
and the United States. Critical to recovering the Canadian portion
of the deferred tax benefits is the successful implementation of
a plan aimed at returning the Canadian operations to profitability.
Key elements of this plan center on reducing indirect staff
levels, successfully outsourcing certain manufacturing operations,
and redirecting sales and marketing efforts toward more
profitable product lines. In the event this plan is
unsuccessful in generating future taxable income, a
write down of this asset may be necessary.
NOTE I-STOCKHOLDERS' EQUITY
Warrants
At September 30, 1997, the Company had outstanding, 5,125,000
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.
In December 1997, the Company completed a 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 net
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.
MVSI, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-Continued
September 30, 1997 and 1996
NOTE I - STOCKHOLDERS' EQUITY-Continued
Stock Option Plan
In April 1997, the Company adopted and the stockholders
ratified the 1997 Stock Option Plan (the "Stock Option Plan"),
under which options to purchase shares of the Company's
common stock have been granted at exercise prices equal to
the market price of the stock at the date of grants,
with the exception of certain stock options granted to
a greater than 10% stockholder with a required exercise
price of 110% of fair market value of the stock at
the date of grant.
The plan authorizes the Company to grant options to
eligible persons to purchase up to 1,000,000 shares of
common stock. Options vest over a two-year period from
the date of grant. The maximum term of the options is
ten years from the grant date.
The Company applies Accounting Principles Board Opinion
No. 25 and related interpretations in accounting for its
stock option plan. Accordingly, no compensation expense
has been recognized related to the granting of such options.
Had the Company recognized compensation expense based upon
the fair value of the options at the grant dates consistent
with SFAS 123, the Company's net income and net income per
share would have changed to the pro forma amounts indicated
below:
1997
----------
Net Income from
continuing operations
As reported $ 109,546
Pro Forma $(126,881)
Earnings Per Share, from
continuing operations
As reported $ .01
Pro Forma $(.01)
The fair value of each option grant is estimated on the date of
the grant using the Black-Scholes options-pricing model with
the following weighted average assumptions used for grants in
1997: expected volatility 74%, risk free interest rate 5.89%
and expected life of options of 2.6 years.
Following is a summary of transactions:
Outstanding, October 1, 1996 -
Granted during the year (at prices
ranging from $2.94 to $7.00 per share) 924,000
Canceled during the year -
Exercised during the year -
----------
Outstanding, September 30, 1997 924,000
Eligible, end of year
for exercise currently (at prices ranging
from $2.94 to $7.00 per share) -
MVSI, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-Continued
September 30, 1997 and 1996
NOTE I-STOCKHOLDERS' EQUITY-Continued
Weighted average stock option price $3.87
-----
Weighted average fair value of options
granted during the year $1.79
-----
NOTE J-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, 1997, are approximately as follows:
Year ending September 30,
1998 $489,597
1999 432,162
2000 334,401
2001 214,658
2002 195,143
---------
$1,665,961
Employment Agreements
The Company has entered into separate employment agreements
with five of its officers, which are subject to certain
termination rights by both the Company and the officers.
In addition to salary 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.
Certain of these agreements also provide for bonuses to be
computed and paid based upon the performance of the
operations under their management or based upon amounts
determined at the discretion of the Board of Directors.
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.
MVSI, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-Continued
September 30, 1997 and 1996
NOTE J-COMMITMENTS AND CONTINGENT LIABILITIES
Continued
Transactions with Stockholders and Affiliates
The Company has loans payable to three officer/stockholders
outstanding as of September 30, 1997. One such loan bears
interest at 9% and is due on demand and carries a balance,
including accrued interest at September 30, 1997 of $239,089.
Two other officers loaned subsidiaries for which they are
employed amounts on an interest bearing, demand basis prior
to being acquired by the Company. At September 30, 1997,
the balance on these loans, including interest, was $50,000
and $448,119, respectively.
Additionally, one of the Company's subsidiaries made payments of
$87,125 during the period ended September 30, 1997, to an affiliated
development company in India, which is partially owned by the former
owner and current President and CEO of the subsidiary.
Other Transactions
As of September 30, 1997, the Company's Canadian subsidiary has
an outstanding purchase commitment under a Manufacturing and
Development Agreement entered into with a local machine and
production shop. The commitment calls for the Subsidiary
to buy specific quantities of finished goods from the vendor
over a period not to exceed one year, and in turn receive
payments for raw materials previously purchased by the
vendor from the subsidiary.
NOTE K_SEGMENT INFORMATION
For purposes of segment reporting for the year ended September
30, 1997, management considers the Company to operate in
three industry segments: the machine vision industry and
the computer product integration and distribution industry,
and the software development industry. For the year ended
September 30, 1996, the Company operated in two segments, the
machine vision industry and the computer product integration and
distribution industry.
For the year ended September 30, 1997, the Company had one
customer which accounted for approximately 21% of its total
revenue. For the year ended September 30, 1996, the Company
had one customer which accounted for approximately 10 percent
of its total revenue. In addition, approximately, 15% and
19% of the Company's sales in fiscal years 1997 and 1996,
respectively, were to customers outside North America. A
substantial portion of the Company's sales outside North
America was to customers in Asia, principally Korea. The
financial crisis currently being experienced in this region
has had and may have in the future a negative impact on the
Company's ability to obtain orders from customers in this
region. However, this impact cannot be estimated at
this time.
MVSI, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-Continued
September 30, 1997 and 1996
NOTE K-SEGMENT INFORMATION Continued
Financial information relating to the Company's industry
segments for the years ended September 30, 1997 and 1996,
is as follows:
1997
-------------------------------------------------
Computer
Integration Software
Machine and Distribution Development
Vision Segment Segment Segment
- -------------------------------------------------------------------------
Sales to Unaffiliated
Customers 5,551,142 33,755,491 579,207
Intersegment sales
Operating profit (loss) (697,368) 1,493,644 (91,302)
Net income (loss) (707,159) 1,115,359 (95,953)
Identifiable assets 7,040,941 12,316,043 2,991,400
(continued)
1997
---------------------------------------------
General
Corporate Total
- ------------------------------------------------------------------------
Sales to Unaffiliated
Customers - 39,855,840
Intersegment sales - -
Operating profit (loss) (1,067,585) (362,611)
Net income (loss) (202,701) 109,546
Identifiable assets 3,142,449 25,490,833
1996
----------------------------------------------
Computer
Integration Software
Machine & Distribution Development
Vision Segment Segment Segment
- ------------------------------------------------------------------------
Sales to Unaffiliated
Customers 4,566,341 11,421,295 -
Intersegment sales - - -
Operating profit (loss) 498,648 380,965 -
Net income 555,094 215,609 -
Identifiable assets 5,670,201 7,439,956 -
(continued)
1996
--------------------------------------------
General
Corporate Total
- -----------------------------------------------------------------------
Sales to Unaffiliated
Customers - 15,987,636
Intersegment sales - -
Operating profit (loss) (1,076,118) (196,505)
Net income 242,061 1,012,764
Identifiable assets 7,050,212 20,160,369
The following is a breakdown of the Company's sales by geographic
region for the years ended September 30, 1997 and 1996:
Sales to unaffiliated customers: 1997 1996
North America, principally United States $35,189,501 $12,970,563
Far East and Asia 4,403,433 1,810,054
Other Regions 292,906 1,207,019
----------- -----------
$39,885,840 $15,987,636
----------- -----------
MVSI, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-Continued
September 30, 1997 and 1996
NOTE L_ACCOUNTING STANDARDS
Earnings Per Share
The Financial Accounting Standards Board recently 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. It replaces the presentation
of primary EPS with a presentation of basic EPS. It also
requires 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 basic EPS computation to
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 or resulted in the issuance of common stock that
then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to Opinion 15. This
Statement requires restatement of all prior-period EPS data
presented. The Company will comply with the requirements of
SFAS No. 128 during the first quarter of fiscal year 1998.
The impact of the adoption of SFAS No. 128 on the financial
statements of the Company has not yet been determined.
Reporting Comprehensive Income
The Financial Accounting Standards Board recently issued
Statement of Financial Accounting Standards No. 130 (SFAS 130),
"Reporting Comprehensive Income," effective for fiscal years
beginning after December 15, 1997. This Statement establishes
standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains, and losses) in a
full set of general-purpose financial statements. This Statement
requires that all items that are required to be recognized
under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the
same prominence as other financial statements. SFAS 130 does not
require a specific format for that financial statement but requires
that an enterprise display an amount representing total comprehensive
income for the period in that financial statement. The Statement requires
that an enterprise classify items of other comprehensive income by their
nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of
financial position. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. The Company will
comply with the disclosure requirements of SFAS 130 in fiscal year 1999.
Disclosures about Segments of an Enterprise and
Related Information
The Financial Accounting Standards Board recently issued
Statement of Financial Accounting Standards No. 131 (SFAS 131),
"Disclosures about Segments of an Enterprise and Related
Information," effective for periods beginning after December 15,
1997. This Statement establishes standards for the way that
public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises
report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic
areas, and major customers.
MVSI, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-Continued
September 30, 1997 and 1996
NOTE L-ACCOUNTING STANDARDS Continued
This Statement requires that a public business enterprise report
financial and descriptive information about its reportable operating
segments. Operating segments are components of an enterprise about
which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Generally,
financial information is required to be reported on the basis
that it is used internally for evaluating segment performance and
deciding how to allocate resources to segments. This Statement
requires that a public business enterprise reports a measure of
segment profit or loss, certain specific revenue and expense
items, and segment assets. It requires a reconciliation of total
segment revenues, total segment profit or loss, total segment
assets, and other amounts disclosed for segments to corresponding
amounts in the enterprise's general-purpose financial statements.
It requires that all public business enterprises report information
about the revenues derived from the enterprise's products or services
(or groups of similar products and services), about the countries
in which the enterprise earns revenues and holds assets, and about
major customers regardless of whether that information is used in
making operating decisions. However, this Statement does not
require an enterprise to report information that is not prepared
for internal use if reporting it would be impracticable. This
Statement also requires that a public business enterprise report
descriptive information about the way that the operating
segments were determined, the products and services provided by
the operating segments, differences between the measurements
used in reporting segment information and those used in the
enterprise's general-purpose financial statements, and changes
in the measurement of segment amounts from period to period.
The Company will comply with the disclosure requirements of SFAS
131 in fiscal year 1998.
NOTE M - SUBSEQUENT EVENTS
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 Warrants 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"). After 5:00 p.m.,
local New York City time, on the Redemption Date, the only
right of any holders of the Class A Warrants or Class B Warrants
who did not either exercise their warrants or, in the case of the
Class A Warrant, trade their warrants to receive the Redemption
Price for each warrant properly tendered to American Stock Transfer
& Trust Company, the Warrant Agent for the warrants.
The following table summarizes the results of the exercise of
warrants and the redemption of warrants pursuant to the Company's
call for the redemption of all outstanding warrants for $.05
cash per warrant. The following information was provided to
the Company by its Warrant Agent.
WARRANTS AVAILABLE WARRANTS PROCEEDS
FOR EXERCISE EXERCISED TO COMPANY
5,125,000 Class A Warrants 5,086,928 $20,347,712
1,000,000 Class B Warrants 1,000,000 4,200,000
-----------
Gross Proceeds to Company: $24,547,712
Less Company open market repurchases
and exercise of 683,654 Class A Warrants ($ 4,333,437)
-----------
Net Proceeds to Company from exercise of
Class A and Class B Warrants $20,214,275 (1)
(1) Net proceeds does not reflect $2,011,427 spent by the
Company to purchase 306,800 shares of Common Stock in open
market repurchases during the warrant redemption period and
pursuant to the Company's previously announced stock repurchase
program. If this expenditure was reflected above, Net
Proceeds to the Company would be $18,202,848.
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.
NOTE N - RESTRUCTURING OF E-NET, INC. TRANSACTION
In August 1996, e-Net, Inc. ("e-Net"), a Delaware corporation,
entered into a letter of intent with the Company, whereby e-Net
would have become a wholly-owned subsidiary of the Company.
Among the principal terms and conditions of the proposed
acquisition, the Company would have exchanged, on a proposed
tax-free basis, 4,000,000 restricted shares of its common
stock, for all of e-Net's 8,000,000 shares of common stock.
In addition, if the acquisition were to be completed, e-Net's
2,000,000 Class A Warrants and 2,000,000 Class B Warrants
would have been exercisable into a total of 2,000,000 shares
of the Company's Common Stock. The newly issued MVSI securities
in the acquisition could not have been sold for a 24-month
period ending September 1998. Edward Ratkovich, the Chairman,
Chief Executive Officer and President of the Company was a
director and is a principal stockholder and warrantholder
of e-Net and Clive Whittenbury, another director of the Company,
is also a director and a stockholder of e-Net.
e-Net is engaged in the business of developing, marketing
and supporting open-client server and integrated software
that enables local, national and international telephone
communications, information exchange and commerce over the
Internet and private Internet Protocol ("IP") networks.
On January 14, 1997, the Company and e-Net entered into a
Mutual Cooperation Agreement. Pursuant to the Mutual
Cooperation Agreement, the Company and e-Net terminated
the proposed acquisition of e-Net by the Company, and
took the following actions to restructure their business
relationship: (1) e-Net executed and issued to the Company
a Convertible Debenture in the principal amount of $1,275,080.76
and bearing interest at 9% per annum, which Convertible
Debenture evidenced monies loaned by the Company to e-Net
up to and as of January 14, 1997; (2) e-Net issued to the
Company and its subsidiaries a non-transferable, fully-paid,
perpetual license to use the software components of e-Net's
Telecom 2000 technology; and (3) e-Net and the Company agreed
to extend to one another and their affiliates the most
favorable pricing, terms and conditions that are granted
to any customer for the purchase, license and support
services with regard to any products or services offered
by it or its subsidiaries (excluding pricing, terms and
conditions offered either the Company or e-Net to the United
States Government. The Company and e-Net have also agreed
in principal to cooperate as strategic partners in any joint
technology projects that required or would benefit from the
integration or use of e-Net's technologies into any of the
Company's products. As of the date of this Report, no material
developments or relationships or benefits have materialized from
the efforts of e-Net and the Company or its subsidiaries to find
a suitable basis for mutual, commercial cooperation.
The terms of the Convertible Debenture provided that the
Company could, at its option, and at any time prior to
September 6, 2002, convert all or any portion of the aggregate
amount owing under the Convertible Debenture into shares of
e-Net Common Stock at a conversion ratio equal to the per-share
offering price in the event of an initial public offering ("IPO")
of e-Net's Common Stock. As the result of a pending IPO by e-Net,
the Company agreed to convert the Convertible Debenture for 250,000
shares of e-Net Common Stock in February 1997. On April 8, 1997,
the Commission declared effective e-Net's initial public offering
registration statement on Form SB-2 (Registration No. 333-3860),
which registration statement also registered for resale the
250,000 shares of e-Net Common Stock, $.01 par value,
beneficially owned by the Company. e-Net's Common Stock,
$.01 par value, commenced trading on the Nasdaq SmallCap
Market System under the trading symbol of "ETEL". The Company
has agreed not to sell any of the 250,000 shares of e-Net
Common Stock until the earlier of the date on which the
lead underwriter for e-Net's initial public offering of e-Net
Common Stock consents to such a sale or April 8, 1998. There
can be no assurances that the Company will sell any or all
of the 250,000 shares of e-Net Common Stock or that any such
sale would allow the Company to realize a profit or gain.
PART IV
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
Post-Effective Amendment No. 2 to Form SB-2 on Form S-3
Registration Statement, and related Prospectus, Registration
File No. 33-89194, declared effective with the Securities and
Exchange Commission ("Commission") on November 14, 1997, and
the registrant's Proxy Statement to be filed with the Commission
on or prior to January 31, 1998.
Item 10. Executive Compensation.
Item 10 is hereby incorporated by reference to the Post-Effective
Amendment No. 2 to Form SB-2 on Form S-3 Registration Statement,
and related Prospectus, Registration File No. 33-89194, declared
effective with the Securities and Exchange Commission
("Commission") on November 14, 1997, and the registrant's
Proxy Statement to be filed with the Commission on or prior
to January 31, 1998.
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
Item 11 is hereby incorporated by reference to the Post-Effective
Amendment No. 2 to Form SB-2 on Form S-3 Registration Statement,
and related Prospectus, Registration File No. 33-89194, declared
effective with the Securities and Exchange Commission
("Commission") on November 14, 1997, and the registrant's
Proxy Statement to be filed with the Commission on or prior
to January 31, 1998.
Item 12. Certain Relationships and Related Transactions.
Item 12 is hereby incorporated by reference to the registrant's
Post-Effective Amendment No. 2 to Form SB-2 on Form S-3
Registration Statement, and related Prospectus, Registration
File No. 33-89194, declared effective with the Securities and
Exchange Commission ("Commission") on November 14, 1997, and
the registrant's Proxy Statement to be filed with the Commission
on or prior to January 31, 1998.
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 Post-Effective Amendment No.
2 to Form SB-2 on Form S-3 Registration Statement, and
related Prospectus, Registration File No. 33-89194, declared
effective with the Securities and Exchange Commission
("Commission") on November 14, 1997, 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. (incorporated by reference
to Exhibit 1.0 to Amendment No. 5 to Registration Statement
on Form SB-2 (File No. 33-89194), filed with Commission on
July 13, 1995)
1.1
Selected Dealers Agreement. (incorporated by reference to
Exhibit 1.1 to Amendment No. 5 to Registration Statement
on Form SB-2 (File No. 33-89194), filed with Commission
on July 13, 1995)
1.2
Form of Agreement Among Underwriters. (incorporated by
reference to Exhibit 1.2 to Amendment No. 5 to Registration
Statement on Form SB-2 (File No. 33-89194), filed with
Commission on July 13, 1995)
3.0
Certificate of Incorporation, filed April 12, 1994.
(incorporated by reference to Exhibit 3.0 to Registration
Statement on Form SB-2 (File No. 33-89194), filed with Commission
on February 9, 1995)
3.1
By-laws, as amended. (incorporated by reference to Exhibit 3.1 to
Registration Statement on Form SB-2 (File No. 33-89194),
filed with Commission on February 9, 1995)
4.0
Specimen Copy of Common Stock Certificate
(incorporated by reference to Exhibit 4.0 to Registration Statement
on Form SB-2 (File No. 33-89194), filed with Commission on February 9, 1995)
4.1
Form of Class A Warrant Certificate. (incorporated by reference
to Exhibit 4.1 to Registration Statement on Form SB-2 (File No. 33-89194),
filed with Commission on February 9, 1995)
4.2
Form of Class B Warrant Certificate. (incorporated by reference to
Exhibit 4.2 to Amendment No. 5 to Registration Statement on
Form SB-2 (File No. 33-89194), filed with Commission on July 13, 1995)
4.3
Form of Underwriter's Purchase Option. (incorporated by reference
to Exhibit 4.3 to Amendment No. 5 to Registration Statement on
Form SB-2 (File No. 33-89194), filed with Commission on July 13, 1995)
4.4
Form of Warrant Agreement (incorporated by reference to Exhibit 4.4 to
Amendment No. 5 to Registration Statement on Form SB-2 (File No. 33-89194),
filed with Commission on July 13, 1995)
4.4.1
Amendment #1 to Warrant Agreement, dated November 11, 1997
(incorporated by reference to Exhibit 4.4 to Post-Effective Amendment
Number 2 to the Form SB-2 on Form S-3 (File No. 33-89194), filed
with the Commission on November 14, 1997).
5.0
Opinion of Paul W. Richter, Esq. For Registrant. (incorporated by
reference to Exhibit 5.0 to Post-Effective Amendment Number 2 to the
Form SB-2 on Form S-3 (File No. 33-89194), filed with the Commission
on November 14, 1997.
10.0
Stock Purchase Agreement and Plan of Reorganization, dated November
1, 1994. (incorporated by reference to Exhibit 10 to Registration
Statement on Form SB-2 (File No. 33-89194), filed with Commission
on February 9, 1995)
10.1
Employment Agreement, Edward Ratkovich, Maj. Gen., USAF (ret.)
(incorporated by reference to Exhibit 10.1 to Registration Statement
on Form SB-2 (File No. 33-89194), filed with Commission on February
9, 1995)
10.2
Employment Agreement, Louis K. Lukanovich. (incorporated by
reference to Exhibit 10.2 to Registration Statement on Form SB-2
(File No. 33-89194), filed with Commission on February 9, 1995)
10.3
Employment Agreement, Bojko D. Vodanovic. (incorporated by reference
to Exhibit 10.3 to Registration Statement on Form SB-2 (File No.
33-89194), filed with Commission on February 9, 1995)
10.4
Texas Instruments Incorporated Agreement, dated April 1, 1994.
(incorporated by reference to Exhibit 10.4 to Registration
Statement on Form SB-2 (File No. 33-89194), filed with Commission
on February 9, 1995)
10.5
Possehl Hong Kong Precision Machining Ltd. Agreement, dated
April 28, 1994 (incorporated by reference to Exhibit 10.5 to
Registration Statement on Form SB-2 (File No. 33-89194),
filed with Commission on February 9, 1995)
10.6
NJC Technical Letter, dated July 21, 1994. (incorporated by
reference to Exhibit 10.6 to Registration Statement on Form
SB-2 (File No. 33-89194), filed with Commission on
February 9, 1995)
10.7
NRC License Agreement, dated September 12, 1986
(incorporated by reference to Exhibit 10.7 to
Registration Statement on Form SB-2 (File No. 33-89194),
filed with Commission on February 9, 1995)
10.8
MRCO License Agreement, dated February 25, 1994.
(incorporated by reference to Exhibit 10.8 to Registration Statement
on Form SB-2 (File No. 33-89194), filed with Commission on February
9, 1995)
10.9
United States Patent, Number 5,406,372, dated April 11, 1995.
(incorporated by reference to Exhibit 10.9 to Registration
Statement on Form SB-2 (File No. 33-89194), filed with
Commission on February 9, 1995)
10.10
Consent and Waiver, dated June 30, 1995. (incorporated by reference
to Exhibit 10.10 to Amendment No. 5 to Registration Statement on
Form SB-2 (File No. 33-89194), filed with Commission on July 13,
1997)
21.0
List of Subsidiaries, filed herewith.
23.0
Consent of Independent Auditors Grant Thornton, LLP, dated
December 30, 1997, filed herewith
24.0
Consent of Paul W. Richter, Esq. (incorporated by reference to
Exhibit 24.0 to Post-Effective Amendment Number 2 to the Form SB-2
on Form S-3 (File No. 33-89194), filed with the Commission on
November 14, 1997).
24.1
Consent of Grant Thornton LLP (incorporated by reference to
Exhibit 24.1 to Post-Effective Amendment Number 2 to the Form
SB-2 on Form S-3 (File No. 33-89194), filed with the Commission
on November 14, 1997).
25.0
Power of Attorney appointing Paul W. Richter (incorporated
by reference to Exhibit 25.0 to Post-Effective Amendment
Number 2 to the Form SB-2 on Form S-3 (File No. 33-89194),
filed with the Commission on November 14, 1997).
B. Reports on Form 8-K.
The Company filed a Form 8-K with the Commission, dated September 1, 1997.
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.
January 4, 1998
By: EDWARD RATKOVICH
--------------------
Edward Ratkovich
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, 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, January 4, 1998
- ---------------- Chief Executive Officer
Edward Ratkovich [Principal Executive Officer]
MARK J. MCKNIGHT Chief Financial Officer, Controller, January 4, 1998
- ---------------- Assistant Secretary
Mark J. McKnight [Principal Financial Officer]
JAMES M. EWAN Director January 4, 1998
- ----------------
James M. Ewan
EDWARD P. ROBERTS Director January 4, 1998
- -----------------
Edward P. Roberts
JEFFREY RUBIN Director January 4, 1998
- -----------------
Jeffrey Rubin
ABBAS FATHI Director January 4, 1998
- -----------------
Abbas Fathi
PAUL W. RICHTER General Counsel and Secretary January 4, 1998
- -----------------
Paul W. Richter
EXHIBIT 21
MVSI, Inc. and Subsidiaries
SUBSIDIARIES OF THE REGISTRANT
The following lists all subsidiaries of MVSI, Inc. as
required by Item 601 of Regulation S-B (Section 228.601):
NAME INCORPORATED IN
Socrates, Inc. Maryland, U.S.A.
Expert, Inc. New York, U.S.A.
Technet Computer Services, Inc. Virginia, U.S.A.
JMR Distributors, Inc. Virginia, U.S.A.
MVS Modular Vision Systems, Inc. Quebec, Canada
EXHIBIT 23
MVSI, INC. AND SUBSIDIARIES
Consent of Independent Certified Public Accountants [LOGO]
We have issued our report dated December 30, 1997, accompanying
the consolidated financial statements incorporated herein
by reference or included in the Annual Report of MVSI, Inc.,
on Form 10-KSB for the year ended September 30, 1997.
We hereby consent to the incorporation by reference of said
reports in the Registration Statement of MVSI, Inc., on
Form S-3 (File No. 33-89194, effective November 14, 1997).
Grant Thornton LLP
Vienna, Virginia
December 30, 1997
ARTICLE 5 FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF EARNINGS FROM
THE COMPANY'S FORM 10-KSB FOR THE YEAR ENDED SEPTEMBER 30, 1997, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<C>
<PERIOD-START> OCT-01-1996
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,704,724
<SECURITIES> 2,833,931
<RECEIVABLES> 6,470,507
<ALLOWANCES> 71,000
<INVENTORY> 3,619,030
<CURRENT-ASSETS> 15,082,857
<PP&E> 1,551,977
<DEPRECIATION> 567,687
<TOTAL-ASSETS> 25,490,833
<CURRENT-LIABILITIES> 7,425,682
<BONDS> 0
0
0
<COMMON> 115,900
<OTHER-SE> 17,949,251
<TOTAL-LIABILITY-AND-EQUITY> 25,490,833
<SALES> 39,885,840
<TOTAL-REVENUES> 39,885,840
<CGS> 33,377,150
<TOTAL-COSTS> 33,377,150
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 76,000
<INTEREST-EXPENSE> (282,377)
<INCOME-PRETAX> (80,234)
<INCOME-TAX> (189,780)
<INCOME-CONTINUING> 109,546
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 109,546
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
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