U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: Commission file number:
June 30, 1998 0-26614
___________
MVSI, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 54-1707718
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8133 Leesburg Pike, Suite 750, Vienna, VA 22182
(Address of principal executive offices) (Zip Code)
(703) 356-5353
(Company's telephone number, including area code)
___________
Check whether the issuer: (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for past 90 days. Yes X No
As of June 30, 1998, 15,641,604 shares of the Registrant's Common Stock,
$.01 par value, were outstanding.
<PAGE>
MVSI, INC.
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements. 3
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations. 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 19
SIGNATURES 20
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
MVSI, Inc. and Subsidiaries
Contents
- ---------------------------------------------------------------------------
Interim Consolidated Financial Statements
Interim Consolidated Balance Sheets 4
Interim Consolidated Statements of Operations 5
Interim Consolidated Statements of Cash Flows 7
Notes to Interim Consolidated Financial Statements 8
<PAGE>
MVSI, Inc. and Subsidiaries
Interim Consolidated Balance Sheets
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
- ------------------------------------------------------------------
(Unaudited) (Audited)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 921,201 $ 1,704,724
Investments 13,217,028 2,833,931
Accounts receivable, net of
allowance for doubtful accounts 11,714,463 6,399,507
Inventory 2,688,479 3,619,030
Tax credits and income
tax receivable 296,464 306,283
Prepaid expenses 671,304 219,382
----------------------------
Total Current Assets 29,508,939 15,082,857
Property and Equipment, net 1,184,538 984,290
Capitalized Software Costs, net 135,000 1,723,138
Goodwill 5,181,185 5,641,582
Investment in Joint Venture - 262,413
Deferred Tax Asset 766,118 1,655,471
Other Assets 100,577 141,082
---------------------------
$36,876,357 $25,490,833
- ------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities
Line of credit and financing
Arrangements $ 2,943,666 $ 1,397,943
Accounts payable and accrued
liabilities 5,033,353 5,290,531
Shareholder loans and interest 251,540 737,208
---------------------------
Total Current Liabilities 8,228,559 7,425,682
Stockholders' Equity
Common stock, $.01 par value,
50,000,000 shares authorized,
17,740,620 and 11,590,000 shares
issued, respectively 177,406 115,900
Stock subscription receivable (150,000) (150,000)
Additional paid-in capital 49,341,984 24,599,441
Treasury stock, at cost (12,366,877) (572,660)
Accumulated deficit (9,629,196) (5,366,056)
Unrealized gain(loss)on investments
available for sale 1,424,937 (205,182)
Cumulative translation adjustment (150,456) (356,292)
---------------------------
Total Stockholders' Equity 28,647,798 18,065,151
---------------------------
$36,876,357 $25,490,833
- ---------------------------------------------------------------------------
<FN>
<F1>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
MVSI, Inc. and Subsidiaries
Interim Consolidated Statements of Operations
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
[RESTATED]
Three Months ended June 30, 1998 1997
- ------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Sales $ 16,330,346 $ 9,972,219
Cost of Sales 13,967,920 8,785,573
-----------------------------
Gross Profit 2,362,426 1,186,646
Expenses
Selling 613,120 192,337
Administrative 1,255,723 694,316
Depreciation and amortization 246,814 93,691
----------------------------
2,115,657 980,344
----------------------------
Earnings from Continuing Operations 246,769 206,302
Investment Income 1,806,029 114,684
Interest and Financing Charges (50,470) 77,094
----------------------------
Earnings from Continuing Operations
before Income Taxes 2,002,328 398,080
Income Tax Provision
Current - 45,000
Deferred - (234,769)
----------------------------
- (189,769)
----------------------------
Net Earnings from Continuing
Operations $ 2,002,328 $ 587,849
Discontinued Operations:
Earnings from discontinued
operations, net of tax effect of
$0.00 and $(191,764), respectively - 228,586
Loss on disposal of discontinued
operations, net of tax effect of
$0.00 and $0.00, respectively (114,296) -
----------------------------
Net earnings (loss) from
discontinued operations (114,296) 228,586
----------------------------
Net earnings $1,888,032 $ 816,435
----------------------------
Basic earnings per share, continuing
Operations $0.13 $0.06
Basic earnings (loss) per share,
discontinued operations (0.01) 0.02
----------------------------
Basic earnings per share $0.12 $0.08
----------------------------
Weighted average shares
outstanding, basic 15,774,944 10,638,082
Diluted earnings per share,
continuing operations $0.12 $0.05
Diluted earnings (loss) per share,
discontinued operations - 0.02
---------------------------
Diluted earnings per share $0.12 $0.07
---------------------------
Weighted average shares
outstanding, diluted 16,125,150 11,171,826
- ---------------------------------------------------------------------------
<FN>
<F1>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
MVSI, Inc. and Subsidiaries
Interim Consolidated Statements of Operations
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
[RESTATED]
Nine Months ended June 30, 1998 1997
- ------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Sales $ 43,867,145 $ 24,894,886
Cost of Sales 38,395,369 21,413,898
-----------------------------
Gross Profit 5,471,776 3,480,988
Expenses
Selling 1,709,697 516,101
Administrative 3,617,377 1,798,723
Depreciation and amortization 694,676 237,536
----------------------------
6,021,750 2,552,360
----------------------------
Earnings from Continuing Operations (549,974) 928,628
Investment Income 2,240,048 427,093
Interest and Financing Charges (109,044) 183,284
----------------------------
Earnings from Continuing Operations
before Income Taxes 1,581,030 1,539,005
Income Tax Provision
Current - 135,000
Deferred - (118,677)
----------------------------
- 16,323
----------------------------
Net Earnings from Continuing
Operations $ 1,581,030 $ 1,522,682
Discontinued Operations:
Earnings from discontinued
operations, net of tax effect of
$0.00 and $(489,926), respectively (1,250,052) 501,984
Loss on disposal of discontinued
operations, net of tax effect of
$0.00 and $1,223,000, respectively (4,594,118) -
----------------------------
Net earnings (loss) from
discontinued operations (5,844,170) 501,984
----------------------------
Net earnings(loss) $(4,263,140) $ 2,024,666
----------------------------
Basic earnings per share, continuing
Operations $ 0.11 $ 0.14
Basic earnings (loss) per share,
discontinued operations (0.40) 0.05
----------------------------
Basic earnings per share $(0.29) $ 0.19
----------------------------
Weighted average shares
outstanding, basic 14,769,705 10,698,690
Diluted earnings per share,
continuing operations $ 0.10 $ 0.12
Diluted earnings (loss) per share,
discontinued operations (0.39) 0.04
---------------------------
Diluted earnings per share $(0.29) $ 0.16
---------------------------
Weighted average shares
outstanding, diluted 15,088,128 12,292,865
- ---------------------------------------------------------------------------
<FN>
<F1>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
MVSI, Inc. and Subsidiaries
Interim Consolidated Statements of Cash Flows
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
[RESTATED]
Nine Months ended June 30, 1998 1997
- ------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Increase (Decrease) in Cash
and Cash Equivalents
Cash Flows from Operating Activities
Net income (loss) $(4,263,140) $ 2,024,666
Adjustments to reconcile net
income to net cash
from operating activities:
Deferred income taxes - (157,512)
Depreciation and amortization 694,676 237,536
Loss on discontinued operations 5,844,170 (501,984)
Unrealized (gain) loss on
investments (1,630,119) 355,980
(Gain) loss on foreign exchange - (743)
Changes in operating assets and
liabilities, net of acquisitions
and dispositions:
(Increase) decrease in
accounts receivable (6,118,897) 878,196
(Increase) in inventory (146,285) (384,807)
(Increase) in tax credits and
income taxes receivable (88,305) -
(Increase) decrease in prepaid
expenses (371,085) 107,833
(Increase) in other assets (46,661) (5,855)
Increase (decrease) in accounts
payable and accrued liabilities 766,320 (2,053,718)
-------------------------
Net Cash (Used in) Operating Activities (5,359,326) (499,592)
-------------------------
Cash Flows from Investing Activities
Net investment purchases (10,383,097) (915,000)
Borrowings on margin against
investments 540,934 3,676,023
Property, plant and equipment
purchases (564,767) (260,917)
-------------------------
Net Cash (Used in) Provided by
Investing Activities (10,406,930) 2,500,106
-------------------------
Cash Flows from Financing Activities
Net increase (decrease) in line
of credit 2,714,906 (274,156)
Proceeds from shareholder loans - 201,920
Payment of shareholder loans (485,668) -
Purchase of treasury stock (11,794,217) (572,660)
Proceeds from issuance of
common stock - 150
Proceeds from conversion of warrants 24,547,712 59,850
-------------------------
Net Cash Provided by (Used in)
Financing Activities 14,982,733 (584,896)
-------------------------
Effect of Exchange Rate Changes
on Cash - (6,158)
-------------------------
Net Increase (Decrease) in Cash (783,523) 1,409,460
Cash at Beginning of Period 1,704,724 313,890
-------------------------
Cash at End of Period $ 921,201 $ 1,723,350
- --------------------------------------------------------------------------
<FN>
<F1>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
MVSI, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements
- ------------------------------------------------------------------
June 30, 1998
- ------------------------------------------------------------------
NOTE A-SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles and with the instructions to Form 10-Q. Accordingly,
they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included.
Effective March 31, 1998, the Company discontinued its Canadian
machine vision operations as described in Note C. The results of
continuing operations for the three months ended June 30, 1998 are
not necessarily indicative of the results to be expected for the
full year. For further information, refer to the financial
statements and footnotes included in the Company's audited
financial statements for the fiscal year ended September 30, 1997.
NOTE B-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Nature of Operations
- ----------------------------------------------
The accompanying interim consolidated financial statements include
the accounts of MVSI, Inc. (a Delaware corporation), and its five
wholly-owned subsidiaries: Socrates Technologies, Inc., a Maryland
corporation, integrates, installs, supports and provides training
on high-end computer and communication equipment and is
headquartered in Largo, Maryland; Technet Computer Services, Inc.,
a Virginia corporation, provides commercial software systems,
customized software development and software maintenance services,
to include Year 2000 (Y2K) solution services, for corporate and
government customers and is headquartered in Vienna, Virginia; JMR
Distributors, Inc., a Virginia corporation, specializes in the
purchase and sale of computer memory chips and network equipment
and is headquartered in Lorton, Virginia; Expert, Inc., a New York
corporation assembles and markets proprietary and generic computer
system products and services for advanced integration and
networking projects and is headquartered in Long Island City, New
York; and MVS Modular Vision Systems, Inc., a Canadian
corporation, engaged in the design and manufacture of proprietary
machine vision products and systems and headquartered in Montreal,
Quebec (collectively referred to as the "Company"). Effective
March 31, 1998, the Company has discontinued its machine vision
operations as described in Note C. The results of operations of
Expert are included in the accompanying financial statements since
the April 1, 1997 acquisition date and the results of Technet are
included in the accompanying financial statements since the July
1, 1997 acquisition date. Significant intercompany accounts and
transactions have been eliminated in consolidation.
Revenue Recognition
- -------------------
Sales are recognized upon shipment of a finished product when
title to the product transfers to the customer. Typical terms of
sale do not provide the customer with the right of return except
for defective products, which are covered either by the Company's
warranty or by the warranty of the original equipment manufacturer
in instances where the Company acts as a distributor. Revenue
from services is generally recognized as the services are rendered
using contractual billing rates. Revenue billed in advance of
customer acceptance is deferred until such time as acceptance
occurs. Amounts received from customers prior to shipment are
recorded as deposit liabilities.
<PAGE>
MVSI, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements-Continued
- ------------------------------------------------------------------
June 30, 1998
- ------------------------------------------------------------------
NOTE B-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents include cash and money market accounts.
Investments
- -----------
Investments consist of a short-term U.S. treasury mutual fund and
a prime income trust fund, which bear interest at 5.25% and 7.20%,
respectively, and the Company's investment in equity securities,
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 equity securities, at June 30, 1998, was $8,036,228
and $5,180,800, respectively. In accordance with Statement of
Financial Accounting Standards No. 115, the Company has classified
these securities as available-for-sale, and recorded the
securities at fair value, based on quoted market prices, with the
unrealized gains or losses, reported in stockholders' equity at
June 30, 1998. During the three months ended June 30, 1998, the
Company recognized gains from the sale of equity investments of
approximately $1,594,000.
Accounts Receivable
- -------------------
Accounts receivable is stated at the unpaid balances, less
allowance on collectible accounts. Management periodically reviews
its outstanding accounts receivable to assess collectibility
of balances based on past experience and evaluation of current
adverse situations which may affect collectibility of receivables.
As of June 30, 1998, management has established an allowance for
doubtful accounts of approximately $152,000.
Inventory Valuation
- -------------------
Inventory is valued at the lower of cost and market. Cost is
determined on a first-in, first-out (FIFO) basis. Management
evaluates obsolete and slow-moving inventory at each reporting
date and either excludes such inventory from the valuation or
provides for a necessary reserve to record inventory at the lower
of cost or market.
Property and Equipment
- ----------------------
Property and equipment are carried at cost, net of an allowance
for accumulated depreciation and amortization. Depreciation is
computed on equipment and furniture, principally using the double-
declining balance method over estimated lives ranging from five to
seven years. Leasehold improvements are amortized on a straight-
line basis over the shorter of the lease term or estimated useful
lives of the related assets.
Capitalized Software Costs
- --------------------------
Capitalized software costs, net of amortization, related to the
Company's machine vision operations were written-off as a result
of the Company discontinuing those operations during the quarter
ended March 31, 1998. These charges have been included in the
Loss on Disposal under Discontinued Operations in the accompanying
financial statements.
<PAGE>
MVSI, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements-Continued
- ------------------------------------------------------------------
June 30, 1998
- ------------------------------------------------------------------
NOTE B-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued
Capitalized Software Costs - Continued
- --------------------------------------
The remaining capitalized software costs relate to computer
software acquired in the July 1, 1997 Technet acquisition (See
Company's audited financial statements for the fiscal year ended
September 30, 1997). Amortization expense related to these costs
was $33,750 for the three months ended June 30, 1998. The
Company's policy is to amortize capitalized software costs by the
greater of (a) the ratio that the current gross revenue for a
product bears to the total current and anticipated future gross
revenue for that product or (b) the straight-line method over the
remaining economic life of the product including the period being
reported on. It is reasonably possible that those estimates of
anticipated future gross revenue, the remaining estimated economic
life of the product, or both will be reduced significantly in the
near term. As a result, the carrying amount of the capitalized
software costs may be reduced materially in the near term.
Goodwill
- --------
Goodwill represents the excess of cost over the fair value of net
assets acquired in business combinations accounted for as
purchases. Goodwill is being amortized on the straight-line
method over ten years. Amortization expense charged to operations
for the three months ended June 30, 1998 and 1997, was $153,466
and $91,613, respectively. Management regularly reviews the
carrying value of goodwill against anticipated cash flows of each
business in order to evaluate realizability.
Income Taxes
- ------------
Deferred taxes are recognized, subject to valuation allowance, for
temporary differences in the timing of recognition of certain
income and expenses using the liability method.
The Company has net operating losses available to offset future
taxable income and taxes payable as a result of the discontinuance
of the Company's Canadian subsidiary. At March 31, 1998, the
discontinuance date, due to uncertainty about future taxable
income, the Company had established a valuation allowance fully
reserving the tax benefit generated from certain deductions made
available on its U.S. tax returns as a result of the disposal. As
of June 30, 1998, the Company reduced its valuation allowance
against deferred tax assets to offset the current period tax
provision.
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.
<PAGE>
MVSI, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements-Continued
- ------------------------------------------------------------------
June 30, 1998
- ------------------------------------------------------------------
NOTE B-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued
Reclassifications
- -----------------
As a result of the discontinued operations presentation of the
Company's machine vision operations, certain amounts in the 1997
financial statements have been reclassified (restated) as required
to conform to the 1998 presentation.
Fair Value of Financial Instruments
- -----------------------------------
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is
practicable to estimate the value:
The carrying amount approximates fair value for cash and cash
equivalents, accounts receivable, notes receivable, accounts
payable, line of credit and other accrued liabilities. Investment
securities classified as current assets are based on quoted market
price.
Stock Options
- -------------
The Company accounts for the value of stock options granted in
accordance with Accounting Principles Board Opinion No.25 (APB25),
whereby if stock options' exercise prices are set at fair market
value or above at the measurement date, usually the date of grant,
no compensation expense is recognized at that date.
The Financial Accounting Standards Board 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 standard encourages all entities to
adopt a fair value based method of accounting for all employee
stock option plans. Under this method, compensation cost is
measured at the grant date based on the value of the stock option
award and is recognized over the service period, which is usually
the vesting period.
Optionally, a Company may continue to use the intrinsic value
method, as described by APB 25, that measures compensation costs
only to the extent that the option price is lower than the quoted
market price of the stock at the date of the award. In fiscal
year 1998, the Company will continue the application of Opinion
25, but will comply with the pro forma disclosures of net income,
and earnings per share, as if the fair value based method of
accounting defined in SFAS 123 had been applied.
Earnings Per Share
- ------------------
In 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No.128 (SFAS 128), "Earnings Per
Share", effective for periods ending after December 15, 1997.
This Statement establishes standards for computing and presenting
earnings per share (EPS) and applies to entities with publicly
held common stock or potential common stock. This Statement
simplifies the standards for computing earnings per share
previously found in APB Opinion No. 15, "Earnings Per Share", and
makes them comparable to international EPS standards. The Company
adopted the provisions of SFAS 128, as required, during its first
quarter of fiscal year 1998.
<PAGE>
MVSI, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements-Continued
- ------------------------------------------------------------------
June 30, 1998
- ------------------------------------------------------------------
NOTE B-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued
Earnings Per Share - Continued
- ------------------------------
SFAS 128 replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires a dual presentation
of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the diluted EPS
computation. Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted-
average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised
or converted into common stock. Diluted EPS is computed using the
weighted-average number of common shares and dilutive potential common
shares outstanding during the period. All earnings per
share amounts for all periods have been presented, and where
necessary, restated to conform to SFAS 128 requirements.
NOTE C-DISCONTINUED OPERATIONS
Effective March 31, 1998, the Company adopted a formal plan to
discontinue its Canadian machine vision subsidiary, MVS Modular
Vision Systems. The results of MVS have been reported separately
as a component of discontinued operations in the accompanying
Consolidated Statements of Operations and Consolidated Statements
of Cash Flows. Prior year financial statements have been
reclassified (restated) to conform to the current year
presentation. In connection with the decision to discontinue the
machine vision operations, the Company recorded, as of March 31,
1998, an estimated loss on disposal of discontinued operations of
approximately $4,480,000, net of tax effects of $1,223,900. The
estimated loss included the write-off or write-down of specific
assets to estimated net realizable value and the anticipated loss
through the estimated date of disposal. During the three months
ended June 30, 1998, the Company recorded an additional loss of
$114,296 related to the discontinued operations. Negotiations
continue on the sale of MVS or its assets and on the reduction of
certain of the subsidiary's liabilities in an effort to recoup a
portion of the Company's investment in MVS. There can be no
assurances, however, that these negotiations will result in
definitive agreements being reached or that the Company will be
able to obtain consideration in any such sale sufficient to recoup
any portion of the Company's investment.
The Condensed Statement of Operations relating to the discontinued
operations for the nine months ended June 30, 1998 are presented below:
<TABLE>
<CAPTION>
Nine Months Ended
June 30, 1998
<S> <C>
Revenue $ 1,354,878
Cost and Expenses 5,975,148
---------------
Loss before income taxes (4,620,270)
Income tax provision 1,223,900
---------------
Net loss $ (5,844,170)
---------------
<PAGE>
MVSI, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements-Continued
- ------------------------------------------------------------------
June 30, 1998
- ------------------------------------------------------------------
NOTE C-DISCONTINUED OPERATIONS-Continued
The assets and liabilities relating to the discontinued machine
vision operations have not been segregated in the accompanying
Consolidated Balance Sheets as of June 30, 1998 and September 30,
1997. At June 30, 1998, net assets held for sale amount to
approximately $1,400,000 and consist of net working capital and
the estimated net realizable value of inventory, property and
equipment and other assets less related liabilities.
NOTE D-SUBSEQUENT EVENTS
General
- -------
In July 1998, the Company was advanced $1,364,019, by a principal
stockholder/officer to be used for general purposes by the
Company. The advance bears interest at the rate of 8% and is due
on demand. The Company anticipates repaying the advance prior to
the Company's September 30, 1998 fiscal year end.
In August 1998, the Company's Board of Directors authorized the
Company to make open market stock repurchases of up to an
additional 1,000,000 shares of MVSI Common Stock. Any such
repurchases of MVSI Common Stock, by the Company, would be in open
market or block transactions in compliance with U.S. Securities
and Exchange Commission regulations.
In August 1998, the Company began the consolidation of JMR and
Expert into Socrates Technologies. Both JMR and Expert are
currently doing business as (d.b.a.) Socrates Technologies. The
consolidation of these subsidiaries is on going with a targeted
completion date of September 30, 1998.
Lease Commitments
- -----------------
In July 1998, the Company entered into an agreement to lease
approximately 15,000 square feet of space in Long Island City, New
York for its subsidiary, Socrates Technologies. The facility
will be used for the manufacturing of build-to-order computer
systems, networking services, systems integration and custom
software development. In addition, the facility will provide
warehouse and office space and service facilities. The five-year
lease term, which includes annual rent escalation clauses,
provides for annual base rent of approximately $140,000, plus the
Company's share of property taxes and maintenance costs.
Additionally, the Company entered into an agreement in August
1998, for the lease of approximately 5,100 square feet in Tysons
Corner, VA. The space will be used for technology training,
system integration personnel and sales offices. The five-year
lease term, which includes annual rent escalation clauses,
provides for annual base rent of approximately $115,000, plus the
Company's share of operating costs.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion and analysis of the Company's
historical results of operations and of its liquidity and capital
resources should be read in conjunction with the Company's
consolidated financial statements and accompanying notes.
Certain statements in this report, including statements
containing the words, "believes", "anticipates", "plans",
"expects", "estimates", "predicts", "foreseeable", "significant"
and other similar expressions, constitute forward-looking
statements within the meaning of the Private Securities Litigation
Reform Act of 1995, as amended. There are a number of important
factors that could cause the Company's actual results to differ
materially from those indicated by such forward-looking
statements. Such factors include, but are not limited to: risks
in products and technological developments; market acceptance of
new products and continuing product demand, the impact of
competitive products, services and pricing, and other factors
mentioned in the Company's current and future filings with the
Securities and Exchange Commission and public announcements.
Overview
- --------
The Company recorded record revenues from continuing
operations of $16.3 million during the third quarter of fiscal
year 1998, a 64% increase over revenues of approximately $9.9
million for the comparable period in fiscal year 1997.
Additionally, the Company achieved record net income from
continuing operations of $2,002,328, as compared to net income
from continuing operations of $587,849 for the third quarter of FY
1997.
The Company is continuing its strategic plans to focus on
software development and maintenance, especially in the Year 2000
(Y2K) remediation, testing, and assessment areas, software
consulting, and IT services in order to achieve higher profit
margins and profitability for the remainder of FY 1998 and beyond.
As previously announced, the Company, in connection with its refocus
into two principal business lines, is consolidating its
three IT subsidiaries (Socrates, JMR and Expert). The
consolidated companies are operating under the "Socrates
Technologies" name and are concentrating on the higher profit
margin areas, such as technology training and computer services,
currently being promoted by Socrates. Socrates will continue the
reseller business as a secondary business line to its core IT services
and capabilities and will refocus the reseller businesses
from wholesale distribution to the more profitable business of
retail sales to corporations and governments. The consolidation
of these subsidiaries is currently on going with a targeted
completion date of September 30, 1998.
Negotiations continue on the sale of MVS Modular Vision Systems or its
assets (See Note C in the accompanying financial statements) and on the
reduction of certain of the discontinued subsidiary's liabilities in an
effort to recoup a portion of the Company's investment in MVS.
<PAGE>
Results of Operations
- ---------------------------------------------------------------------------
Quarter Ended June 30, 1998 Compared to Quarter Ended June 30, 1997
- ---------------------------------------------------------------------------
The Company reported sales from continuing operations of
$16,330,346 for the three-month period ended June 30, 1998, as
compared to $9,972,219 (restated) for the same period in fiscal
year 1997. The increase in sales of $6,358,127 or 64% is
attributable to internal growth at Socrates as a result of the
strong increase in demand for the Company's Information Technology
(IT) products and services, and the acquisition of Technet
Computer Services, Inc. ("Technet"), effective July 1, 1997.
The Company's gross margin from continuing operations
increased to 14.5% for the three months ended June 30, 1998, as
compared to 11.9% for the three-month period ended June 30, 1997.
The increase in margins as a percentage of sales was due
principally to an improved product mix resulting from the
Company's continued focus on higher gross profit margin areas.
For the three months ended June 30, 1998, selling expenses
related to continuing operations increased by $420,783 (219%).
The increase in selling expenses, over those of the prior year,
are primarily a result of the Company's acquisition of Expert and
Technet and the Company's focus and commitment to marketing the
Socrates Technologies "brand name" and Technet's Y2K and software
development and consulting capabilities. Administrative expenses
increased $561,407 (81%) to $1,255,723 for the three months ended
June 30, 1998, as a result of an increase in the Company's overall
level of operations and the acquisition of Technet.
Investment income, net of interest expense and financing
charges, increased by $1,563,781 to $1,755,559 for the three
months ended June 30, 1998. The increase is attributable to the
Company realizing gains of approximately $1.59 million on the
sales of equity investments.
The Company has net operating loss and research expenditure
carryforwards available to offset future taxable income generated
in Canada totaling approximately $8,000,000 at June 30, 1998,
expiring in 2010, and investment tax credits of approximately $1.5
million available as a direct offset to taxes payable in the
future. In the event a change in ownership occurs in the
Company's discontinued Canadian operations, use of all or a
portion of these Canadian generated net operating loss and
research expenditure carryforwards could be affected. In
addition, the Company has net operating loss carry forwards
available to offset U.S. taxable income of approximately
$6,000,000 at June 30, 1998, expiring in 2011. However, in the
event a change in control in the Company occurs in the future, use
of all or a portion of the U.S. carryforwards could be affected.
As of June 30, 1998, the Company has recorded net deferred
tax assets totaling approximately $766,000 relating to tax
benefits derived from the Company's operations in the United
States. Recoverability of this asset is dependent upon the
Company generating future taxable income in the United States.
The Company reviews the valuation allowance quarterly to
determine the future realizability of these deferred tax assets.
Additionally, the Company has net operating losses available to
offset future taxable income and taxes payable as a result of the
discontinuance of the Company's Canadian subsidiary. At March 31,
1998, the discontinuance date, due to uncertainty about future
taxable income, the Company had established a valuation allowance
fully reserving the tax benefit generated from certain deductions
made available on its U.S. tax returns as a result of the
disposal. As of June 30, 1998, the Company reduced its valuation
allowance against deferred tax assets to offset the current period tax
provision.
The Company recorded net income from continuing operations of
$2,002,328 or $0.12 per share (diluted) for the three months ended
June 30, 1998, as compared to net income of $587,849 or $0.05 per
share (diluted) for the three months ended June 30, 1997.
<PAGE>
Related to the discontinuance of the Company's machine vision
operations, effective March 31, 1998, MVSI reported a loss on
disposal of discontinued operations, net of tax effect, of
$114,296 for the third quarter of fiscal 1998. See Note C in the
Notes to Interim Consolidated Financial Statements and the
Overview section in Management's Discussion and Analysis, above.
Nine Months Ended June 30, 1998 Compared to Nine Months Ended June 30, 1997
- ---------------------------------------------------------------------------
The Company reported sales from continuing operations of
$43,867,145 for the nine-month period ended June 30, 1998 as
compared to $24,894,886, for the same period ended June 30, 1997.
The increase in sales of $18,972,259 or 76% is attributable to
internal growth at Socrates as a result of the strong increase in
demand for the Company's IT products and services and the Technet
acquisition.
The Company's gross margin from continuing operations
increased to $5,471,776 for the nine months ended June 30, 1998,
from $3,480,988 in the same period a year ago, but decreased to
12.5% for the nine months ended June 30, 1998, as a percentage of
sales. The decrease was due principally to increased market price
pressures and product mix which resulted in an increase in
revenues in the relatively lower gross profit margin areas of
computer distribution and reselling. The Company is continuing to
strategically focus on its product and service offerings in the higher
profit margin areas to improve gross margins, as evidenced
by the Company's third quarter improvement in this area.
For the nine months ended June 30, 1998, selling expenses
increased by $1,193,596 (231%) to $1,709,697. The increase in
selling expenses, over those of the prior year, are primarily a
result of the Company's acquisition of Technet and the Company's
focus and commitment to marketing the Socrates Technologies "brand
name" and Technet's Y2K and software development and consulting
capabilities. Administrative expenses increased $1,818,654 (101%)
to $3,617,377 for the nine months ended June 30, 1998, as a result
of an increase in the Company's overall level of operations and
the acquisition of Technet.
Investment income, net of interest expense and financing
charges, increased by $1,520,627 to $2,131,004 for the nine months
ended June 30, 1998. The increase is attributable to the Company
realizing gains of approximately $1.59 million on the sales of
equity investments during the quarter ended June 30, 1998.
The Company recorded net income from continuing operations of
$1,581,030 or $0.10 per share (diluted) for the nine months ended
June 30, 1998, as compared to net income from continuing
operations of $1,522,682 or $0.12 per share (diluted) for the nine
months ended June 30, 1998.
MVSI reported a loss from discontinued operations, net of tax
effect, of $(1,250,052) for the nine months ended June 30, 1998,
versus income from discontinued operations of $501,984 for the
same period of fiscal 1997. The loss in fiscal 1998 reflected the
inability of the Company's Canadian machine vision operations to
cover operating costs from gross profits on product sales.
As a result of the discontinuance of the Company's machine
vision operations, effective March 31, 1998, MVSI has reported a
loss on disposal of discontinued operations, net of tax effect, of
$(5,844,170) for the nine months ended June 30, 1998.
<PAGE>
Capital Resources, Liquidity and Backlog
- ----------------------------------------
As of June 30, 1998, the Company had working capital of
$21,280,380 compared to $9,561,893 as of June 30, 1997. The
Company's expansion of the its primary business lines will require
sufficient working capital to finance increases in inventory and
accounts receivable comparable to or greater than the increase
experienced in the three months ended June 30, 1998 (see
Consolidated Statements of Cash Flows). With the enhanced
liquidity of the Company as a result of the December 15, 1997
Warrant Redemption, the Company believes that existing cash and
cash equivalents on hand and investments will be sufficient to
meet the Company's working capital and other financing
requirements for the foreseeable future. The Company continues to
have no long-term debt outstanding as of June 30, 1998.
The Company 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 June
30, 1998 and 1997, amounted to $2,928,381 and $350,807,
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.
The Company has a loan outstanding with a principal
stockholder/officer (Edward Ratkovich) for monies advanced to the
Company in a previous fiscal. The loan bears interest at 9% and
is due on demand. No repayments were made during fiscal year 1997
or during the six months ended March 31, 1998. Total loans and
accrued interest, outstanding at June 30, 1998 and 1997, total
$251,540 and $234,938, respectively. Subsequent to June 30, 1998,
the principal stockholder/officer advanced the Company an
additional $1,364,019, to be used by the Company for general
purposes. The money is expected to be repaid to the
stockholder/officer prior to the Company's September 30, 1998
fiscal year end.
Additionally, two other officers loaned subsidiaries, for
which they are currently employed, amounts on an interest bearing demand
basis prior to being acquired by the Company. During the nine
months ended June 30, 1998, approximately $500,000 was repaid to
these officers. At June 30, 1998, no amounts remained outstanding
to the two officers.
As of June 30, 1998, the Company had 2,099,016 shares of its
common stock held in treasury, of which 201,192 shares were
purchased during the three months ending June 30, 1998. The
shares held in treasury were repurchased as part of two
authorized, and publicly announced, open market stock and warrant
repurchase programs during calendar year 1997. Subsequent to
June 30, 1998, the Company's Board of Director's authorized the
Company to make open market repurchases of up to an additional
1,000,000 shares of MVSI Common Stock. Any such repurchases of
MVSI Common Stock, by the Company, would be in open market or
block transactions in compliance with U.S. Securities and Exchange
Commission regulations.
The Company and its representatives may from time to time
make written or oral forward-looking statements, including
statements contained in the Company's filings with the U.S.
Securities and Exchange Commission and in its reports to
stockholders. In connection with the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995, as amended,
the Company is hereby identifying additional 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.
<PAGE>
The Company's operating results could be affected by a number
of factors. They include the availability and cost of components,
an unexpected inability to manage expenses relative to sales
growth, and an inability to anticipate downward price pressures by
customers using our products and services. Also, there is the
potential problem of competing with companies having significantly
greater financial, technical and market resources than the
Company.
A significant percentage of the Company's sales to major
customers historically has occurred in the last month of a
quarter. Changes in purchasing patterns by one or more of the
Company's major customers, and the inability of the Company to
anticipate in advance the mix of customer orders and its ability
to ship the necessary quantities of product near the end of a
fiscal quarter, could result in material fluctuations in quarterly
operating results.
The Company participates in competitive industries marked by
changing technology, which could result in volatility of the
Company's common stock price. Additionally, any shortfall in
revenue or earnings from the levels expected by securities
analysts could have an immediate and significant effect on the
trading price of the Company's common stock in any given period.
Moreover, it is possible the Company may not learn of such
shortfalls until late in the fiscal quarter, which could result in
an even more immediate and adverse effect on the trading price of
the Company's stock.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits.
---------
Exhibit 20, Press Release, dated August 11, 1998
Exhibit 27, Article 5 - Financial Data Schedule
b. Reports on Form 8-K.
--------------------
Form 8-K, filed June 23, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MVSI, INC.
July 30, 1998
By: EDWARD RATKOVICH
----------------
Edward Ratkovich
Chairman of the Board
</TABLE>
EXHIBIT 20.
[COMPANY LETTERHEAD]
FOR IMMEDIATE RELEASE
Tuesday, August 11, 1998
MVSI AUTHORIZES STOCK REPURCHASE OF UP TO AN ADDITIONAL 1,000,000
SHARES OF MVSI COMMON STOCK
MVSI, Inc. (Nasdaq: "MVSI"), a Washington, D.C. area broad-based
technology products and services company, announced today that the Company's
Board of Directors has authorized the Company to make additional open market
stock repurchases of up to 1,000,000 shares of MVSI Common Stock, $.01 par
value. MVSI says it plans to buy shares on the open market or block
purchases from time to time, depending on market conditions. Since January
1997, the Company and members of the Board of Directors have repurchased
approximately 2,000,000 shares, or about 12% of MVSI's outstanding Common
Stock, under earlier Board authorizations. This latest repurchase program
reflects the Board of Directors continued confidence in the Company's
fundamental strength and long-term growth prospects.
MVSI Chairman Edward Ratkovich stated: "We believe the securities of
MVSI are currently undervalued based on the Company's record revenue and
profit performance in the last quarter and our prediction of significantly
higher revenues and profits from all sources for the current and foreseeable
quarters."
Chairman Ratkovich concluded: "Our progress to date in building our
software development and information technology (IT) business is going very
well. We continue to aggressively address Year 2000 (Y2K) assessment,
remediation, testing and verification work; SAP and PeopleSoft
implementation; Internet, Intranet and Extranet development; technology
training; and custom-built management information systems for corporations
and government, directly with our clients or in partnership with other major
information technology companies, such as multi-billion dollar Science
Applications International Corporation (SAIC) of San Diego, California.
These business areas and significant partnerships continue to show the
greatest potential for growth and profitability for the Company."
Certain statements in this press release, including statements
containing the words, "believes", "anticipates", "plans", "expects",
"estimates", "prediction", "foreseeable" "significant" and similar
expressions, constitute forward looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, as amended. There
are a number of important factors that could cause the Company's actual
results to differ materially from those indicated by such forward-looking
statements. Such factors include, but are not limited to: risks in
products and technological developments; market acceptance of new
products and continuing product demand; the impact of competitive products,
services and pricing; and the other factors mentioned in the Company's
current and future filings with the Securities and Exchange Commission and
public announcements.
For additional public information on MVSI, Inc., please contact the
company at its principal executive offices at 8133 Leesburg Pike,
Suite 750, Vienna, Virginia 22182, telephone (703) 356-5353 and
(703) 356-5354 facsimile. MVSI, Inc.'s website is located at
www.mvsiinc.com.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED
STATEMENTS OF OPERATIONS FROM THE COMPANY'S FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C> <C>
<PERIOD-START> OCT-01-1997
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 921,201
<SECURITIES> 13,217,028
<RECEIVABLES> 11,866,375
<ALLOWANCES> 151,912
<INVENTORY> 2,688,479
<CURRENT-ASSETS> 29,508,939
<PP&E> 1,935,761
<DEPRECIATION> 751,223
<TOTAL-ASSETS> 36,876,357
<CURRENT-LIABILITIES> 8,228,559
<BONDS> 0
0
0
<COMMON> 177,406
<OTHER-SE> 28,470,392
<TOTAL-LIABILITY-AND-EQUITY> 36,876,357
<SALES> 16,330,346
<TOTAL-REVENUES> 16,330,346
<CGS> 13,967,920
<TOTAL-COSTS> 13,967,920
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,755,559)
<INCOME-PRETAX> 2,002,328
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,002,328
<DISCONTINUED> (114,296)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,888,032
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
