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:
March 31, 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 March 31, 1998, 15,771,446 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>
March 31, September 30,
1998 1997
ASSETS (Unaudited) (Audited)
- -----------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 2,571,069 $ 1,704,724
Investments 12,377,286 2,833,931
Accounts receivable, net of
allowance for doubtful accounts 8,922,010 6,399,507
Inventory 3,735,420 3,619,030
Tax credits and income tax receivable 297,735 306,283
Prepaid expenses 316,402 219,382
------------- -------------
Total Current Assets 28,219,922 15,082,857
Property and Equipment, net 1,053,680 984,290
Capitalized Software Costs 168,750 1,723,138
Goodwill, net of accumulated amortization 5,344,650 5,641,582
Investment in Joint Venture - 262,413
Deferred Tax Asset 766,118 1,655,471
Other Assets 64,783 141,082
------------ -------------
$ 35,607,903 $ 25,490,833
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Line of credit and financing
arrangements $ 4,104,867 $ 1,397,943
Accounts payable and accrued
liabilities 4,683,953 5,290,531
Shareholder loans and interest 476,079 737,208
----------- ------------
Total Current Liabilities 9,264,899 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 49,289,415 24,599,441
Treasury stock, at cost (11,405,141) (572,660)
Accumulated deficit (11,517,228) (5,366,056)
Unrealized gain (loss) on
investments available for sale 41,310 (205,182)
Cumulative translation adjustment (92,578) (356,292)
------------ ------------
Total Stockholders' Equity 26,343,004 18,065,151
------------ ------------
$ 35,607,903 $ 25,490,833
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
MVSI, Inc. and Subsidiaries
Interim Consolidated Statements of Operations
<TABLE>
<CAPTION>
[RESTATED]
Three Months ended March 31, 1998 1997
- -----------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Sales $ 14,823,275 $ 8,162,627
Cost of Sales 13,425,976 6,997,174
------------ ------------
Gross Profit 1,397,299 1,165,453
Expenses
Selling 1,200,350 170,891
Administrative 653,317 543,396
Depreciation and amortization 227,200 73,187
----------- ------------
2,080,867 787,474
----------- ------------
Earnings (Loss) from Continuing Operations (683,568) 377,979
Interest Income 339,442 120,308
Interest and Financing Charges (15,168) 65,605
----------- ------------
Earnings (Loss) From Continuing Operations
Before Income Taxes (359,294) 563,892
Income Tax Provision
Current - (20,000)
Deferred - 79,870
----------- ------------
- 59,870
----------- ------------
Net Earnings (Loss) From
Continuing Operations $ (359,294) $ 600,128
----------- -----------
Discontinued Operations:
Earnings (loss) from discontinued operations,
including tax effect of $0.00 and $(138,162),
respectively (748,495) 104,081
(Loss) on disposal, including tax effect of
$1,223,900 and $0.00, respectively (4,479,822) -
----------- -----------
Net earnings (loss) from discontinued
operations (5,228,317) 104,081
----------- -----------
Net earnings (loss) $ (5,587,611) $ 608,103
Basic earnings (loss) per share,
continuing operations $ (0.02) $ 0.05
Basic earnings (loss) per share,
discontinued operations (0.33) 0.01
----------- -----------
Basic earnings (loss) per share $ (0.35) $ 0.06
=========== ===========
Weighted average shares outstanding, basic 15,924,611 10,710,972
Diluted earnings (loss) per share,
continuing operations $ (0.02) $ 0.05
Diluted earnings (loss) per share,
discontinued operations (0.33) 0.01
------------- ------------
Diluted earnings (loss) per share $ (0.35) $ 0.06
============= ============
</TABLE>
The accompanying notes are an integral part of these statements
<PAGE>
MVSI, Inc. and Subsidiaries
Interim Consolidated Statements of Operations
<TABLE>
<CAPTION>
[RESTATED]
Six Months ended March 31, 1998 1997
- -----------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Sales $ 27,536,800 $ 14,922,667
Cost of Sales 24,427,450 12,628,325
------------ -------------
Gross Profit 3,109,350 2,294,342
Expenses
Selling 1,096,577 323,764
Administrative 2,361,654 1,104,407
Depreciation and amortization 447,862 143,845
------------ -------------
3,906,093 1,572,016
------------ -------------
Earnings (Loss) from Continuing Operations (796,743) 722,326
Interest Income 434,019 312,408
Interest and Financing Charges (58,574) 106,190
------------ -------------
Earnings (Loss) From Continuing Operations
Before Income Taxes (421,298) 1,140,924
Income Tax Provision
Current - 90,000
Deferred - 116,091
------------ ------------
- 206,091
------------ ------------
Net Earnings (Loss) From Continuing
Operations $ (421,298) $ 934,833
------------ ------------
Discontinued Operations:
Earnings (loss) from discontinued operations,
including tax effect of $0.00 and $(298,162),
respectively (1,250,052) 273,398
(Loss) on disposal, including tax effect of
$1,223,900 and $0.00, respectively (4,479,822) -
------------ -----------
Net earnings (loss) from discontinued
operations (5,729,874) 273,398
------------ -----------
Net earnings (loss) $ (6,151,172) $ 1,208,231
============ ===========
Basic earnings (loss) per share,
continuing operations $ (0.03) $ 0.09
Basic earnings (loss) per share,
discontinued operations (0.40) 0.02
-------------- ------------
Basic earnings (loss) per share $ (0.43) $ 0.11
============== ============
Weighted average shares outstanding, basic 14,267,086 10,728,995
Diluted earnings (loss) per share,
continuing operations $ (0.03) $ 0.08
Diluted earnings (loss) per share,
discontinued operations (0.40) 0.02
-------------- ------------
Diluted earnings (loss) per share $ (0.43) $ 0.10
============== ============
Weighted average shares outstanding, diluted 14,267,086 12,497,734
</TABLE>
The accompanying notes are an integral part of these statements.
MVSI, Inc. and Subsidiaries
Interim Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
[RESTATED]
Six Months ended March 31, 1998 1997
(Unaudited) (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ (563,561) $ 600,128
Adjustments to reconcile net income to net cash
from operating activities:
Deferred income taxes - (13,779)
Depreciation and amortization 331,573 81,824
Unrealized loss on investments 35,951 -
(Gain) loss on foreign exchange - (31,228)
Changes in operating assets and liabilities,
net of acquisitions and dispositions:
Decrease (increase) in accounts receivable (1,182,914) (636,067)
(Increase) decrease in inventory (391,909) 27,457
(Increase) in tax credits and income
taxes receivable 33,373 (7,898)
Decrease in prepaid expenses 88,083 (58,383)
(Increase) in other assets 4,537 (623)
(Decrease) in accounts payable and
accrued liabilities (137,282) (246,480)
------------ -------------
Net Cash (Used in) Operating Activities (1,782,149) (285,049)
------------ -------------
Cash Flows from Investing Activities
Net investment purchases (18,202,848) -
Borrowings on margin against investments 2,229,463 1,707,268
Property, plant and equipment purchases (131,583) (136,930)
Capitalized software costs - (300,730)
------------ -------------
Net Cash (Used in) Provided by
Investing Activities (16,104,968) 1,269,608
------------ -------------
Cash Flows from Financing Activities
Net increase (decrease) in line of credit 397,565 (77,411)
Proceeds from shareholder loans - 4,242
Payment of shareholder loans (105,329) -
Purchase of treasury stock (7,052,844) -
Proceeds from issuance of common stock - 150
Proceeds from conversion of warrants 24,547,712 59,850
------------- -------------
Net Cash Provided by (Used in)
Financing Activities 17,787,104 (13,169)
------------- -------------
Effect of Exchange Rate Changes on Cash 161,564 (30,977)
------------- -------------
Net Increase in Cash 61,551 940,413
Cash at Beginning of Period 1,704,724 313,890
------------- -------------
Cash at End of Period $ 1,766,275 $ 1,254,303
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
MVSI, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements
- -----------------------------------------------------------------------------
March 31, 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. In March 1998, the Company discontinued its Canadian machine
vision operations as described in Note C. The accompanying Consolidated
Statements of Operations and Consolidated Statements of Cash Flows have
been reclassified (restated) to reflect the discontinued operations
treatment. The results of continuing operations for the three months ended
March 31, 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 Fresh Meadows, New York; and MVS
Modular Vision Systems,Inc., a Canadian corporation, engaged in the design
and manufacture of proprietary machine vision products and systems and
headquartered in Montreal, Quebec (collectively referred to as the
"Company"). In March 1998, the Company 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
- -----------------------------------------------------------------------------
March 31, 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 common stock of e-Net, Inc., which is accounted
for using the cost method. The market value of the short-term U.S. treasury
and prime income trust mutual funds and the Company's investment in the
common stock of e-Net, Inc., at March 31, 1998, was $10,752,286 and
$1,625,000, 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 March 31, 1998. During the three months ended
March 31, 1998, the Company recognized gains from the sale of mutual fund
investments of approximately $115,000.
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 March 31, 1998, management has
established an allowance for doubtful accounts of approximately $154,000.
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 excludry 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.
<PAGE>
MVSI, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements-Continued
- -----------------------------------------------------------------------------
March 31, 1998
- -----------------------------------------------------------------------------
NOTE B-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued
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.
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
March 31, 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 March 31, 1998 and
1997, was $153,466 and $68,589, respectively. Management regularly reviews
the carrying value of goodwill against anticipated cash flows of each
business in order to evaluate realizability.
Income Taxes
- -----------
Deferred taxes are recognized, subject to valuation allowance, for temporary
differences in the timing of recognition of certain income and expenses using
the liability method.
Using Estimates in Preparing Financial Statements
- -------------------------------------------------
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
- -----------------
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.
<PAGE>
MVSI, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements-Continued
- -----------------------------------------------------------------------------
March 31, 1998
- -----------------------------------------------------------------------------
NOTE B-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.
Investment securities classified as current assets are based on quoted market
price.
Stock Options
- -------------
The Company accounts for the value of stock options granted in accordance
with Accounting Principles Board Opinion No.25 (APB 25), whereby if stock
options' exercise prices are set at fair market value or above at the
measurement date, usually the date of grant, no compensation expense is
recognized at that date.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation", effective for fiscal years that begin after
December 15, 1996. The new standard encourages all entities to adopt a fair
value based method of accounting for all employee stock option plans. Under
this method, compensation cost is measured at the grant date based on the
value of the stock option award and is recognized over the service period,
which is usually the vesting period.
Optionally, a Company may continue to use the intrinsic value method, as
described by APB 25, that measures compensation costs only to the extent that
the option price is lower than the quoted market price of the stock at the
date of the award. In fiscal year 1998, the Company will continue the
application of Opinion 25, but will comply with the pro forma disclosures of
net income, and earnings per share, as if the fair value based method of
accounting defined in SFAS 123 had been applied.
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
- -----------------------------------------------------------------------------
March 31, 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-DISCONTINUED OPERATIONS
In March 1998, the Company adopted a formal plan to sell 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 a loss on disposal of discontinued operations
of approximately $4,480,000, including tax effects of $1,223,900. The
loss includes the write-off or write-down of specific assets to estimated
net realizable value and the anticipated loss through the June 30,
1998 estimated date of disposal. Negotiations continue on the sale of MVS
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. As a result the Company has not included any estimated
net proceeds in the accompanying financial statements related to the
potential sale of MVS.
The Condensed Statement of Operations relating to the discontinued operations
for the six months ended March 31, 1998 are presented below:
<TABLE>
<CAPTION>
Six Months
Ended
March 31, 1998
---------------------------------------------------------------------------
<S> <C>
Revenue $ 1,221,326
Cost and Expenses 2,471,378
----------------
Loss before income taxes (1,250,052)
Income tax provision -
----------------
Net Loss $ (1,250,052)
================
</TABLE>
<PAGE>
MVSI, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements-Continued
- ----------------------------------------------------------------------------
March 31, 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 March 31, 1998 and September 30, 1997. At March 31, 1998, net
assets held for sale amount to approximately $1,366,000 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-INVESTMENT BANKING RELATIONSHIP
Effective March 1, 1998, the Company engaged BlueStone Capital Partners, L.P.
(BlueStone) to serve as the Company's investment banker and financial
advisor. In connection with the agreement, the Company paid BlueStone an
initial advisory fee and is committed to paying a monthly advisory fee for
their ongoing services. Additionally, the Company is committed to issuing
BlueStone up to 200,000 warrants during 1998, to purchase the Company's
Common Stock at the closing bid price on specific dates of issuance.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion and analysis of the Company's historical results
of operations and of its liquidity and capital resources should be read in
conjunction with the Company's consolidated financial statements and
accompanying notes.
Moreover, this Management's Discussion and Analysis of Financial Condition
and Results of Operations may contain forward-looking statements concerning
the Company's business and operations. Except for the historical information
herein, certain matters discussed in this Report include forward-looking
statements that may involve a number of risks and uncertainties, which
projections and statements are made pursuant to the "Safe Harbor" provisions
of the Private Securities Litigation Reform Act of 1995. Actual risks and
results may vary significantly based on a number of factors, including, but
not limited to: risks in products and technology development; market
acceptance of new products and continuing product demand, the impact of
competitive products and pricing, and other factors mentioned in the
Company's current and future filings with the Securities and Exchange
Commission.
Overview
- --------
Effective March 31, 1998, the Company announced the discontinuance of its
unprofitable machine vision operations, MVS Modular Vision Systems.
The ongoing financial crisis in the Far East market and its negative impact
on sales of MVS' microcomputer chip inspection scanners has continued to
produce losses at MVS. As a result, management concluded that it could no
longer jeopardize the promising potential of the Company's Information
Technology (IT) and software development businesses by continuing to support
MVS. The discontinuance of MVS' operations will require the completion of
certain contractual obligations by the Company between now and the current
anticipated disposal date of June 30, 1998.
The Company recorded record revenues from continuing operations of $14.8
million during the first quarter of fiscal year 1998, an 82% increase over
revenues of approximately $8.1 million for the comparable period in fiscal
year 1997.
The Company has strategically turned its focus to software development and
maintenance,especially in the Year 2000 (Y2K) remediation, testing, and
assessment areas, and to IT services in order to achieve higher profit
margins and profitability for the remainder of FY 1998 and beyond.
Technet, the Company's software development and Y2K subsidiary, has been
awarded several Y2K projects since the first of the year and is currently
awaiting the outcome of a number of Y2K proposals and bids. In addition to
Y2K opportunities, Technet is experiencing a growing demand for its software
consulting capabilities.
In connection with MVSI's refocus into two principal business lines, the
Company will consolidate its three IT subsidiaries. The new consolidated
companies will operate under the "Socrates Technologies" name and will
concentrate 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 it 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.
<PAGE>
Results of Operations
- ---------------------
Quarter Ended March 31, 1998 Compared to Quarter Ended March 31, 1997
- ---------------------------------------------------------------------
The Company reported sales from continuing operations of $14,823,275 for
the three-month period ended March 31, 1998, as compared to $8,162,627 for
the same period in fiscal year 1997. The increase in sales of $6,660,648 or
82% is attributable to the acquisitions of Expert, Inc., effective April 1,
1997 and the acquisition of Technet Computer Services, Inc. ("Technet"),
effective July 1, 1997, and internal growth at Socrates as a result of the
strong increase in demand for the Company's Information Technology (IT)
products and services.
The Company's gross margin from continuing operations decreased to 9.4%
for the three months ended March 31, 1998, as compared to 14.2% for the
three-month period ended March 31, 1997. The decrease in margins as a
percentage of sales 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.
For the three months ended March 31, 1998, selling expenses related to
continuing operations increased by $482,426 (282%). 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 vast Y2K capabilities. Administrative expenses increased $656,954
(121%) to $1,200,350 for the three months ended March 31, 1998, as a result
of an increase in the Company's overall level of operations and the
acquisitions of Expert and Technet.
Interest income, net of interest expense and financing charges, increased
by $138,361 from $185,913 to $324,274 for the three-months ended March 31,
1998. The increase is primarily attributable to increased interest income
due to higher investment balances and higher interest rates earned in the
Company's short-term mutual fund investments coupled with a related reduction
in margin loan interest. The increase also includes gains realized on the
sale of certain mutual fund investments during the quarter.
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 March 31, 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 March 31, 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 March 31, 1998, the Company has recorded net deferred tax assets
totaling approximately $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 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.
<PAGE>
The Company experienced a net loss from continuing operations of
$359,294 or $(.02) per share for the three months ended March 31, 1998, as
compared to net income of $504,022 or $0.05 per share for the three months
ended March 31, 1997.
MVSI reported a loss from discontinued operations, net of tax effect, of
$748,495 in the second quarter of fiscal 1998, versus income from
discontinued operations of $104,081 in the second quarter of fiscal 1997.
The loss in the 1998 fiscal second quarter reflected the inability ofthe
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 reported a loss on disposal of
discontinued operations, net of tax effect, of $4,479,822 for the second
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.
Six Months Ended March 31, 1998 Compared to Six Months Ended March 31, 1997
The Company reported sales from continuing operations of $27,536,800 for
the six-month period ended March 31, 1998 as compared to $14,922,667, for the
same period ended March 31, 1997. The increase in sales of $12,614,133 or
85% is attributable to the acquisitions of Expert and Technet and internal
growth at Socrates as a result of the strong increase in demand for the
Company's IT products and services.
The Company's gross margin from continuing operations increased to
$3,109,350 for the six months ended March 31, 1998, from $2,294,342 in the
same period a year ago, but decreased to 11% for the six months ended March
31, 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.
For the six months ended March 31, 1998, selling expenses increased by
$772,813 (239%) to $1,096,577. 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 vast Y2K capabilities.
Administrative expenses increased $1,257,247 (114%) to $2,361,654 for the six
months ended March 31, 1998, as a result of an increase in the Company's
overall level of operations and the acquisitions of Expert and Technet.
The Company experienced a net loss from continuing operations of
$421,298 or $(.03) per share for the six months ended March 31, 1998, as
compared to net income of $934,833 or $0.09 per share for the six months
ended March 31, 1997.
MVSI reported a loss from discontinued operations, net of tax effect, of
$1,250,052 for the six months ended March 31, 1998, versus income from
discontinued operations of $273,398 for the same period of fiscal 1997. The
loss in the first six months of fiscal 1998 reflected the inability of the
Company's Canadian machine vision operations to cover operating costs from
gross profits on product sales.
<PAGE>
As a result of 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 $5,729,874 for the six
months ended March 31, 1998.
Capital Resources, Liquidity and Backlog
- ----------------------------------------
As of March 31, 1998, the Company had working capital of $18,955,023
compared to $8,105,969 as of March 31, 1997. The Company's prior year
acquisitions and the general future expansion of the Company's primary
business lines will require sufficient working capital to finance increases
in inventory and accounts receivable comparable to or greater than the
increase experienced in the three-months ended March 31, 1998 (see
Consolidated Statements of Cash Flows). With the enhanced liquidity of the
Company as a result of the December 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
significant long-term debt outstanding as of March 31, 1998.
The Company previously had a bank line of credit with a Canadian bank for
support of its Canadian operations temporary cash flow requirements, with
interest payable monthly at the prime rate plus .75%. During the quarter
ended March 31, 1998, the Company paid off the then outstanding line of
credit balance of approximately $1,150,000.
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 March 31, 1998 and 1997, amounted to $4,087,784 and $603,326,
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 March 31, 1998 and 1997, total
$247,390 and $230,788, respectively.
Additionally, two other officers loaned subsidiaries, for which they are
employed, amounts on an interest bearing, demand basis prior to being
acquired by the Company. During the six months ended March 31, 1998,
approximately $265,000 was repaid to these officers. At March 31, 1998, the
balance on the one remaining loan, including interest, was $228,689.
In February 1997, the Company converted a $1.25 million note with e-Net,
Inc. to 250,000 shares of e-Net, Inc. common stock. The 250,000 shares of
e-Net common stock owned by MVSI (classified as investments in the
accompanying balance sheet) were registered as part of e-Net's initial
public offering (IPO) and as of April 8, 1998 became eligible for sale.
As of March 31, 1998, the Company had 1,969,174 shares of its common stock
held in treasury, of which 712,200 shares (at a cost of $3,850,613) were
purchased during the three months ending March 31, 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.
The Company may, from time-to-time, continue to buy back additional MVSI
securities in open market or block transactions in compliance with U.S.
Securities and Exchange Commission regulations.
<PAGE>
The Company and its representatives may from time to time make written or
oral forward-looking statements, including statements contained in the
Company's filings with the U.S. Securities and Exchange Commission and in its
reports to stockholders. In connection with the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995, the Company is hereby
identifying important factors that could cause actual results to differ
materially from those contained in any forward-looking statement made by or
on behalf of the Company. Any such statement is qualified by reference to
the following cautionary statements.
The Company's operating results could be affected by a number of factors.
They include the availability and cost of components, an unexpected inability
to manage expenses relative to sales growth, and an inability to anticipate
downward price pressures by customers using our products and services. Also,
there is the potential problem of competing with companies having
significantly greater financial, technical and market resources than the
Company.
A significant percentage of the Company's sales to major customers
historically has occurred in the last month of a quarter. Changes in
purchasing patterns by one or more of the Company's major customers, and the
inability of the Company to anticipate in advance the mix of customer orders
and its ability to ship the necessary quantities of product near the end of a
fiscal quarter, could result in material fluctuations in quarterly operating
results.
The Company participates in competitive industries marked by changing
technology, which could result in volatility of the Company's common stock
price. Additionally, any shortfall in revenue or earnings from the levels
expected by securities analysts could have an immediate and significant
effect on the trading price of the Company's common stock in any given period.
Moreover, it is possible the Company may not learn of such shortfalls until
late in the fiscal quarter, which could result in an even more immediate and
adverse effect on the trading price of the Company's stock.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
a. Exhibits.
Exhibit 27, Article 5 - Financial Data Schedule
b. Reports on Form 8-K.
--------------------
No reports on Form 8-K were filed during the quarter ended
March 31, 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.
May 14, 1998 By: EDWARD RATKOVICH
----------------
Edward Ratkovich
Chairman of the Board
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED
STATEMENTS OF OPERATIONS FROM THE COMPANY'S FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED MARCH 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-START> OCT-01-1997
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,571,069
<SECURITIES> 12,377,286
<RECEIVABLES> 9,075,871
<ALLOWANCES> 153,861
<INVENTORY> 3,735,420
<CURRENT-ASSETS> 28,219,922
<PP&E> 1,734,247
<DEPRECIATION> 680,567
<TOTAL-ASSETS> 35,607,903
<CURRENT-LIABILITIES> 9,264,899
<BONDS> 0
0
0
<COMMON> 177,406
<OTHER-SE> 26,165,598
<TOTAL-LIABILITY-AND-EQUITY> 35,607,903
<SALES> 14,823,275
<TOTAL-REVENUES> 14,823,275
<CGS> 13,425,976
<TOTAL-COSTS> 13,425,976
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (324,274)
<INCOME-PRETAX> (359,294)
<INCOME-TAX> 0
<INCOME-CONTINUING> (359,294)
<DISCONTINUED> (5,228,317)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,587,611)
<EPS-PRIMARY> (.35)
<EPS-DILUTED> (.35)
</TABLE>
