<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 30, 1997
INVISION TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation)
0-28236 94-3123544
(Commission File No.) (IRS Employer Identification No.)
3420 E. THIRD AVENUE
FOSTER CITY, CALIFORNIA 94404
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (510) 739-2400
------------------------------
<PAGE>
THIS CURRENT REPORT ON FORM 8-K CONTAINS FORWARD LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES RELATING TO THE ACQUISITION BY INVISION
TECHNOLOGIES, INC., A DELAWARE CORPORATION ("INVISION"), OF QUANTUM MAGNETICS,
INC., A CALIFORNIA CORPORATION ("QUANTUM"), INCLUDING: RISKS RELATING TO THE
POSSIBILITY THAT INTEGRATION OF THE OPERATIONS, TECHNOLOGIES, PRODUCTS AND
EMPLOYEES OF INVISION AND QUANTUM MIGHT NOT OCCUR AS ANTICIPATED; THAT THE
SYNERGIES EXPECTED TO RESULT FROM THE MERGER DESCRIBED BELOW MIGHT NOT OCCUR AS
ANTICIPATED; AND THAT MANAGEMENT'S ATTENTION MIGHT BE DIVERTED FROM DAY-TO-DAY
BUSINESS ACTIVITIES. ACTUAL RESULTS AND DEVELOPMENTS MAY DIFFER MATERIALLY FROM
THOSE DESCRIBED IN THIS CURRENT REPORT. FOR MORE INFORMATION ABOUT INVISION AND
RISKS RELATING TO INVESTING IN INVISION, REFER TO INVISION'S MOST RECENT REPORTS
ON FORM 10-K AND FORM 10-Q.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On September 30, 1997, InVision acquired Quantum by the merger (the
"Merger") of QP Acquisition Corp., a California corporation and wholly-owned
subsidiary of InVision ("Merger Sub") with and into Quantum, with Quantum
surviving the merger. Following the merger Merger Sub ceased to exist and
Quantum became a wholly-owned subsidiary of InVision. The acquisition was
accomplished pursuant to an Agreement and Plan of Merger and Reorganization
dated as of September 3, 1997, among InVision, Merger Sub and Quantum (the
"Reorganization Agreement"). In connection with the Merger, InVision issued
shares of its Common Stock in exchange for the shares of Quantum capital stock
outstanding on September 30, 1997, and will issue additional shares of its
Common Stock upon exercise of Quantum employee stock options assumed by InVision
in the Merger. The total number of shares of InVision Common Stock issued or to
be issued, collectively, in connection with the Merger will not exceed 777,000
shares. The Merger is intended to be a tax-free reorganization under the
Internal Revenue Code and is expected to be accounted for as a pooling of
interests.
InVision, concurrently with the execution of the Reorganization Agreement,
entered into Voting Agreements with certain directors and officers of Quantum
and their affiliates, who in the aggregate held approximately 38.9% of the
outstanding shares of Quantum capital stock. Pursuant to the Voting Agreements,
such directors and officers agreed, among other things, to vote their shares in
favor of the Merger. Dr. Sergio Magistri, a director of Quantum, is also a
director and the President and Chief Executive Officer of InVision.
Quantum Magnetics, Inc. ("Quantum") was founded in 1987 to develop and
commercialize patented and proprietary technology for inspection, detection and
analysis of explosives and other materials based on quadrupole resonance ("QR")
technology, a form of magnetic resonance. Its products, in the prototype stage,
include devices to inspect checked and carry-on luggage and cargo at airports
and customs facilities, a small scanner to detect explosives and illegal drugs
in mail and other small packages, and an advanced security system for the
detection of liquid explosives and flammables in sealed glass or plastic
containers.
A copy of the press release announcing the consummation of the Merger is
attached hereto as Exhibit 99.3 and incorporated by reference herein.
2.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
The Financial Statements required by this item are submitted in a separate
section beginning on page F-1 of this Current Report on Form 8-K and are
incorporated by reference herein:
PAGE
Report of Independent Accountants. . . . . . . . . . . . . . . . . . .F-1
Consolidated Balance Sheets as of September 30, 1995 and 1996,
and June 30, 1997 (unaudited). . . . . . . . . . . . . . . . . . . . .F-2
Consolidated Statements of Operations for the Years Ended
September 30, 1995 and 1996, and the Nine Months Ended
June 30, 1996 and 1997 (unaudited) . . . . . . . . . . . . . . . . . .F-3
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1995 and 1996, and the Nine Months Ended
June 30, 1996 and 1997 (unaudited) . . . . . . . . . . . . . . . . . .F-4
Consolidated Statement of Shareholders' Deficit for the
Years Ended September 30, 1995 and 1996 and the Nine Months
Ended June 30, 1997 (unaudited). . . . . . . . . . . . . . . . . . . .F-5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . .F-6
(b) PRO FORMA FINANCIAL INFORMATION.
The following unaudited combined condensed financial statements give effect
to the combination of InVision and Quantum on a pooling of interests basis. The
pro forma combined condensed balance sheet assumes the Merger took place on June
30, 1997 and combines InVision's unaudited consolidated balance sheet at that
date with the unaudited consolidated balance sheet of Quantum at June 30, 1997.
The pro forma combined condensed statements of operations assume that the Merger
took place as of the beginning of each of the periods presented and combine
InVision's audited consolidated statements of operations for each of the three
years in the period ended December 31, 1996 with Quantum's unaudited
consolidated statement of operations for the year ended September 30, 1994 and
Quantum's audited consolidated statements of operations for the years ended
September 30, 1995 and 1996. The pro forma combined condensed statements of
operations also combine InVision's unaudited consolidated statements of
operations for the six months ended June 30, 1996 and 1997 with the
3.
<PAGE>
unaudited consolidated statements of operations of Quantum for the six months
ended June 30, 1996 and 1997, respectively. Accordingly, the pro forma combined
condensed statements of operations do not include a $440,000 loss for the three
month period ended December 31, 1996 which has been reflected as a charge to
retained earnings to arrive at the June 30, 1997 retained earnings of Quantum.
The pro forma combined condensed statements of operations are not
necessarily indicative of the operating results which would have been achieved
had the Merger been consummated as of the beginning of such periods and should
not be construed as representative of future operations.
These pro forma combined condensed financial statements should be read in
conjunction with the historical financial statements and the notes thereto of
Quantum which are incorporated by reference herein and attached hereto as pages
F-1 to F-19, and with historical financial statements and the notes thereto of
InVision which are included in InVision's Registration Statement on Form S-4, as
filed on September 10, 1997.
4.
<PAGE>
INVISION AND QUANTUM
PRO FORMA COMBINED CONDENSED BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
InVision Quantum
June 30, June 30, Pro Forma
1997 1997 Adjustments Combined
-------- -------- ------------ ----------
ASSETS
<S> <C> <C> <C> <C>
Current Assets
Cash, cash equivalents and short term
investments $ 21,836 $ 659 $ 872(5)(6) $ 23,367
Restricted Cash 112 - - 112
Accounts Receivable 7,237 1,033 - 8,270
Inventories 8,324 70 - 8,394
Prepaid expenses 1,755 - - 1,755
-------- -------- ------ --------
Total current assets 39,264 1,762 872 41,898
Long term restricted cash 800 - - 800
Property and equipment, net 4,087 307 - 4,394
Other assets 1,232 327 (1,200)(3)(6) 359
-------- -------- ------ --------
$ 45,383 $ 2,396 $ (328) $ 47,451
-------- -------- ------ --------
-------- -------- ------ --------
<CAPTION>
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities $ 7,864 $ 670 $ 700(4) $ 9,234
Short-term debt 2,200 727 2,927
Deferred revenue 2,407 307 - 2,714
Current maturities of obligations under capital
leases 32 48 - 80
-------- ------- ------ -------
Total current liabilities 12,503 1,752 700 14,955
-------- ------- ------ -------
Long-term debt obligations including capital
leases 154 222 - 376
-------- ------- ------ -------
Mandatorily redeemable convertible preferred
stock - 4,522 (4,522)(1) -
-------- ------- ------ -------
Stockholders' equity(deficit):
Convertible preferred stock - 533 (533)(1) -
Common stock 11 1,031 (1,030)(1) 12
Additional paid-in capital 50,176 - 6,147(1)(3)(5) 56,323
Deferred stock compensation expense (178) (233) - (411)
Accumulated deficit (17,283) (5,431) (1,090)(4)(6) (23,804)
-------- ------- ------ --------
Total stockholders' equity (deficit) 32,726 (4,100) 3,494 32,120
-------- ------- ------ --------
$ 45,383 $ 2,396 $ (328) $ 47,451
-------- ------- ------ --------
-------- ------- ------ --------
</TABLE>
See accompanying notes to pro forma combined condensed financial statements
5.
<PAGE>
INVISION AND QUANTUM
PRO FORMA COMBINED CONDENSED
STATEMENTS OF OPERATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
--------------------------------------- ------------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues $ - $ 9,066 $ 15,841 $ 7,477 $ 22,785
Cost of revenues - 6,777 9,736 4,641 11,401
--------- -------- -------- -------- --------
Gross Profit - 2,639 6,105 2,836 11,384
--------- -------- -------- -------- --------
Operating expenses:
Research and development 1,141 2,159 3,246 1,995 3,798
Sales and marketing 736 2,190 3,800 1,558 2,822
General and administrative 1,490 2,177 3,884 1,767 2,830
--------- -------- -------- -------- --------
Total operating expenses 3,367 6,426 10,930 5,320 9,450
--------- -------- -------- -------- --------
Income (loss) from operations (3,367) (4,137) (4,825) (2,212) 2,196
Interest expense (including related party interest) (426) (464) (1,732) (1,558) (284)
Other income, net 7 34 172 59 183
--------- -------- -------- -------- --------
Income (loss) before provision for income taxes (3,786) (4,567) (6,385) (3,711) 2,095
Provision for income taxes - - - - 474
--------- -------- -------- -------- --------
Net income (loss) $ (3,786) $ (4,567) $ (6,385) $ (3,711) $ 1,621
--------- -------- -------- -------- --------
--------- -------- -------- -------- --------
Net income (loss) per share (Note 7) $ (0.62) $ (0.72) $(0.45) $0.14
-------- -------- -------- --------
-------- -------- -------- --------
Shares used in per share calculations
(Note 7) 7,418 8,918 8,275 11,701
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying notes to pro forma combined condensed financial statements
6.
<PAGE>
INVISION AND QUANTUM
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS
(UNAUDITED)
1. The pro forma combined condensed financial statements reflect the issuance
of up to 777,000 shares of InVision Common Stock for an aggregate of up to
9,284,705 shares of Quantum Common Stock and Common Stock Equivalents on an
as converted basis (based on shares of Quantum Common Stock and Common
Stock Equivalents outstanding as of July 31, 1997) in connection with the
Merger based on (i) the exercise of warrants to purchase 154,088 and
632,076 shares of Quantum Series A and Series C Stock, respectively, at
exercise prices of $1.50 and $0.50 per share, respectively; (ii) the
conversion of 1,091,328 shares of Quantum Series D Stock into shares of
Quantum Common Stock which occurred prior to consummation of the Merger;
(iii) the distribution of 184,133, 35,969 and 153,423 shares of InVision
Common Stock to holders of Quantum Series A, Series B and Series C Stock,
respectively, in satisfaction of their liquidation preferences in the
amounts of $1.50, $0.75 and $1.00, respectively, based on the designated
InVision Stock price as calculated in accordance with the Reorganization
Agreement of $14.83241 per share; (iv) the distribution of the remaining
407,360 shares of InVision Common Stock equally among (A) the holders of
Quantum Series A and Series C Stock based on the number of shares of
Quantum Common Stock into which the respective series of Quantum Preferred
Stock convert (using a conversion ratio of 1:1.228 for the Quantum Series A
Stock and 1:1 for Quantum Series C Stock) and (B) the holders of Quantum
Common Stock and Common Stock options outstanding on the date of
consummation of the Merger. However, no InVision Common Stock will be
issued to Quantum Stock option holders until such options are exercised.
2. Except as discussed in items 3 and 4 below, on a combined basis, there were
no material transactions between InVision and Quantum during any period
presented.
3. In April 1997, InVision purchased 1,091,328 shares of Quantum Series D
Stock for $1,200,000. Quantum used the proceeds from the sale of the Series
D Preferred Stock to repay certain accrued liabilities and short term debt.
4. The combined company incurred charges to operations of approximately
$700,000 in the quarter ended September 30, 1997 for transaction fees and
costs incident to the Merger. This estimated charge is reflected in the pro
forma combined condensed balance sheet as an increase in the accumulated
deficit and an increase to accrued liabilities as if it had been incurred
in the period ended June 30, 1997. The estimated charge is not reflected in
the pro forma combined statement of operations data because the costs are
of a non-recurring nature.
5. Assumes the exercise of Series A and Series C Preferred Stock warrants to
purchase 154,088 and 632,076 shares of Quantum Series A and Series C
Preferred Stock, respectively, which occurred prior to the consummation of
the Merger generating net proceeds from such exercise of $547,000, as if
such exercise had occurred on June 30, 1997.
6. Assumes the conversion to common stock and subsequent sale by InVision in
July 1997 of 650,000 shares of Series D Preferred Stock generating net
proceeds of $325,000 and a net loss on sale of $390,000, reflected as an
increase in the accumulated deficit, as if such sale had occurred on June
30, 1997. The loss is not reflected in the pro forma combined statement of
operations data.
7. Research and development expenses in the pro forma combined condensed
statement of operations are reflected net of reimbursements and fees
received under research contracts, primarily with U.S. government agencies.
In 1994, such reimbursements and fees exceeded actual costs incurred on a
combined basis.
8. See Notes to Consolidated Financial Statements of InVision and Quantum for
explanations of the methods used to determine the number of shares used to
compute income (loss) per share. Historical net loss per share amounts
have not been presented in 1994 because such amounts are not deemed
meaningful due to the significant changes in InVision's capital structure
that occurred in connection with InVision's initial public offering.
7.
<PAGE>
(c) Exhibits.
Exhibit No. Description
2.1* Agreement and Plan of Merger and Reorganization dated as of
September 3, 1997, among InVision Technologies, Inc., a Delaware
corporation, QP Acquisition Corp., a California corporation, and
Quantum Magnetics, Inc., a California corporation.
2.2** Form of Agreement of Merger between Quantum Magnetics, Inc. and
QP Acquisition Corp.
2.3** Form of Escrow Agreement between the Registrant, Quantum
Magnetics, Inc., Randall R. Lunn and the Escrow Agent.
4.1 Reference is made to Exhibits 2.1, 2.2 and 2.3.
23.1 Consent of Price Waterhouse LLP.
99.1* Form of Voting Agreement dated as of September 3, 1997, by and
between InVision Technologies, Inc., a Delaware corporation, and
each of Techno Venture Management, TVM Techno Venture Enterprises
No. II Limited Partnership, TVM Intertech Limited Partnership,
TVM Eurotech Limited Partnership, TVM Zweite Beteilgung-US
Limited Partnership, TVM Techno Venture Investors No. I Limited
Partnership, Lowell Burnett, Randall Lunn, John Downing, Dale
Sheets and Andrew Hibbs.
99.2* Press release announcing the execution of the Reorganization
Agreement.
99.3 Press release announcing the consummation of the Merger.
* Previously filed with InVision's Current Report on Form 8-K (File No.
0-28236) dated September 3, 1997 and filed September 10, 1997.
** Previously filed with InVision's Registration Statement on Form S-4
(Registration No. 333-35341) filed September 10, 1997.
8.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INVISION TECHNOLOGIES, INC.
Dated: October 7, 1997 By: /s/ Sergio Magistri
---------------------------------------
Sergio Magistri
President and Chief Executive Officer
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
InVision Technologies, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of cash flows and of
shareholders' deficit present fairly, in all material respects, the financial
position of Quantum Magnetics, Inc. and its subsidiary at September 30, 1996 and
1995, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and negative cash flows, and has a net capital deficiency that
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
PRICE WATERHOUSE LLP
San Jose, California
August 22, 1997, except as to Note 15
(Merger Agreement), which is as
of September 30, 1997
F-1.
<PAGE>
QUANTUM MAGNETICS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
Assets (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . $ 60 $ 107 $ 659
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . 501 1,338 1,033
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 113 70
-------- -------- --------
Total current assets 703 1,558 1,762
-------- -------- --------
-------- -------- --------
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . 202 353 307
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 172 327
-------- -------- --------
$ 953 $ 2,083 $ 2,396
-------- -------- --------
-------- -------- --------
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND SHAREHOLDERS' DEFICIT
Current liabilities:
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 742 $ 106 $ 727
Notes payable, related party. . . . . . . . . . . . . . . . . . . . 275 542 -
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . 283 816 233
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . 759 532 437
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . - 120 307
Current maturities of obligations under capital leases. . . . . . . - 43 48
-------- -------- --------
Total current liabilities 2,059 2,159 1,752
-------- -------- --------
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 552 203
Notes payable, related party. . . . . . . . . . . . . . . . . . . . . 280 - -
Long-term obligations under capital leases, less current
portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 46 19
-------- -------- --------
341 598 222
-------- -------- --------
Mandatorily redeemable convertible preferred stock - 2,500 4,522
-------- -------- --------
Commitments and contingencies (Notes 11, 12 and 13)
Shareholders' deficit:
Series B Convertible Preferred Stock, noncumulative
without stated value; 711 shares authorized, 711
shares issued and outstanding at September 30,
1996 and June 30, 1997. . . . . . . . . . . . . . . . . . . . . - 533 533
Common Stock, without stated value; 10,000,
15,000 and 17,000 shares authorized; 2,357,
3,272 and 3,343 shares issued and outstanding . . . . . . . . . 136 718 1,031
Deferred stock compensation expense . . . . . . . . . . . . . . . - (29) (233)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . (1,583) (4,396) (5,431)
-------- -------- --------
Total shareholders' deficit (1,447) (3,174) (4,100)
-------- -------- --------
$ 953 $ 2,083 $ 2,396
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2.
<PAGE>
QUANTUM MAGNETICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, JUNE 30,
------------------------ ------------------------
1995 1996 1996 1997
--------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Contract Revenues . . . . . . . . . . . . . . . . . . $ 2,739 $ 3,213 $ 1,964 $ 3,085
Cost of contract revenues . . . . . . . . . . . . . . 2,389 2,836 1,737 2,499
--------- --------- --------- ---------
Gross profit. . . . . . . . . . . . . . . . . . . . 350 377 227 586
--------- --------- --------- ---------
Operating expenses:
Research and development. . . . . . . . . . . . . . 469 838 717 585
Sales and marketing . . . . . . . . . . . . . . . . 324 824 478 213
General and administrative. . . . . . . . . . . . . 706 1,307 933 566
--------- --------- --------- ---------
Total operating expenses. . . . . . . . . . . . . 1,499 2,969 2,128 1,364
--------- --------- --------- ---------
Loss from operations. . . . . . . . . . . . . . . . . (1,149) (2,592) (1,901) (778)
Interest expense, including related party interest
expense of $31, $47, $36 and $0 . . . . . . . . . . (126) (221) (88) (257)
--------- --------- --------- ---------
Net loss. . . . . . . . . . . . . . . . . . . . . . . $ (1,275) $ (2,813) $ (1,989) $ (1,035)
--------- --------- --------- ---------
--------- ---------- --------- ---------
Net loss per share (Note 3) . . . . . . . . . . . . . $ (0.55) $ (1.00) $ (0.71) $ (0.31)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average shares outstanding (Note 3). . . . . 2,332 2,826 2,815 3,308
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3.
<PAGE>
QUANTUM MAGNETICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, JUNE 30,
------------------------- --------------------------
1995 1996 1996 1997
----------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,275) $ (2,813) $ (1,989) $ (1,035)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization. . . . . . . . . . . . . 34 76 35 80
Stock compensation expense . . . . . . . . . . . . . . 61 149 147 36
Amortization of warrant expense. . . . . . . . . . . . 18 148 69 185
Write-off of purchased in-process research and
development. . . . . . . . . . . . . . . . . . . . . - - - 230
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . 47 (837) (131) 305
Inventories. . . . . . . . . . . . . . . . . . . . . . . (142) 29 (345) 43
Other assets . . . . . . . . . . . . . . . . . . . . . . (29) (124) (83) (80)
Accounts payable . . . . . . . . . . . . . . . . . . . . 189 533 263 (583)
Accrued liabilities. . . . . . . . . . . . . . . . . . . 485 (66) (241) (95)
Deferred revenue . . . . . . . . . . . . . . . . . . . . - 120 16 187
----------- ---------- ---------- ----------
Net cash used in operating activities. . . . . . . . . (612) (2,785) (2,259) (727)
----------- ---------- ---------- ----------
Cash flows from investing activities:
Acquisitions of property and equipment . . . . . . . . . . (69) (168) (165) -
----------- ---------- ---------- ----------
Cash flows from financing activities:
Proceeds from debt financing . . . . . . . . . . . . . . . 852 495 - 423
Repayments of debt financing . . . . . . . . . . . . . . . (103) (45) (45) (550)
Repayments of capital lease financing. . . . . . . . . . . (32) (31) (19) (31)
Proceeds from exercise of stock options. . . . . . . . . . - 81 4 17
Proceeds from issuance of preferred stock. . . . . . . . . - 2,500 2,500 1,420
----------- ---------- ---------- ----------
Net cash provided by financing activities. . . . . . . 717 3,000 2,440 1,279
----------- ---------- ---------- ----------
Net increase in cash and cash equivalents for the period 36 47 16 552
Cash and cash equivalents at beginning of period . . . . . . 24 60 60 107
----------- ---------- ---------- ----------
Cash and cash equivalents at end of period . . . . . . . . . $ 60 $ 107 $ 76 $ 659
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid. . . . . . . . . . . . . . . . . . . . . . . $ 49 $ 54 $ 19 $ 72
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Acquisition of equipment under capital lease . . . . . . . $ 93 $ 59 $ 59 $ 9
Issuance of Common Stock as compensation . . . . . . . . . $ 61 $ 178 $ 178 $ 240
Issuance of Preferred Stock upon
the conversion of debt and accrued interest. . . . . . . $ - $ 533 $ 533 $ 602
Warrants issued in connection with debt financings . . . . $ 53 $ 270 $ 57 $ 56
Purchase of in-process research and development
and property and equipment in exchange for
note payable . . . . . . . . . . . . . . . . . . . . . $ - $ - $ - $ 330
Sale of equipment in exchange for note receivable. . . . . $ - $ - $ - $ 100
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4.
<PAGE>
QUANTUM MAGNETICS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES B
CONVERTIBLE PREFERRED STOCK COMMON STOCK DEFERRED TOTAL
--------------------------- ------------ STOCK ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT COMPENSATION DEFICIT DEFICIT
-------- -------- -------- -------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994 . - $ - 2,182 $ 75 $ - $ (308) $ (233)
Stock compensation . . . . . . . - - 200 62 - - 62
Rescinded shares . . . . . . . . - - (25) (1) - - (1)
Net loss . . . . . . . . . . . . - - - - - (1,275) (1,275)
------- -------- -------- -------- -------- -------- --------
Balance at September 30, 1995 . - - 2,357 136 - (1,583) (1,447)
Stock compensation . . . . . . . - - 367 103 (34) - 69
Amortization of deferred
stock compensation . . . . . . - - - - 5 - 5
Stock options exercised. . . . . - - 48 6 - - 6
Fair value of warrants
issued . . . . . . . . . . . . - - - 323 - - 323
Shares issued under the
employee stock purchase plans - - 500 150 - - 150
Series B Convertible Preferred
Stock issued in exchange for
bank debt and accrued interest 711 533 - - - - 533
Net loss . . . . . . . . . . . . - - - - - (2,813) (2,813)
------- -------- -------- -------- -------- -------- --------
Balance at September 30, 1996 . 711 533 3,272 718 (29) (4,396) (3,174)
Stock compensation (unaudited) . - - - 240 (240) - -
Amortization of deferred stock
compensation (unaudited) . . . - - - - 36 - 36
Fair value of warrants
issued (unaudited) . . . . . . - - - 56 - - 56
Stock options exercised
(unaudited). . . . . . . . . . - - 71 17 - - 17
Net loss (unaudited) . . . . . . - - - - - (1,035) (1,035)
------- ------- ------- ------- ------- ------- -------
Balance at June 30, 1997
(unaudited). . . . . . . . . . 711 $ 533 3,343 $ 1,031 $ (233) $ (5,431) $ (4,100)
------- -------- -------- -------- -------- -------- --------
------- -------- -------- -------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5.
<PAGE>
QUANTUM MAGNETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GOING CONCERN:
For the years ended September 30, 1995 and 1996 and for the nine month
period ended June 30, 1997, Quantum Magnetics, Inc. (the "Company") incurred
negative cash flows from operations of $612,000, $2,785,000 and $727,000,
respectively, and incurred net losses of $1,275,000, $2,813,000, and $1,035,000,
respectively, resulting in an accumulated deficit of $5,431,000 at June 30,
1997.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern which contemplates
continuity of operations, realization of assets and liquidation of liabilities
in the ordinary course of business. In October 1996 and April 1997, the Company
received additional equity funding (Note 8) to be used for working capital
purposes and to fund operating activities. In order to continue to fund
operating activities, management is seeking additional capital from investors or
a strategic partner. If management is unable to obtain such additional capital,
it may be required to liquidate assets in satisfaction of liabilities.
NOTE 2 - ORGANIZATION AND DESCRIPTION OF BUSINESS:
The Company, which was organized in 1987 and began operations in 1988,
performs research and development services in the areas of magnetic sensing and
detecting technologies on a contract basis, principally to various agencies of
the U.S. government. The Company has also developed several aviation security
products to the prototype level. These products use advanced technology known
as quadrupole resonance to detect explosives and contraband contained in
baggage, mail and cargo.
During fiscal 1996, the Company began marketing its products in Europe
through its London based wholly-owned subsidiary, QM Ltd., Inc. However no
significant sales have been recorded, and the Company has curtailed efforts to
commercially market its products in Europe.
The Company was an 85%-owned subsidiary of Quantum Design, Inc. ("QD")
until April 1994 when additional shares of the Company were issued to outside
management and employees of the Company. As of September 30, 1996, the four
principal shareholders who own 96% of QD's common stock also own approximately
27% of the outstanding common stock of the Company.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiary. All significant intercompany transactions and balances have
been eliminated.
CASH EQUIVALENTS
The Company considers all liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents and
accounts receivable which are not collateralized. The Company maintains its
cash and cash equivalents in high credit quality financial institutions. Most
of the Company's accounts
F-6.
<PAGE>
receivable are from U.S. government agencies and companies under contract with
U.S. government agencies under grants which have received funding approval. To
date, the Company has not experienced material losses resulting from
uncollectible receivables.
U.S. government agencies and companies under contract with U.S. government
agencies accounted for 84%, 97% and 100% of contract revenues in fiscal 1995 and
1996 and the nine month period ended June 30, 1997, respectively, and 100% of
September 30, 1995 and 1996 and June 30, 1997 accounts receivable. There can be
no assurance that U.S. government spending on research activities performed by
the Company will be continued in the future, or that the Company will be able to
find alternate sources of funding for its research activities.
INVENTORIES
Inventories are stated at the lower of cost (which approximates the
first-in, first-out (FIFO) basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Expenditures significantly
increasing asset lives are capitalized, while ordinary maintenance and repairs
are charged to operations as incurred.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, usually five years. Leasehold improvements are
amortized using the straight-line method over the lesser of the remaining lease
term or useful life of the improvements.
LONG-LIVED ASSETS
The Company investigates potential impairments of long-lived assets,
primarily consisting of patents, when events or changes in circumstances
indicate that an asset's carrying value may not be recoverable. An impairment
loss is recognized when the sum of the expected future undiscounted net cash
flows is less than the carrying amount of the assets. No such losses have been
identified by the Company.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's notes payable and capital lease obligations
approximate fair value as the rates of interest for these instruments
approximate market rates of interest currently available to the Company for
similar instruments. The carrying amounts of the Company's accrued liabilities
and its bank line of credit approximate their fair values due to their
short-term maturities.
RECOGNITION OF REVENUE
Contract revenues are derived primarily from the performance of services
for various agencies of the U.S. government, through prime government contracts
or through subcontracts issued by U.S. government prime contractors. Contracts
generally are in the form of reimbursement of costs under cost-plus fixed fee
contracts or fixed price contracts which are generally on a best efforts basis.
Revenues are generally recognized as costs are incurred and include a portion of
the total estimated earnings to be realized based upon the relationship between
contract costs incurred to date and total estimated contract costs at
completion. Provision is made for any expected losses on contracts by a charge
to operations in the period during which the losses are first determined to be
probable.
F-7.
<PAGE>
RESEARCH AND DEVELOPMENT COSTS
Company-sponsored research and development costs to develop new concepts
and proprietary systems and products including prototypes are charged to
operations as incurred.
NET LOSS PER SHARE
Net loss per share is computed on the basis of the weighted average number
of common and common equivalent shares from dilutive convertible preferred stock
and stock options outstanding during the period.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL DATA
The unaudited interim financial statements as of June 30, 1997 and for the
nine-month periods ended June 30, 1996 and 1997 have been prepared on the same
basis as the audited financial statements and, in the opinion of management,
include all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial information set forth therein, in
accordance with generally accepted accounting principles. The data disclosed in
the notes to the financial statements at such dates and for such periods are
unaudited. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for any future period.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No.123, "Accounting for Stock Based
Compensation" ("SFAS 123"). SFAS 123 is effective for transactions entered into
in fiscal years beginning after December 15, 1995. This statement establishes a
fair value based method of accounting for employee stock-based compensation
plans. An entity may continue to apply the intrinsic value method of accounting
for such plans, however, it must disclose pro forma net income determined as if
the fair value based method has been applied in measuring compensation cost.
The Company will adopt the disclosure method for the year ending September 30,
1997.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128").
SFAS 128 is effective for the year ending September 30, 1998. Under SFAS 128,
primary earnings per share is replaced by basic earnings per share and fully
diluted earnings per share is replaced by diluted earnings per share. If the
Company had adopted SFAS 128, the Company's basic and diluted loss per share
would not have differed materially from the reported amounts in each period
presented. The Company will adopt SFAS 128 for the year ending September 30,
1998.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for the reporting of comprehensive income
and its components in a full set of general-purpose financial statements for
periods ending after December 15, 1997. Reclassification of financial statements
for earlier periods for comparative purposes is required. The Company will adopt
SFAS 130 for the year ending September 30, 1998.
F-8.
<PAGE>
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of An
Enterprise and Related Information" ("SFAS 131"). SFAS 131 revises information
requirements regarding the reporting of operating segments. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. The Company will adopt SFAS 131 for the year ending
September 30, 1998.
NOTE 4 - BALANCE SHEET COMPONENTS (IN THOUSANDS):
SEPTEMBER 30,
--------------------------- JUNE 30,
1995 1996 1997
--------------------------- ---------------
(UNAUDITED)
ACCOUNTS RECEIVABLE:
Billed $ 382 $ 1,100 $ 685
Unbilled 119 238 348
------------- ------------- ---------------
$ 501 $ 1,338 $ 1,033
------------- ------------- ---------------
------------- ------------- ---------------
Accounts receivable are primarily derived from contracts and subcontracts
with various agencies of the U.S. government. Reimbursable costs incurred under
U.S. government contracts and subcontracts, including allocated indirect
expenses, are subject to audit and adjustment by negotiations between the
Company and U.S. government representatives. Contract revenues have been
recorded in amounts which are expected to be realized upon final audit.
Unbilled receivables are stated at their estimated realizable value and consist
of amounts billed subsequent to the balance sheet date or which are billable
upon the occurrence of specified events, as well as contract retentions and
unreimbursed costs subject to contract execution or modification. Contract
retentions of $36 and $62 at September 30, 1995 and 1996, respectively, are
collectible upon contract completion, final customer approval and final indirect
rate settlement, and the majority thereof is expected to be collected within one
year.
SEPTEMBER 30,
--------------------------- JUNE 30,
1995 1996 1997
--------------------------- ---------------
(UNAUDITED)
INVENTORIES:
Raw material $ 31 $ 113 $ 70
Work-in-progress 38 - -
Finished goods 73 - -
------------- ------------- ---------------
$ 142 $ 113 $ 70
------------- ------------- ---------------
------------- ------------- ---------------
F-9.
<PAGE>
SEPTEMBER 30,
------------------ JUNE 30,
1995 1996 1997
-------- -------- --------
(UNAUDITED)
PROPERTY AND EQUIPMENT:
Machinery and equipment $ 302 $ 475 $ 484
Leasehold improvements 17 71 71
-------- -------- --------
319 546 555
Less: accumulated depreciation
and amortization (117) (193) (248)
-------- -------- --------
$ 202 $ 353 $ 307
-------- -------- --------
-------- -------- --------
Included in property and equipment is $93 and $127 of assets under capital
leases with $4 and $23 of accumulated amortization on September 30, 1995 and
1996, respectively.
SEPTEMBER 30,
------------------ JUNE 30,
1995 1996 1997
-------- -------- --------
(UNAUDITED)
ACCRUED LIABILITIES:
Accrued employee compensation $ 223 $ 252 $ 222
Reserve for losses on contracts 99 124 117
Customer deposits 129 - -
Accrued interest 27 28 48
Other 281 128 50
-------- -------- --------
$ 759 $ 532 $ 437
-------- -------- --------
-------- -------- --------
F-10
<PAGE>
NOTE 5 - NOTES PAYABLE:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1995 1996 1997
------------- ------------ ------------
Notes payable are summarized as follows (in thousands): (UNAUDITED)
<S> <C> <C> <C>
Revolving credit agreement (the "Line of Credit")
with a bank that provides up to $500,000, due December
1997. The outstanding balance bears interest at the prime
rate plus 0.5% (8.75% at September 30, 1996) $ - $ 203 $ 203
Subordinated promissory notes payable (the "Notes
Payable II") to a third party, due December 1997. The
outstanding balance bears interest at 6% payable upon
maturity - 200 -
Subordinated promissory notes payable (the "Notes
Payable III") to a group of investors, due at the earlier
of October 1997 or a qualified equity financing. The
outstanding balance bears interest at 8% payable upon
maturity 352 352 352
Convertible subordinated promissory notes payable to a
group of investors, due March 1996. The outstanding
balance bears interest at 10% payable upon maturity 425 - -
Subordinated promissory note payable to a third party,
payable quarterly through January 1998. The outstanding
balance bears interest at 10% also payable quarterly - - 403
Less discount attributable to warrants (35) (97) (28)
------------- ------------ ------------
742 658 930
Less current portion (742) (106) (727)
------------- ------------ ------------
$ - $ 552 $ 203
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
The Line of Credit is collateralized by the Company's accounts receivable
and inventory and by third party pledge agreements. The Company is able to draw
down on the Line of Credit up to the dollar amount of cash pledged with a
maximum of $500,000. At September 30, 1996, $212,640 had been pledged by a
group of investors. Of this amount, $30,000 was pledged by the directors of the
Company. In exchange for the pledged amounts, the group of investors received
warrants to purchase shares of Series C Preferred Stock (Note 8). Such value
represents a discount to be amortized as a financing cost over the original term
of the Line of Credit. The aggregate fair value of warrants, as determined at
their grant dates, was $102,000. Amortization of $0, $15,000 and $87,000 was
recorded as interest expense for the years ended September 30, 1995 and 1996,
and the nine-month period ended June 30, 1997, respectively.
The Notes Payable II were issued with nondetachable warrants to purchase
108,145 shares of Series A Preferred Stock at a price of $1.50 per share. The
warrants were exercisable upon an event of default on the Notes Payable II and
were subsequently canceled upon repayment of the Notes Payable II (Note 14).
F-11
<PAGE>
The Notes Payable III were issued in August 1995 and were initially due in
October 1996. In connection with the Notes Payables III, the holders received
warrants to purchase shares of Series A Preferred Stock (Note 8). The aggregate
fair value of the warrants was determined to be $53,000. Amortization of the
discount of $18,000, $35,000 and $0 was included in interest expense for the
years ended September 30, 1995 and September 30, 1996 and the nine-month period
ended June 30, 1997, respectively.
In November 1995, the Notes Payable III were amended and the maturity date
extended to October 1997. In connection with this extension, the Company issued
warrants to purchase shares of Series A Preferred Stock (Note 8). The aggregate
fair value of the warrants was determined to be $19,000. Amortization of the
discount of $0, $9,000 and $10,000 was included in interest expense for the
years ended September 30, 1995 and 1996 and the nine-month period ended June 30,
1997, respectively.
NOTE 6 - NOTES PAYABLE, RELATED PARTIES:
<TABLE>
<CAPTION>
Notes payable to related parties consist of the following (in thousands):
SEPTEMBER 30,
------------------------
1995 1996
-------- ----------
<S> <C> <C>
Promissory note payable to QD ("Agreement I"), payable in monthly
installments of $6,200, including interest at prime plus 2% adjusted
periodically through December 1996, with the remaining balance due
January 1997. The note is collateralized by substantially all of the
assets of the Company $ 332 $ 287
Revolving note payable to QD ("Agreement II"), interest only payments made
until maturity in October 1996, interest accrues at prime plus 1.5% 148 148
Convertible subordinated promissory notes (the "Notes Payable I") due to
certain shareholders of the Company, maturing December 1996.
Outstanding balance bears interest at 10% payable upon maturity 75 167
Less discount attributable to warrants - (60)
-------- ----------
555 542
Less current portion (275) (542)
-------- ----------
$ 280 $ -
-------- ----------
-------- ----------
</TABLE>
Agreements I and II (collectively, the "Agreements") each contain a right
to convert clause allowing QD to convert the outstanding balances of the notes
and accrued interest into common stock of the Company at the fair market value
of such stock in an event of default, subject to certain restrictions, as
defined in the Agreements. The Company must comply with certain covenants which
include, but are not limited to, a requirement that the Company maintain a
senior liability balance, as defined by the Agreement, excluding debt to QD, of
less than $850,000 and a tangible net worth plus subordinated debt balance of
not less than negative $650,000. In November 1995, Agreement I was amended and
the maturity date extended to January 1997. In exchange for the extension, the
F-12
<PAGE>
Company issued warrants to purchase shares of Series A Preferred Stock, as
described in Note 8. The aggregate fair value of the warrants was determined to
be $15,000. Amortization of the discount of $0, $11,000 and $4,000 was included
in interest expense for the years ended September 30, 1995 and 1996 and the
nine-month period ended June 30, 1997, respectively. In October 1996, the
principal and accrued interest of Agreements I and II were converted to 869,036
shares of Series C Preferred Stock (Note 8).
The Notes Payable I contain an automatic conversion clause whereby, if the
Company issues and sells equity securities for gross proceeds of $300,000 or
more prior to repayment, the Notes Payable I are automatically converted into
the number of shares of such equity security that could be purchased for the
principal and accrued interest of the Notes Payable I at the price per share at
which such equity security is sold by the Company. In connection with the Notes
Payable I, the holders received warrants to purchase shares of Series C
Preferred Stock (Note 8). The aggregate fair value of the warrants was
determined to be $111,000. Amortization of the discount of $0, $56,000 and
$55,000 was included in interest expense for the years ended September 30, 1995
and 1996 and the nine-month period ended June 30, 1997, respectively. Upon
consummation of the Series C Preferred Stock offering in October 1996, the
principal balance of Notes Payable I and accrued interest thereon aggregating
$167,000 were converted into 335,436 shares of Series C Preferred Stock.
NOTE 7 - OTHER RELATED PARTY TRANSACTIONS:
In fiscal 1995 and 1996, revenues from services performed for QD were
$168,000 and $18,000, respectively, and payments to QD for research and
development services performed on behalf of the Company were $179,000 and
$24,000, respectively. There were no material amounts owed by the Company to QD
or amounts owing by QD to the Company at either September 30, 1995 or 1996.
The Company utilizes computer processing services provided by QD without
charge. The value of these services is not considered material and,
accordingly, has not been reflected in these consolidated financial statements.
NOTE 8 - MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SERIES A
PREFERRED STOCK:
The Company has authorized 7,911,340 shares of Preferred Stock, no par
value, of which 2,000,000, 711,340, 3,500,000 and 1,200,000 have been designated
Series A, B, C and D, respectively (collectively referred to as "Preferred
Stock"). The Series A, B and D Preferred Stock is mandatorily redeemable (see
"Redemption" below).
F-13
<PAGE>
A summary of Mandatorily Redeemable Convertible Preferred Stock activity is
as follows (in thousands, except per share amounts):
Shares Amount
------------ -----------
Issuance of Mandatorily Redeemable
Convertible Series
A Preferred Stock at $1.50 per share 1,667 $ 2,500
------------ -----------
Balance at September 30, 1996 1,667 2,500
Issuance of Mandatorily Redeemable
Convertible
Series C Preferred Stock at $0.50 per
share (unaudited) 1,644 822
Issuance of Mandatorily Redeemable
Convertible
Series D Preferred Stock at $1.10 per
share (unaudited) 1,091 1,200
------------ -----------
Balance at June 30, 1997 (unaudited) 4,402 $ 4,522
------------ -----------
------------ -----------
Holders of Preferred Stock have certain rights, preferences and
restrictions with respect to dividends, redemption, conversion, liquidation,
anti-dilution and voting as set forth in the Amended and Restated Articles of
Incorporation, which are summarized below:
DIVIDENDS
Holders of Series A, B, C and D Preferred Stock are entitled to receive
noncumulative, preferential annual dividends when declared of $0.015, $0.0075,
$0.005 and $0.011, respectively, per share. Under the California Corporations
Code, the Company is legally restricted from distributing dividends because of
its accumulated deficit.
REDEMPTION
At the election of the holders of a majority of the Series D Preferred
Stock voting as a separate class and the holders of a majority of the Series A
and C Preferred Stock voting together as a single class, the Company must redeem
one-third of the outstanding shares of the respective series of Preferred Stock
that are requested to be redeemed by such holders per year beginning January
2001 until all such shares of Preferred Stock are redeemed. The redemption
price will be the original issue price plus any declared and unpaid dividends.
CONVERSION
At the option of the holder, each share of Series A Preferred Stock is
convertible into 1.228 shares of common stock and each share of Series B, C and
D Preferred Stock is convertible into one share of common stock. Such
conversion prices are subject to adjustment to give effect to certain dilutive
events that may occur. Conversion occurs automatically for each share of
Preferred Stock upon closing of an underwritten public offering with a minimum
price per share of $5.00 and aggregate proceeds to the Company of at least
$10,000,000.
F-14
<PAGE>
LIQUIDATION
In the event of liquidation, acquisition, merger or sale of substantially
all of the assets of the Company, holders of Series A, B, C and D Preferred
Stock are entitled to a per share distribution in preference to holders of
common stock equal to $1.50, $0.75, $1.00 and $1.10 respectively, plus any
declared but unpaid dividends. Thereafter, any excess will be distributed pro
rata to the common shareholders and the Series A, C and D Preferred shareholders
on an if converted basis. In the event funds are insufficient to make a
complete distribution to the holders of Preferred Stock, as described above, the
remaining assets of the Company will be distributed first to the holders of
Series D Preferred Stock, second, to the holders of Series A and C Preferred
Stock, and third, to the holders of Series B Preferred Stock.
VOTING
The holders of each share of Preferred Stock shall have the right to one
vote for each share of common stock into which the Preferred Shares could then
be converted. The holders of Preferred Stock have full voting rights and powers
equal to the voting rights and powers of the holders of common stock.
WARRANTS
In connection with the Line of Credit (Note 5), the Company issued warrants
to purchase 306,640 shares of Series C Preferred Stock at a price of $0.50 per
share. The warrants expire in August 2001, and the Company has reserved 309,840
shares of Series C Preferred Stock for issuance upon exercise of these warrants.
In connection with the Notes Payable I (Note 6), the Company issued
warrants to purchase 335,436 shares of Series C Preferred Stock at a price of
$0.50 per share. The warrants are exercisable commencing upon the closing of a
qualified equity financing and expire in July 2001. At September 30, 1996, the
Company has reserved 223,624 shares of Series A Preferred Stock for issuance
upon exercise of these warrants.
In connection with the Notes Payable III (Note 5), the Company issued
warrants to purchase 52,800 shares of Series A Preferred Stock at a price of
$1.50 per share. The warrants are exercisable on the earlier of a qualified
equity financing or October 1997 and expire in August 2000. The Company has
reserved 52,800 shares of Series A Preferred Stock for issuance upon exercise of
the warrants.
In connection with the extension of Agreement I (Note 6), the Company
issued warrants to purchase 15,333 shares of Series A Preferred Stock at a price
of $1.50 per share. The warrants expire in October 2000, and the Company has
reserved 15,333 shares of Series A Preferred Stock for issuance upon exercise of
these warrants.
In November 1995, the Company issued a warrant to purchase 22,800 shares of
Series A Preferred Stock at a price of $1.50 per share in exchange for services
performed by a consultant during the year. The warrant is exercisable and
expires on November 27, 2000. The Company has reserved 22, 800 shares of Series
A Preferred Stock for issuance upon exercise of the warrant. The fair value of
the warrant of $23,000 was charged to operations in the year ended September 30,
1996.
NOTE 9 - INCOME TAXES:
As a result of the losses generated during fiscal 1995 and 1996, the
Company has recorded no provision for income taxes and therefore a
reconciliation of the federal statutory rate to the effective rate is not
meaningful.
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
F-15
<PAGE>
SEPTEMBER 30,
1995 1996
------------ -----------
Net operating loss carryforwards $ 483 $ 1,468
Credit carryforwards 94 131
Other 67 102
------------ -----------
Gross deferred tax assets 644 1,701
Deferred tax asset valuation allowance (644) (1,701)
------------ -----------
Net deferred tax assets $ - $ -
------------ -----------
------------ -----------
The Company provides a valuation allowance for deferred tax assets when it
is more likely than not, based upon currently available evidence including its
prior history of losses, that some portion or all of the deferred tax assets
will not be realized. At September 30, 1996, the Company had federal net
operating loss carryforwards of approximately $4,000,000 available to reduce
future federal and state taxable income. The Company's net operating loss
carryforwards begin to expire in 2005. Utilization of the Company's net
operating loss and research and development credit carryforwards is subject to
limitations based on ownership changes that have occurred and may be further
limited should additional ownership changes occur. The annual limitation may
result in the expiration of the net operating loss and credit carryforwards
before their utilization.
NOTE 10 - EMPLOYEE BENEFIT PLANS:
401(k) SAVINGS PLAN
In fiscal 1995, the Company established a contributory 401(k) savings plan
covering employees working over 1,000 hours in a plan year after completion of
one year of employment. Participants can contribute up to 15% of their
compensation and, at the sole discretion of the Board, the Company can
contribute up to 5% of the participants' compensation to the 401(k) savings
plan. Participants vest in the Company's contributions over six years. The
Company contributed $48,000 and $71,000 to this plan in the years ended
September 30, 1995 and 1996, respectively.
COMMON STOCK AWARDS
In November 1995, the Company issued 367,000 shares of Common Stock to its
employees at a price of $0.15 per share, for net proceeds aggregating $55,000.
The Company recorded compensation expense of $14,000 in connection with this
issuance, representing the difference between the deemed fair value of the
underlying common stock and the issue price at the date of grant.
STOCK PURCHASE PLANS
In June 1996, the Company adopted the Employee Stock and the Key Employee
Stock Purchase Plans (the "Purchase Plans"), whereby eligible employees and key
employees may purchase shares of common stock of the Company, not to exceed
500,000 shares in aggregate. As of September 30, 1996, 500,000 shares were
issued under the Purchase Plans for net proceeds of $75,000.
The Company recorded compensation expense of $75,000 in fiscal 1996 in
connection with this issuance, representing the difference between the deemed
fair value of the underlying common stock and the issue price at the date of
grant.
F-16
<PAGE>
STOCK OPTION PLAN
The Company sponsors a Stock Option Plan (the "Plan") that provides for the
issuance of incentive and non-qualified stock options to officers and employees.
There are 1,000,000 shares of the Company's common stock authorized for issuance
under the Plan. The outstanding stock options generally vest over a four year
period, are exercisable at a price of $0.04 to $0.15 per share and expire ten
years from date of grant. At September 30, 1996, 131,126 shares are exercisable
under the Plan.
A summary of activity under the Plan is as follows (in thousands, except
per share amounts):
EXERCISE OPTIONS
PRICE OUTSTANDING
------------ -----------
Outstanding as of September 30, 1994 $ -
-
Granted 0.04 344
Exercised - -
Canceled 0.04 (4)
------------ -----------
Outstanding as of September 30, 1995 0.04 340
Granted 0.15 196
Exercised 0.04-0.15 (48)
Canceled 0.04-0.15 (24)
------------ -----------
Outstanding as of September 30, 1996 $ 0.04-0.15 464
------------ -----------
------------ -----------
For the year ended September 30, 1996 and the nine-month period ended June
30, 1997, the Company recorded $34,000 and $240,000, respectively, of deferred
stock compensation for the excess of the deemed fair value at the date of grant
over the exercise price related to options granted under the Plan from December
1995 to January 1997. Of such amounts, $5,000 and $36,000 were recorded as
expense in the year ended September 30, 1996 and the nine-month period ended
June 30, 1997, respectively. The remaining $233,000 is being amortized over the
remaining vesting period of the related options.
NOTE 11 - LEASES:
The Company leases office and research and development space under
noncancelable operating leases expiring in April 2002 and equipment under
noncancelable capital leases expiring through 1999. Future minimum lease
payments under noncancelable leases at September 30, 1996 were as follows (in
thousands):
F-17
<PAGE>
CAPITAL OPERATING
LEASES LEASES
------- ---------
1997 $ 55 $ 235
1998 44 235
1999 7 235
2000 - 235
2001 - 235
Thereafter - 69
------- ---------
Total minimum lease payments 106 $ 1,244
---------
---------
Less: amount representing interest (17)
-------
Present value of capitalized lease
obligations 89
Less: current portion (43)
-------
Long-term portion of capitalized
leases $ 46
obligations -------
-------
NOTE 12 - LITIGATION:
The Company is involved in various potential claims which management
believes will not have a material adverse effect on the results of operations
and liquidity of the Company.
NOTE 13 - LICENSE AGREEMENTS:
In October 1994, the Company entered into a twelve year license agreement
with a third party. As amended in May 1997, the agreement provides the Company
with a non-exclusive, irrevocable license to certain in-process detection
technology, as well as equipment with a fair value of $100,000 in exchange for a
$330,000 note payable due in unequal quarterly payments plus 11% interest. The
fair value of the technology license of $230,000 was charged to operations in
May 1997.
In March 1995, the Company executed a ten year exclusive license agreement
with a third party. The Company is subject to royalty payments based on a
percentage of the net sales price of certain products made, used or sold.
Minimum annual royalties of $20,000 are due beginning in calendar year 1997
through the remaining term of the agreement. The Company did not incur royalty
expense under this agreement in fiscal 1995 or 1996.
In June 1995, the Company entered into an exclusive license agreement with
a third party. Per the agreement terms, the Company is subject to royalty
payments based on a percentage of the net sales price of certain products sold
and requires a minimum royalty payment of $25,000 in June 1997 to guarantee
continued license exclusivity. The Company has requested an extension in payment
terms for this payment but is uncertain whether the request will be granted.
Additionally, within the first three years of the agreement, the Company is
required to spend a minimum of $300,000 for the development of certain related
technology; as of June 30, 1997 the Company has incurred costs of $84,000. The
final payment of the license fee was due in June 1996; however, the license was
declared non-exclusive and the payment due date was extended until June 30,
1997. The Company has
F-18
<PAGE>
since requested extension of the final payment to September 30, 1997; however,
that request has not been granted and the license may be terminated at any time
by the third party.
In recognition of development costs incurred by QD, the Company agreed to
pay QD a royalty rate of 4% of net sales of certain products, whether sold by
the Company or any licensee, for a period of six years from the effective date
of the agreement, April 15, 1994. The agreement also established future minimum
royalty payments of $50,000 in fiscal years 1997 and 1998, which will be applied
against royalties that may become due to QD in the respective fiscal years.
NOTE 14 - SUBSEQUENT EVENTS:
In October and December 1996, the Company issued two subordinated
promissory notes payable to an investor for $150,000 each. The notes were
issued with nondetachable stock purchase warrants to purchase 214,219 shares of
Series A Preferred Stock at an exercise price of $1.50 per share. The warrants
were exercisable upon an event of default on the notes and were to expire on
December 31, 2002. These notes and the Notes Payable II were repaid in May
1997, and the warrants were canceled.
In January 1997, the Board of Directors approved the issuance of employee
incentive stock options to purchase an aggregate of 1,358,212 shares of common
stock at an exercise price of price of $0.15 per share. The options vest over a
four year period and expire ten years from the date of grant.
In May 1997, the Company renewed its Line of Credit and the due date was
extended to December 1997. In exchange for the extension of the collateral
pledged for the Line of Credit, the investors received warrants to purchase
102,211 shares of Series A Preferred Stock at a price of $1.50 per share. The
warrants vest ratably through December 31, 1997 and expire in May 2002. The
Company has reserved 102,211 shares of Series A Preferred Stock for issuance
upon exercise of these warrants. The aggregate fair value of the warrants was
determined to be $56,000. Amortization of the discount of $28,000 was included
in interest expense for the nine-month period ended June 30, 1997.
In June 1997, the Company entered into a joint venture to perform research
and development related to certain detection technologies. In exchange for a
38% ownership interest in the joint venture, the Company has granted a
non-exclusive, royalty free, perpetual, transferable sub-license on certain
superconductor technology, has agreed that the joint venture will be the sole
source of fabrication and testing products developed by the joint venture, and
has agreed to jointly guarantee a $200,000 working capital loan to the joint
venture. In connection with the formation of the joint venture, the Company
sold equipment to the joint venture in exchange for an eleven year note
receivable being interest at 6.7% per annum.
In July 1997, a Series D Preferred shareholder converted 650,000 shares
into 650,000 shares of common stock.
NOTE 15 - MERGER AGREEMENT
On September 30, 1997 the Company was acquired by and became a wholly-owned
subsidiary of InVision Technologies, Inc. ("InVision") in accordance with an
Agreement and Plan of Merger and Reorganization (the "Merger"). The Merger was
effected through the exchange of common stock based upon an agreed upon exchange
ratio. The Merger is intended to qualify as a pooling of interests for
financial reporting purposes.
F-19
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
2.1* Agreement and Plan of Merger and Reorganization dated as of
September 3, 1997, among InVision Technologies, Inc., a Delaware
corporation, QP Acquisition Corp., a California corporation, and
Quantum Magnetics, Inc., a California corporation.
2.2** Form of Agreement of Merger between Quantum Magnetics, Inc. and
QP Acquisition Corp.
2.3** Form of Escrow Agreement between the Registrant, Quantum
Magnetics, Inc., Randall R. Lunn and the Escrow Agent.
4.1 Reference is made to Exhibits 2.1, 2.2 and 2.3.
23.1 Consent of Price Waterhouse LLP.
99.1* Form of Voting Agreement dated as of September 3, 1997, by and
between InVision Technologies, Inc., a Delaware corporation, and
each of Techno Venture Management, TVM Techno Venture Enterprises
No. II Limited Partnership, TVM Intertech Limited Partnership,
TVM Eurotech Limited Partnership, TVM Zweite Beteilgung-US
Limited Partnership, TVM Techno Venture Investors No. I Limited
Partnership, Lowell Burnett, Randall Lunn, John Downing, Dale
Sheets and Andrew Hibbs.
99.2* Press release announcing the execution of the Reorganization
Agreement.
99.3 Press release announcing the announcing the consummation of the
Merger.
* Previously filed with InVision's Current Report on Form 8-K (File No.
0-28236) dated September 3, 1997 and filed September 10, 1997.
** Previously filed with InVision's Registration Statement on Form S-4
(Registration No. 333-35341) filed September 10, 1997.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-08559 and 333-35237) of InVision Technologies,
Inc. of our report on the consolidated financial statements of Quantum
Magnetics, Inc. dated August 22, 1997 except as to Note 15 which is as of
September 30, 1997, which is incorporated in this Current Report on Form 8-K.
PRICE WATERHOUSE LLP
San Jose, California
October 7, 1997
<PAGE>
EXHIBIT 99.3
NEWS RELEASE
FOR IMMEDIATE RELEASE: 1 October 1997
INVISION COMPLETES ACQUISITION OF QUANTUM MAGNETICS; QUANTUM RECEIVES FAA
CONTRACT FOR QSCAN-500 ADVANCED TECHNOLOGY SYSTEMS
FAA Order Demonstrates Benefits of the Acquisition in Expanding InVision's
Detection Product Portfolio
FOSTER CITY, Calif. --- InVision Technologies, Inc. (NASDAQ: INVN),
manufacturer of the CTX 5000 - the only US Federal Aviation Administration (FAA)
certified explosives detection system (EDS), today announced that has completed
the approximately $12 million acquisition of Quantum Magnetics (Quantum) in a
stock for stock merger in which InVision will issue up to 777,000 shares of its
common stock. In addition, Quantum has entered into a contract with the FAA to
supply a minimum of two and up to five QSCAN-500 advanced technology systems.
The initial $860,000 order with an option for three more units could bring the
total contract value to more than $2.3 million. Quantum will be operated as a
wholly owned subsidiary of InVision.
The QSCAN-500 utilizes quadrupole resonance analysis (QR) technology which
is based on several key patents which Quantum has licensed on an exclusive basis
from the Naval Research Laboratory (NRL) combined with significant patented
advancements developed by Quantum. QR has significant detection capabilities,
especially for identifying compounds typically found in sheet explosives, which
have been the most difficult type of explosive to detect, as well as bulk
military and plastic explosives. The QSCAN-500 systems purchased by the FAA are
expected to complement existing airport x-ray systems. The FAA has not disclosed
where the systems will be deployed.
"This purchase recognizes the potential of Quantum's QR technology in the
EDS industry," said Sergio Magistri, President and Chief Executive Officer of
InVision. "The Quantum QR technology can add explosives detection capability to
x-ray systems, as well as improve the performance of FAA certified explosives
detection systems, such as the CTX 5000, by increasing throughput and reducing
false alarms. With the acquisition of Quantum Magnetics completed, InVision
broadens its industry leadership."
"This contract from the FAA is the culmination of more than 10 years of
research and development," said Dale Sheets, President of Quantum. "The
QSCAN-500 scans for explosive compounds providing high detection levels of
virtually all military and commercial high performance plastic explosives
combined with one of the lowest alarm rates of any advanced technology system."
The order is a result of The White House Commission on Aviation Safety and
Security chaired by Vice President Al Gore which recommended the purchase and
deployment of explosives detection, trace detection and other advanced
technology systems, such as the QSCAN-500 and enhanced x-ray systems.
Another strength of the QR technique is that it examines volume without
imaging. The configuration of the explosive, whether in bulk, sheet or
distributed is irrelevant to detection by QR, nor is there any degradation in
performance when detecting US military C-4 plastic explosive rolled into very
thin sheets. Similar results are achieved using commercial sheet explosives.
Quantum was founded in 1987 to develop and commercialize patented and
proprietary technology for inspection, detection and analysis of explosives and
other materials based on a state-of-the-art, low-cost version of magnetic
resonance. Its products include devices to inspect checked and carry-on luggage
and cargo at airports and customs facilities, a small scanner to detect
explosives and illegal drugs in mail and other small packages, and an advanced
security system for the detection of liquid explosives and flammables in sealed
glass or plastic containers. The company is headquartered in San Diego, Calif.
1.
<PAGE>
InVision Technologies, Inc. develops, manufactures, and markets an
explosives detection system based upon advanced computed tomography technology
for the inspection of checked luggage on commercial airline flights. The
Company is based in Foster City, California. Additional information about the
Company can be obtained on the World Wide Web at:
http://www.businesswire.com/cnn/invn.htm or at http://www.invision-tech.com.
Except for the historical information contained herein, this news release
may contain forward looking statements that involve risks and uncertainties,
including the risk that difficulties will arise in combining QR technology with
x-ray and CT systems, the risks inherent with combining the operations of two
separate companies, the timely development of products and the acceptance and
pricing of new products, as well as other risks detailed from time to time in
the Company's SEC reports, including the most recent report on Form 10-K, as
amended.
###
Media Contact:
Todd Irwin
Coltrin & Associates
650/373-2005
[email protected]
Investor Contact:
Curt DiSibio
InVision Technologies
650/578-1930
2.
