UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number: 0-28236
INVISION TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
94-3123544
(I.R.S. Employer Identification No.)
7151 Gateway Boulevard, Newark, CA 94560
(Address of principal executive offices, including zip code)
(510) 739-2400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No___
On September 30, 1999, there were 12,135,220 shares of the Registrant's Common
Stock outstanding.
AMENDED FILING ON FORM 10-Q
This amendment is being filed for the sole purpose of correcting the
presentation of the table information in Note 2, Net Income (Loss) Per Share.
All other information in the originally filed Form 10-Q for the quarter ended
September 30, 1999 was presented as of the November 12, 1999 filing date, or
earlier as indicated, and has not been updated in this amended filing.
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InVision Technologies, Inc.
Form 10-Q/A
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I: FINANCIAL INFORMATION
1. Consolidated Financial Statements (Unaudited)
a. Consolidated Balance Sheets - September 30, 1999
and December 31, 1998................................ 3
b. Consolidated Statements of Operations - Three
months and nine months ended September 30, 1999
and 1998............................................. 4
c. Consolidated Statements of Cash Flows - Nine months
ended September 30, 1999 and 1998.................... 5
d. Notes to Consolidated Financial Statements........... 6
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 9
PART II. OTHER INFORMATION
3. Legal Proceedings.......................................... 19
6. Exhibits and Reports on Form 8-K........................... 20
Signature Page................................................. 21
Exhibits....................................................... 22
</TABLE>
Page 2
<PAGE>
InVision Technologies, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
(Unaudited)
Sept. 30, Dec. 31,
1999 1998
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $13,412 $10,462
Short-term investments 5,608 1,995
Restricted cash - 1,056
Accounts receivable, net 16,597 26,933
Inventories 13,100 11,825
Other current assets 1,873 1,731
--------- ---------
Total current assets 50,590 54,002
Long-term restricted cash 230 200
Property and equipment, net 7,703 8,035
Other assets 1,280 1,249
--------- ---------
$59,803 $63,486
========= =========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable 2,902 3,402
Accrued liabilities 6,135 6,331
Deferred revenue 460 1,496
Short-term debt - 2,967
Current maturities of long-term obligations 444 895
--------- ---------
Total current liabilities 9,941 15,091
--------- ---------
Long-term obligations 1,333 1,565
--------- ---------
Contengencies (Note 6)
Shareholders' equity:
Preferred stock , no par value, 5,000,000 shares
authorized; no shares issued and outstanding - -
Common stock, $0.001 par value, 20,000,000 shares
authorized; 12,135,000 and 12,067,000 issued
and outstanding 12 12
Additional paid-in capital 57,757 57,372
Deferred stock compensation expense (80) (131)
Accumulated deficit (8,295) (9,558)
Treasury stock, at cost (115,000 shares) (865) (865)
--------- ---------
Total shareholders' equity 48,529 46,830
--------- ---------
$59,803 $63,486
========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
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InVision Technologies, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------- --------- --------- ---------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $10,233 $16,464 $37,480 $47,776
Cost of revenues 6,375 8,906 21,641 26,194
--------- --------- --------- ---------
Gross profit 3,858 7,558 15,839 21,582
--------- --------- --------- ---------
Operating expenses:
Research and development 1,992 1,932 5,882 5,241
Sales and marketing 1,118 1,604 3,583 4,842
General and administrative 1,654 1,647 5,210 5,077
--------- --------- --------- ---------
Total operating expenses 4,764 5,183 14,675 15,160
--------- --------- --------- ---------
Income (loss) from operations (906) 2,375 1,164 6,422
Interest expense (49) (158) (176) (240)
Interest and other income, net 180 191 498 626
--------- --------- --------- ---------
Income (loss) before income taxes (775) 2,408 1,486 6,808
Provision (benefit) for income
taxes (116) 289 223 817
--------- --------- --------- ---------
Net income (loss) ($659) $2,119 $1,263 $5,991
========= ========= ========= =========
Net income per share:
Basic ($0.05) $0.18 $0.10 $0.50
========= ========= ========= =========
Diluted ($0.05) $0.17 $0.10 $0.47
========= ========= ========= =========
Weighted average shares outstanding:
Basic 12,124 12,048 12,090 12,040
Diluted 12,124 12,760 12,738 12,853
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
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InVision Technologies, Inc.
Consolidated Statements of Cash Flow
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------- ---------
1999 1998
--------- ---------
<S> <C> <C>
Net cash provided by (used in) operating activities $11,626 ($2,429)
--------- ---------
Cash flows from investing activities:
Proceeds from (purchases of) of short-term
investments, net (3,613) 3,034
Purchases of property and equipment (1,694) (2,456)
Additions to capitalized software development costs - (798)
--------- ---------
Net cash used in investing activities (5,307) (220)
--------- ---------
Cash flows from financing activities:
Repayments of short-term debt, net (2,967) (560)
Repayments of long-term debt (787) (323)
Proceeds from issuance of common stock, net 385 633
Repurchase of common stock - (688)
--------- ---------
Net cash used in financing activities (3,369) (938)
--------- ---------
Net increase (decrease) in cash and cash equivalents
for the period 2,950 (3,587)
Cash and cash equivalents at beginning of period 10,462 14,111
--------- ---------
Cash and cash equivalents at end of period $13,412 $10,524
========= =========
Supplemental disclosure of cash flow information:
Interest paid $178 $238
Income taxes paid $280 $757
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
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InVision Technologies, Inc.
Notes To Consolidated Financial Statements
(Unaudited)
Summary of Significant Accounting Policies
1. Interim Unaudited Financial Information
The accompanying interim unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not contain all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying
unaudited consolidated financial statements reflect all adjustments
(consisting only of normal recurring adjustments) considered necessary for
fair presentation. These financial statements should be read in conjunction
with the audited consolidated financial statements of InVision Technologies,
Inc. and its subsidiaries (the "Company") as of December 31, 1998 and 1997
and for each of the three years in the period ended December 31, 1998,
including notes thereto, included in the Company's Annual Report on Form 10-
K (Commission File No. 0-20815).
Operating results for the three month and nine month periods ended
September 30, 1999 may not necessarily be indicative of the results that may
be expected for the year ended December 31, 1999 or any other future period.
Certain prior period amounts have been reclassified to conform to the
current period presentation.
2. Net Income (Loss) Per Share
Basic earnings per share is computed by dividing income available to
common stockholders by the weighted-average common shares outstanding for
the period. Diluted earnings per share reflects the weighted-average common
shares outstanding plus the potential effect of dilutive securities or
contracts which are convertible to common shares such as options (using the
treasury stock method).
The following is a reconciliation between the components of the basic
and diluted net income per share calculations for the periods presented
below (in thousands, except per share data
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
----------------------------------------------- -----------------------------------------------
1999 1998 1999 1998
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Per Per Per
Income Share Share Share Share
(Loss) Shares Amount Income Shares Amount Income Shares Amount Income Shares Amount
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Basic net income (loss) per
share:
Income (loss) available to
common stockholders ($659) 12,124 ($0.05) $2,119 12,048 $0.18 $1,263 12,090 $0.10 $5,991 12,040 $0.50
Effect of dilutive securities:
Options - - - - 712 (0.01) - 648 - - 813 ($0)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Diluted net income (loss)
per share:
Income (loss) available to
common stockholders plus
assumed conversions ($659) 12,124 ($0.05) $2,119 12,760 $0.17 $1,263 12,738 $0.10 $5,991 12,853 $0.47
======= ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The computation of diluted earnings per share for the three and nine
months ended September 30, 1999 does not include shares issuable upon
exercise of options in the amount of 2,079,000 shares and 984,000 shares,
respectively, because the options exercise price were greater than the
average market price of the common shares, or because the Company's net loss
per share would have decreased.
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InVision Technologies, Inc.
Notes To Consolidated Financial Statements (continued)
(Unaudited)
3. Accounts Receivable, net
The components of accounts receivable, net consist of the following
(in thousands):
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1999 1998
--------- ---------
<S> <C> <C>
Accounts receivable, net:
Billed $10,923 $20,452
Unbilled 5,730 6,183
Other receivables 139 338
--------- ---------
Subtotal $16,792 $26,973
Less: allowance for doubtful accounts ($195) ($40)
--------- ---------
Total $16,597 $26,933
========= =========
</TABLE>
4. Inventories
The components of inventory consist of the following (in thousands):
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1999 1998
--------- ---------
<S> <C> <C>
Inventories:
Raw materials and purchased components $7,716 $6,272
Work-in-process 5,049 4,365
Finished goods 335 1,188
--------- ---------
Total $13,100 $11,825
========= =========
</TABLE>
5. Property and Equipment
The components of property and equipment consist of the following (in
thousands):
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1999 1998
--------- ---------
<S> <C> <C>
Property and equipment:
Machinery and equipment $5,020 $4,705
Self constructed assets 4,856 3,697
Furniture and fixtures 1,112 1,078
Leasehold improvements 2,948 2,939
--------- ---------
Subtotal $13,936 $12,419
Less: accumulated depreciation (6,233) (4,384)
--------- ---------
Total $7,703 $8,035
========= =========
</TABLE>
6. Litigation
On January 7, 1999, Vivid Technologies, Inc. ("Vivid") filed a summons
and complaint (the "Complaint") in Superior Court of the State of California
for the County of San Diego against InVision, Quantum, ESI International, Inc.
("ESI"), Robert Price and Sandra Price (collectively, "Defendants"). The
Complaint asserts causes of action for (1) misappropriation of trade secrets;
(2) inducing breach of contract; (3) interference with contractual relations;
(4) statutory unfair competition; (5) common law unfair competition; (6)
interference with prospective economic advantage; (7) defamation; and (8)
declaratory relief (declaring that Vivid has not misappropriated trade secrets
from Quantum). On February 8, 1999, defendants InVision and
Page 7
<PAGE>
Quantum filed an answer in which they denied all material allegations of the
complaint and asserted various affirmative defenses. Discovery has only
recently commenced. No specific amount of damages has been requested.
This complaint was filed by Vivid following efforts by Quantum
and ESI, a private investigator hired by Quantum, to investigate the alleged
theft of intellectual property from Quantum by a former key employee hired by
Vivid and to bring certain evidence to the attention of the Federal Bureau of
Investigation ("FBI") and the United States Attorney for the Southern
District of California. On February 10, 1999, defendants InVision and Quantum
filed a motion for a temporary stay of all civil proceedings. On March 5,
1999, the judge granted the motion. The stay remains in effect until on or
after November 19, 1999 with a ruling by the judge as to whether to continue
the stay expected on that date. Management believes that the outcome of this
matter, even if adverse, will not have a material adverse effect on the
Company's business, financial condition or results of operations.
In addition to the foregoing matter, the Company may be involved,
from time to time, in other litigation, including litigation relating to
claims arising out of its operations in the normal course of business. The
Company is not currently a party to any legal proceedings, the adverse outcome
of which, in management's opinion, individually or in aggregate would have a
material adverse effect on the Company's business, financial condition or
results of operations.
1. Stockholders' Equity
During the nine month period ended September 30, 1998, the Company
repurchased 81,000 shares of its common stock at prevailing market prices.
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InVision Technologies, Inc.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion contains forward-looking statements, which
involve risks and uncertainties. When used in this discussion, the words
"anticipate," "believe," "estimate," and "expect" and similar expressions as
they relate to the Company or its management are intended to identify such
forward-looking statements. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or
implied by, these forward-looking statements. Factors that could cause or
contribute to such differences include risks related to market acceptance of
the Company's main product, including the loss of the Company's order from
the FAA or the failure to obtain additional orders, loss of any of the
Company's sole source suppliers, intense competition including competition
from a new supplier of a certified product that has now begun accepting
orders, reliance on large orders, concentration of the Company's customers,
risks related to the lengthy sales cycles for the Company's products,
budgeting limitations of the Company's customers and prospective customers,
risks inherent to the development and production of new products and new
applications, fluctuations in the amount of government funding of the
Company's research and development activities, and certification of certain
of these products, as well as those discussed in "Item 1. Business" and more
particularly in the "Business Risks" section thereof in the Company's Annual
Report on Form 10-K for the year ended December 31 1998, and in subsequent
Quarterly Reports on Form 10-Q.
Overview
InVision Technologies, Inc. ("InVision," or together with its
subsidiaries, the "Company") designs, manufactures and markets explosive
detection systems ("EDS") based on advanced computed tomography ("CT")
technology. InVision was formed in September 1990 to design and develop an
EDS based on CT technology and exited the development stage in 1995 upon the
first commercial sale of its product, the CTX 5000 system. Today the Company
markets its more advanced CTX 5500 system, its next generation CTX 9000
system, and its newest member of the CTX system family, the CTX 2500. In
addition to these products, the Company has other products in development. To
date, the Company's CTX 5000 system and the CTX 5500 system (together, the
"CTX 5000 Series") are the only explosive detection systems certified by the
Federal Aviation Administration ("FAA") currently deployed for use in the
inspection of checked luggage on commercial flight. In April 1999, the
Company's next generation CTX 9000 system successfully completed FAA
certification and the Company sold its first system in the third quarter of
1999. Since its first sale in 1995 through September 30, 1999, the Company
has received orders for a total of 186 CTX systems, of which a total of 179
had been shipped. For the three month and nine month periods ended September
30, 1999, the Company had revenues of $10.2 million and $37.5 million,
respectively, and as of September 30, 1999 had in backlog equipment orders and
service agreements of $14.2 million.
In October 1999, the Company received a letter contract with a
potential value of more than $80 million over three years from the FAA for CTX
9000 systems and accessories. In addition, in October 1999 the Company
received an order valued at approximately $7.1 million from an international
customer for multiple CTX 9000 systems and accessories.
InVision's principal subsidiary, Quantum Magnetics, Inc. ("Quantum"),
develops and commercializes 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, and
passive magnetic sensing. Its products, most of which are in the prototype
stage, include advanced detection systems for such markets as carry-on luggage
screening, drug detection, postal inspection, detection of concealed weapons
and landmines. In the third quarter of 1999, Quantum sold its first QScan 160
EDS to the United States Navy for mail and other parcel screening applications
at an international location. Quantum is also a leading supplier of research
and development services in the area of QR technology and passive magnetic
sensing to a number of government agencies. Quantum was acquired by InVision
in 1997 in a pooling of interests transaction.
The Company considers research and development to be a vital part of
its operating discipline and continues to dedicate substantial resources for
research to enhance the performance, functionality and reliability of its CTX
systems as well as the development of new products. At September 30, 1999,
the Company had 96 full-time employees engaged in research and development
activities while also using the services of 12 specialized contract employees
and consultants in this area. Total research and development expenditures by
the Company are partially offset by amounts reimbursed by the FAA and other
government agencies and private entities under research and development
contracts and grants. During the nine months ended September 30, 1999 and
1998, the Company spent $14.5 million and $13.3 million, respectively, on
research and development activities. Of these amounts, $8.6 million and $7.3
million, respectively, were funded under research and development contracts
Page 9
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and grants. To the extent that research and development contracts and
grants receipts decline in the future and research and development
expenditures borne by the Company increase, the Company's results of
operations would be adversely impacted. As of September 30, 1999, the Company
had in backlog research and development contracts and grants of $4.4 million.
The Company's revenues have principally consisted, and the Company
believes will continue to consist, of orders of multiple units from a limited
number of customers. For the nine months ended September 30, 1999 and 1998,
$30.0 million, and $31.6 million, respectively, were generated from sales to
the Company's largest customer, the U.S. government, representing 80.0% and
66.1% of the Company's revenues, respectively.
The Company markets its products both directly through internal sales
personnel and indirectly through authorized agents, distributors and systems
integrators. In the United States, the Company markets its products primarily
through direct sales personnel. Internationally, the Company utilizes both a
direct sales force and authorized agents to sell its products. For the nine
months ended September 30, 1999 and 1998, international sales represented
15.5% and 33.6%, respectively, of the Company's revenues.
The sales cycle of the Company's product line is often lengthy due to
the protracted approval process that typically accompanies large capital
expenditures and the time required to manufacture, install and assimilate the
product. Typically, six to twelve months may elapse between a new customer's
initial evaluation of the Company's product line and the execution of a
contract. Another three months to a year may elapse prior to shipment of the
product as the customer site is prepared and the system is manufactured.
During this period the Company expends substantial funds and management
resources but recognizes no associated revenue.
The Company recognizes revenue upon shipment unless extended acceptance
criteria exist, in which case revenue is recognized upon achievement of such
acceptance criteria. The Company typically requires customer deposits in
advance of shipment on customer purchase orders. Provision for estimated
installation, training and warranty costs is recorded at the time revenue is
recognized and adjusted periodically based on historical and anticipated
experience. Systems typically carry a one-year warranty.
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Results of Operations
The following table sets forth certain income and expenditure items
from the Company's consolidated statements of income expressed as a percentage
of revenues for the periods indicated.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
----------------- -----------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenue 62.3 54.1 57.7 54.8
-------- -------- -------- --------
Gross profit 37.7 45.9 42.3 45.2
-------- -------- -------- --------
Operating expenses:
Research and development 19.5 11.7 15.7 11.0
Sales and marketing 10.9 9.7 9.6 10.1
General and administrative 16.2 10.0 13.9 10.6
-------- -------- -------- --------
Total operating expenses 46.6 31.4 39.2 31.7
-------- -------- -------- --------
Income (loss) from operations (8.9) 14.5 3.1 13.5
Interest expense (0.5) (1.0) (0.5) (0.5)
Income and other (expense), net 1.8 1.2 1.3 1.3
-------- -------- -------- --------
Income (loss) before income taxes (7.6) 14.7 3.9 14.3
Provision (benefit) for income taxes (1.1) 1.8 0.6 1.7
-------- -------- -------- --------
Net income (loss) (6.5)% 12.9% 3.3% 12.6%
======== ======== ======== ========
</TABLE>
CURRENT QUARTER COMPARED TO PRIOR YEAR QUARTER
Revenues. The Company's revenues are comprised of system revenues,
which include sales of CTX systems, accessories, installation and
configuration, and maintenance related to product support. Revenues were
$10.2 million for the third quarter of 1999, a decrease of 37.8% from the
$16.5 million in the third quarter of 1998. This decrease was primarily
attributable to 6 fewer systems as well as fewer accessories and upgrade kits
shipped in the third quarter of 1999 compared to the same quarter a year ago.
In the third quarter of 1999, the Company shipped 9 CTX 5500 units to the FAA.
In addition, San Francisco International Airport exchanged a CTX 5500 unit
previously purchased by the airport for one of the Company's next generation
CTX 9000 units. In the third quarter of 1998, the Company shipped 15 CTX 5500
units (10 units to the FAA and 5 units to international customers). The
Company typically ships against a backlog of orders for its products. As of
September 30, 1999, the Company had in backlog equipment orders and service
agreements of $14.2 million.
Gross Profit. Cost of revenues primarily consists of purchased
materials procured for use in the assembly of the Company's products, as well
as manufacturing labor and overhead, warranty costs and costs associated with
service agreements. In any given period the Company's gross profit may be
affected by several factors, including revenue mix, product configuration,
location of the installation and complexity of integration into various
airport environments. Gross profit was $3.9 million in the third quarter of
1999, a decrease of 49.0% from the $7.6 million in the third quarter of 1998.
Gross margins were 37.7 % and 45.9%, respectively. The decrease was
primarily due to higher manufacturing costs per unit resulting from the
decrease in the number of units manufactured and sold, and inventory valuation
adjustments in the period. Additionally, the decrease is due to fewer
accessories and upgrade kits sold that typically carry slightly higher margins
in the third quarter of 1999.
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Research and Development. Research and development expenses consist
primarily of compensation paid to personnel engaged in research and
development activities, amounts paid for outside services, and costs of
materials utilized in the development of hardware products, including
prototype units. Research and development expenditures by the Company are
partially offset by amounts reimbursed by the FAA and other government
agencies and private entities under research and development contracts and
grants. These services are provided on both a cost and cost plus basis.
Net research and development expenses were $2.0 million in the third
quarter of 1999. Net research and development expenses would have been $2.2
million in the same quarter in 1998 without the capitalization of software
development costs in the amount of $0.3 million in accordance with Statement
of Financial Accounting Standards No. 86 ("SFAS 86"), "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed." Under
SFAS 86, software production costs for computer software that is to be used as
an integral part of the product or process are to be capitalized once
technological feasibility has been established for the software and all
research and development activities for the other components of the product or
process have been completed. Software development costs qualifying for
capitalization were insignificant in the third quarter of 1999. In the third
quarter of 1999, the Company began amortizing the capitalized software costs
using the straight-line method over the forecasted units of production.
Gross research and development expenses were $4.8 million in the third quarter
of 1999, an increase of 1.4% from the $4.7 million in the third quarter of
1998, before considering the impact of software capitalization. Of these
amounts, $2.8 million and $2.5 million, respectively, were funded by research
and development contracts and grants from the FAA and other government
agencies and private entities. As of September 30, 1999, the Company had in
backlog research and development contracts and grants of $4.4 million. To the
extent that research and development contracts and grants receipts decline in
the future and research and development expenditures borne by the Company
increase, the Company's results of operations would be adversely impacted. As
a percentage of revenues, net research and development expenses were 19.5% and
11.7% in the third quarter of 1999 and 1998, respectively. The increase in net
research and development expenses as a percentage of revenues is primarily the
result of lower revenues during the quarter compared to the same quarter last
year.
Sales and Marketing. Sales and marketing expenses consist primarily of
compensation paid to direct and indirect sales and marketing personnel,
consultant fees, travel related to the sales process, and other selling and
distribution costs. Sales and marketing expenses were $1.1 million in the
third quarter of 1999, a decrease of 30.3% from the $1.6 million in the third
quarter of 1998. The decrease in sales and marketing expenses is primarily
the result of a decrease in commission expense due to changes in the structure
of sales incentive compensation plans in 1999 and lower revenues in the
quarter, lower compensation expense due to a reduction in headcount and the
Company's efforts to reduce sales and marketing spending levels in 1999. As a
percentage of revenues, sales and marketing expenses were 10.9% in the third
quarter of 1999, compared to 9.7% in the third quarter of 1998. The increase
is primarily the result of lower revenues in the quarter compared to the same
quarter a year ago, partially offset by the decrease in sales and marketing
expenses.
General and Administrative. General and administrative expenses
consist primarily of compensation paid to administrative personnel, including
directors, consultant fees, professional service fees, insurance, travel and
other general expenses. General and administrative expenses were
$1.7 million in the third quarter of 1999, a slight increase of 0.4% from
$1.6 million in the third quarter of 1998. As a percentage of revenues,
general and administrative expenses were 16.2% in the third quarter of 1999,
compared to 10.0% in the third quarter of 1998. The increase in general and
administrative expenses as a percentage of revenues is primarily the result
of lower revenues in the quarter compared to the same quarter last year.
Interest Expense. Interest expense decreased to $49,000 in the third
quarter of 1999 from $158,000 in the third quarter of 1998. Interest expense
in the third quarter of 1999 and 1998 resulted primarily from debt financing
associated with the Company's working capital lines of credit, equipment term
loans and capital leases.
Interest and Other Income, Net. Interest and other income, net,
decreased to $180,000 in the third quarter of 1999 from $191,000 in the
third quarter of 1998. The 1999 amount consists primarily of interest
income for the quarter on cash equivalents and short-term investments of
$189,000, partially offset by other expense (net) of $9,000. The 1998
amount consists primarily of interest income for the quarter on cash
equivalents and short-term investments.
Provision (Benefit) for Income Taxes. No provision for income taxes was
recorded in the third quarter of 1999. The benefit for income taxes of
$116,000 in the third quarter of 1999 reflects the provision adjustment based
on an effective tax rate of 15% for the year. The provision for income taxes
was $289,000 for the third of 1998, representing an effective tax rate of 12%
for the period. The Company's effective tax rates for 1999 and 1998 were
lower than statutory tax rates primarily due to the utilization of net
operating loss carryforwards. At December 31, 1998, the Company had federal
net operating loss carryforwards of approximately $6.0 million available to
reduce future federal taxable income and $1.7 million available to reduce
state taxable income. The Company's net operating loss carryforwards expire
from 2005 to 2011.
Page 12
<PAGE>
CURRENT NINE MONTH PERIOD COMPARED TO PRIOR NINE MONTH PERIOD
Revenues. Revenues were $37.5 million for the nine month period ended
September 30, 1999, a decrease of 21.6% from the $47.8 million in the nine
month period ended September 30, 1998. This decrease was primarily
attributable to 15 fewer systems shipped in the nine month period ended
September 30, 1999, partially offset by the shipment of more CTX 5500 upgrade
kits to the FAA and international customers and increased service contract
revenue primarily due to the commencement of additional support and
maintenance agreements in the domestic market. In the nine month period ended
September 30, 1999, the Company shipped 33 CTX 5500 units (29 units to the FAA
and 4 units to international customers) and shipped the remaining 27 CTX 5500
upgrade kits purchased by the FAA, and 6 CTX 5500 upgrade kits to
international customers. In addition, San Francisco International Airport
exchanged a CTX 5500 unit previously purchased by the airport for one of the
Company's next generation CTX 9000 units. In the nine month period ended
September 30, 1998, the Company shipped 48 CTX 5500 units (32 units to the FAA
and 16 units to international customers) and the first 12 CTX 5500 upgrade
kits to the FAA. The Company typically ships against a backlog of orders for
its products. As of September 30, 1999, the Company had in backlog equipment
orders and service agreements of $14.2 million.
Gross Profit. Gross profit was $15.8 million in the nine month period
ended September 30, 1999, a decrease of 26.6% from the $21.6 million in the
nine month period ended September 30, 1998. Gross margins were 42.3% and
45.2%, respectively. The decrease was primarily due to higher manufacturing
costs per unit resulting from the decrease in the number of units manufactured
and sold, and inventory valuation adjustments in the third quarter of 1999.
The decrease is partially offset by an increase in upgrade kits sold that
typically carry slightly higher margins in the nine month period ended
September 30, 1999.
Research and Development. Research and development expenditures by the
Company are partially offset by amounts reimbursed by the FAA and other
government agencies and private entities under research and development
contracts and grants. These services are provided on both a cost and cost
plus basis.
Net research and development expenses were $5.9 million in the nine
month period ended September 30, 1999. Net research and development expenses
would have been $6.0 million in the nine month period ended September 30, 1998
without the capitalization of software development costs in the amount of $0.8
million in accordance with SFAS 86. Software development costs qualifying for
capitalization were insignificant in the nine month period ended September 30,
1999. In the third quarter of 1999, the Company began amortizing the
capitalized software costs using the straight-line method over the forecasted
units of production. Gross research and development expenses were $14.5
million in the nine month period ended September 30, 1999, an increase of 8.4%
from the $13.3 million in the nine month period ended September 30, 1998,
before considering the impact of software capitalization. Of these amounts,
$8.6 million and $7.3 million, respectively, were funded by research and
development contracts and grants from the FAA and other government agencies
and private entities. As of September 30, 1999, the Company had in backlog
research and development contracts and grants of $4.4 million. To the extent
that research and development contracts and grants receipts decline in the
future and research and development expenditures borne by the Company
increase, the Company's results of operations would be adversely impacted. The
increase in gross research and development expenses is primarily the result of
increased spending on engineering materials and services related to increased
contracts and grants activity. As a percentage of revenues, net research and
development expenses were 15.7% and 11.0% in the nine month period ended
September 30, 1999 and 1998, respectively. The increase in research and
development expenses as a percentage of revenues is primarily the result of
lower revenues.
Sales and Marketing. Sales and marketing expenses were $3.6 million in
the nine month period ended September 30, 1999, a decrease of 26.0% from the
$4.8 million in the nine month period ended September 30, 1998. The decrease
in sales and marketing expenses is primarily the result of a decrease in
commission expense due to changes in the structure of sales incentive
compensation plans in 1999 and lower revenues for the nine month period ended
September 30, 1999, lower compensation expense due to a reduction in headcount
and the Company's efforts to reduce sales and marketing spending levels in
1999. As a percentage of revenues, sales and marketing expenses were 9.6% in
the nine month period ended September 30, 1999, compared to 10.1% in the nine
month period ended September 30, 1998. The decrease is primarily the result of
the decrease in sales and marketing expenses, partially offset by the lower
revenues in the period compared to the same period last year.
General and Administrative. General and administrative expenses were
$5.2 million in the nine month period ended September 30, 1999, an increase
of 2.6% from the $5.1 million in the nine month period ended September 30,
1998. As a percentage of revenues, general and administrative expenses were
13.9% in the nine month period ended September 30, 1999, compared to 10.6%
in the nine month period ended September 30, 1998. The increase in general
and administrative expenses as a percentage of revenues is primarily the
result of lower revenues in 1999.
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<PAGE>
Interest Expense. Interest expense decreased to $176,000 in the nine
month period ended September 30, 1999 from $240,000 in the nine month period
ended September 30, 1998. Interest expense in the nine month period ended
September 30, 1999 and 1998 resulted primarily from debt financing associated
with the Company's working capital lines of credit, equipment term loans and
capital leases.
Interest and Other Income, Net. Interest and other income, net,
decreased to $498,000 in the nine month period ended September 30, 1999 from
$626,000 in the nine month period ended September 30, 1998. The 1999 amount
consists primarily of interest income for the first nine months on cash
equivalents and short-term investments of $612,000, partially offset by
other expense (net) of $114,000. The 1998 amount consists primarily of
interest income for the period on cash equivalents and short-term
investments.
Provision for Income Taxes. The Company's effective tax rate for the
nine month period ended September 30, 1999 and 1998 was 15% and 12%,
respectively. The Company's effective tax rate for the nine month periods
ended September 30, 1999 and 1998 was lower than statutory tax rates primarily
due to the utilization of net operating loss carryforwards. At December 31,
1998, the Company had federal net operating loss carryforwards of
approximately $6.0 million available to reduce future federal taxable income
and $1.7 million available to reduce state taxable income. The Company's net
operating loss carryforwards expire from 2005 to 2011.
Liquidity and Capital Resources
Since inception, the Company has financed its operations primarily
through private sales of $16.5 million of Preferred and Common Stock (of which
$5.6 million represents indebtedness converted to equity), the sale of
$9.5 million of Common Stock in the Company's initial public offering in
April 1996, the sale of $21.2 million of Common Stock in the Company's follow-
on offering in May 1997 and short-term borrowings under working capital lines
of credit. At September 30, 1999, the Company had $19.0 million in cash, cash
equivalents and short-term investments, compared to $12.5 million at December
31, 1998. Working capital was $40.6 million at September 30, 1999 compared to
$38.9 million at December 31, 1998.
Net cash provided by operating activities was $11.6 million in the nine
month period ended September 30, 1999, compared to $2.4 million used in
operating activities in the same period of 1998. Cash provided by operating
activities in the nine month period ended September 30, 1999 primarily
resulted from net income of $1.3 million, a $2.0 million non-cash effect from
depreciation and amortization, a $10.2 million decrease in accounts
receivable, and the release of restricted cash of $1.0 million, partially
offset by a $1.3 million increase in inventories, a $1.0 million decrease in
deferred revenues and a $0.7 million decrease in accounts payable and accrued
liabilities. Cash used in operating activities in the nine month period ended
September 30, 1998 primarily resulted from net income of $6.0 million, a $1.5
million non-cash effect from depreciation and amortization, and a $1.3 million
increase in accrued liabilities, offset by a $6.1 million increase in accounts
receivable, a $2.6 million decrease in deferred revenues, a $1.8 million
increase in prepaid expenses, a $1.0 million decrease in accounts payable, and
a $0.9 million increase in inventories.
Net cash used in investing activities was $5.3 million in the nine
month period ended September 30, 1999, compared to $0.2 million in the same
period of 1998. Net cash used in investing activities in the nine month
period ended September 30, 1999 primarily resulted from $1.7 million in
acquisitions of capital equipment, and $3.6 million of purchases in short-term
investments (net of sales). Net cash used in investing activities in the nine
month period ended September 30, 1998 primarily resulted from $2.5 million in
acquisitions of capital equipment and $0.8 million in additions to noncurrent
assets related to the capitalization of software development costs, partially
offset by $3.0 million in proceeds on sales of short-term investments (net of
purchases). The Company has no significant capital spending or purchase
commitments other than normal purchase commitments and commitments under
leases.
Net cash used in financing activities was $3.4 million in the nine
month period ended September 30, 1999, compared to $0.9 million in the same
period of 1998. Net cash used in financing activities in the nine month
period ended September 30, 1999 was primarily due to $3.8 million in
repayments of debt financing (principally, short-term borrowings under the
lines of credit), partially offset by $0.4 million in proceeds from sales
under the employee stock purchase plan and exercises of incentive stock
options. Net cash used in financing activities in the nine month period ended
September 30, 1998 was primarily due to $0.9 million in repayments of debt
financing (principally, short-term borrowings under the lines of credit) and
$0.7 million from the repurchase of common stock at prevailing market prices,
partially offset by $0.6 million in proceeds from sales under the employee
stock purchase plan and exercises of incentive stock options.
In May 1999, the Company renewed its two one-year revolving line of
credit agreements with a bank. The first agreement provides for maximum
borrowings of $5.0 million. The second agreement is partially guaranteed by
the Export-Import Bank of the United States and provides for maximum
borrowings in an amount up to the lower of the sum of
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<PAGE>
90% of eligible export accounts receivable plus 70% of eligible raw
materials and work-in-process inventory designated for export customers, net
of advance payments and deposits, or $2.5 million. Borrowings under both
agreements bear interest at the bank's prime rate (8.25% at September 30,
1999) and are secured by all of the Company's assets other than its
intellectual property. The agreements expire in April 2000 and require that
the Company maintain certain financial ratios and levels of tangible net
worth and profitability and also prohibit the Company from paying cash
dividends. At September 30, 1999, the Company was in default of a covenant
set forth in the loan agreement. In October 1999, the Company received a
waiver of the default under the loan agreement from the bank for the period
ended September 30, 1999. Proceeds of loans under both lines of credit may
be used for general corporate purposes. At September 30, 1999, the Company
had outstanding guarantees to customers through issuance of letters of
credit secured by the lines of credit totaling $0.9 million. There were no
outstanding borrowings under the lines of credit at September 30, 1999.
In May 1999, the Company renewed its committed equipment line of
credit agreement with a bank that transforms into a term loan after
drawdown. The agreement expires in April 2000 and provides for borrowings
up to $0.5 million. Borrowings under this agreement bear interest at the
bank's prime rate (8.25% at September 30, 1999) plus 0.25% or the bank's
prime rate plus 0.25% during the draw period and a fixed rate equal to 3.5%
above the yield of a 36 month Treasury Note (5.75% at September 30, 1999)
during the amortization period. Borrowings are secured by the assets
purchased or financed. At September 30, 1999, the Company had no
outstanding borrowings under the line of credit.
The Company believes that existing cash, cash equivalents and short-
term investments together with available borrowings under its lines of
credits and funds expected to be generated from operations will be
sufficient to finance its working capital and capital expenditure
requirements for at least the next 12 months.
Business Risks
No Assurance of Continued Profitability. From the first quarter of
1997 to the second quarter of 1999, the Company reported a profit in each
quarter. In the third quarter of 1999, the Company experienced a decline in
revenues and an operating loss. There can be no assurance that revenues
will not decline further in the future, or that the Company will not
experience operating losses in the future. The Company's past operating
results have been, and its future operating results will be, subject to
fluctuations resulting from a number of factors, including the timing and
announcement of orders, delays in shipments caused by customer readiness or
integration issues, the timing of new or enhanced product offerings by the
Company or its competitors and the certification of certain of these
products, the mix between sales to domestic and international customers,
market acceptance of any new or enhanced version of the Company's products,
availability of key components, the Company's ability to rapidly increase
production, and fluctuations in demand driven by general conditions
impacting the aviation security industry beyond the control of the Company.
The Company's revenues in any period are generally derived from a limited
number of customers, a high percentage of which are public agencies which
are subject to legislative budgeting and other limitations, including with
respect to its largest customer, the U.S. government, the risk that funds
appropriated by Congress to purchase explosive detection systems equipment
in fiscal 1999 and fiscal 2000 will not be used to purchase the Company's
products. The Company may also choose to reduce prices or increase spending
in response to competition or to pursue new market opportunities, all of
which may adversely affect the Company's business, financial condition and
results of operations.
Fluctuations in Operating Results. The Company's quarterly revenues
have fluctuated significantly in the past and are expected to fluctuate
significantly in the future. These fluctuations are the result of a variety
of factors, including the Company's delivery cycle, variations in product
configuration, timing of orders, and suitability of client sites. The
Company's cost of revenues fluctuates from quarter to quarter consistent with
fluctuations in such revenues. In addition, the Company's gross margins may be
affected by, among other factors, the configuration of systems sold, the mix
between system and add-on sales, and the breakdown between domestic and
international sales.
Competition. To date, the Company's CTX 5000 and CTX 5500 are the only
explosive detection systems certified by the FAA and deployed for use in the
inspection of checked luggage on commercial flights. However, during the
second half of 1999, a company, whose competing CT-based system was certified
by the FAA in late 1998, obtained its first commercial orders, including an
order from the Company's largest customer. Although it is too soon to conclude
what the market reception will be for this product, the impact of the
introduction of this competitor into the market for certified explosive
detection systems may include lower selling prices, an increase in sales and
marketing costs, decreased margins, and a decrease in orders and revenues.
Public Agency Contract and Budget Considerations. Substantially all
of InVision's customers and a high percentage of Quantum's research and
development customers to date have been public agencies or quasi-public
agencies. In contracting with public agencies, the Company is subject to
public agency contract requirements which vary from jurisdiction to
jurisdiction and are subject to budgetary processes and expenditure
constraints. Budgetary allocations for explosive
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<PAGE>
detection systems are dependent, in part, upon governmental policies
which fluctuate from time to time in response to political and other
factors, including the public's perception of the threat of commercial
airline bombings. Many domestic and foreign government agencies have
experienced budget deficits that have led to decreased capital expenditures
in certain areas. The Company's results of operations may be subject to
substantial period-to-period fluctuations as a result of these and other
factors affecting capital spending. A reduction of funding for explosive
detection technology deployment could materially and adversely affect the
Company's business, financial condition or results of operations. Future
sales to public agencies will depend, in part, on the Company's ability to
meet public agency contract requirements, certain of which may be onerous or
even impossible for the Company to satisfy. In addition, public agency
contracts are frequently awarded only after formal competitive bidding
processes, which have been and may continue to be protracted, and typically
contain provisions that permit cancellation in the event that funds are
unavailable to the public agency. There can be no assurance that the Company
will be awarded any of the contracts for which its products are bid or, if
awarded, that substantial delays or cancellations of purchases will not
result from protests initiated by losing bidders.
Year 2000 Compliance
Definition. The Year 2000 issue is the result of a common computer
programming convention that represents years in two digits (e.g. "98" for
"1998"). Beginning in the year 2000, these date code fields may need to
accept four digit entries to distinguish 21st century dates from 20th
century dates. When the millennium date change occurs, these date sensitive
systems and products may recognize the year 2000 as the year 1900, or not at
all. This inability to recognize or properly treat the year 2000 may result
in system failure or cause systems to process critical operational or
financial information incorrectly.
Since the market for explosive detection systems certified by the FAA is
the Company's largest market and the FAA is the Company's largest customer,
the Company has determined to apply the FAA definition of Year 2000
compliance as stated in the FAA's Year 2000 Certificate of Compliance to all
of its products and operations:
Year 2000 compliant means information technology that accurately
processes date/time data (including, but not limited to, calculating,
comparing, and sequencing) from, into, and between the twentieth and
twenty-first centuries, and the years 1998, 1999, 2000, and leap year
calculations. Furthermore, year 2000 compliant information technology,
when used in combination with other information technology, shall
accurately process date/time data if the other information technology
properly exchanges date and time data with it.
Methodology: Achieving Year 2000 Readiness. In 1997, the Company
began Year 2000 product assessment and planning to identify and remedy any
compliance issues regarding product operation. In December 1998, the
Company instituted a more comprehensive Year 2000 project designed to
identify and assess the risks associated with its operations and
infrastructure, information systems, suppliers and customers that were not
Year 2000 compliant, and to develop, implement, and test, resolution and
contingency plans to mitigate these risks. The project, which is now
complete, was comprised of four phases: (1) identification of risks; (2)
assessment of risks; (3) development of resolution and contingency plans;
and (4) implementation and testing.
The Status of the Company's Products.
CTX 9000 System. The FAA has tested the current version of the CTX 9000
by applying its Year 2000 compliance definition as stated in the FAA Year
2000 (Y2K) Repair Process and Standards Handbook, as managed by a third-
party contracted by the FAA. The Company has been verbally advised by the
FAA that the CTX 9000 has passed the Year 2000 certification testing and
expects to receive formal documentation from the FAA that the CTX 9000 is
compliant with its Year 2000 compliance definition.
CTX 5500 System and Upgrade Kits. The FAA has tested and certified that
both versions of the CTX 5500 and the CTX 5500 upgrade kit (with and without
the PCS 50 operating system) shipped after January 1, 1999 are compliant
with its Year 2000 compliance definition. This testing and certification
was performed using the FAA Year 2000 (Y2K) Repair Process and Standards
Handbook, as managed by a third-party contracted by the FAA. A compliance
certificate on the version without the PCS 50 has been received from the
FAA, the receipt of a compliance certificate for the PCS 50 is anticipated.
All CTX 5500 systems shipped prior to January 1, 1999 have been upgraded to
match a certified version.
CTX 5000 System. Identification and assessment of risks and development
of a year 2000 fix including upgrades where necessary have been completed
for all released software for this product. With respect to hardware the
Company has reviewed all components for embedded chips, clocks and supplier
testing of Year 2000 compliance and found no material compliance issues. A
beta version of the Year 2000 fix for the CTX 5000 was released during the
second quarter. Although
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<PAGE>
it has not and will not be tested by the FAA since the FAA no longer
owns this model, the fix for the CTX 5000 was designed to meet the FAA Year
2000 compliance definition and the Company has successfully conducted its
own tests on the CTX 5000 using a test plan similar to the one used by the
FAA in certifying compliance of the CTX 5500. In addition, the beta version
of the fix was successfully tested by the FAA in June. The final version of
CTX 5000 Year 2000 fix was released at the end of the third quarter of 1999.
Customers under warranty or service contract may receive this fix, if
desired, at no charge. Alternatively, CTX 5000 customers may purchase a CTX
5500 upgrade kit which provides the compliance certified by the FAA and also
offers other operational benefits. Assuming customers place orders on a
timely basis, installation of the CTX 5000 fix or of the CTX 5500 upgrade
will be completed on all installed CTX 5000 systems before the end of the
fourth quarter of 1999. The CTX 5500 upgrade kit has been purchased and
installed on all CTX 5000 systems previously purchased by the FAA.
Company Infrastructure. With respect to the Company's internal
computerized systems in its manufacturing, field service, engineering, human
resources, information, facilities and financial and administrative areas,
the Company has completed all phases of the project including the
finalization of contingency plans for all systems determined to be critical
to the Company's mission. Outside consultants were engaged to assist the
Director of Quality Assurance and the Executive Staff under the direction of
the Chief Financial Officer to complete this process, including the
implementation of any necessary solutions and the design of any necessary
contingency plans. As a result of its review, the Company did not identify
any Year 2000 problems relating to systems operated by the Company which
have not been resolved which could have a material adverse effect on the
Company's business, results of operations or financial condition.
Suppliers and Customers. Substantially all of the Company's current
suppliers of products and services have completed a questionnaire regarding
their readiness for the Year 2000. Based on the Company's review of the
responses received, no significant problems were identified. Where
possible, the information received was verified by internal testing. Where
the information provided was not subject to verification by internal
testing, the Company has identified those suppliers and customers whose
products or services are mission critical and is focussed its efforts on the
development of contingency plans. Notwithstanding the Company's good faith
efforts to anticipate problems and develop effective contingency plans, the
Company will remain vulnerable to any failure by its major suppliers,
service providers and customers (including airports, airlines and foreign
and domestic governments which are the end-users of its products or sponsors
of its research and development activities) to identify the full extent of
and successfully remedy their own internal Year 2000 issues. This failure
could have a material adverse effect on the Company's supplies, orders,
installation schedules and timing of payments. The Company is unable to
estimate the nature or extent of any potential adverse impact resulting from
the failure of third parties to achieve Year 2000 compliance. Moreover,
such third parties, even if Year 2000 compliant, could experience
difficulties resulting from Year 2000 issues that may affect their
suppliers, service providers and customers. As a result, although the
Company does not currently anticipate that it will experience any material
shipment delays from its major product suppliers or any material sales
delays from its major customers due to Year 2000 issues based on information
developed through its Year 2000 project, these third parties may nonetheless
experience Year 2000 problems. Any such problems could have a material
adverse effect on the Company's results of operations and financial
condition.
Costs of Compliance. The Company believes that the costs of compliance
with respect to both its products and its infrastructure, including third
party suppliers and the cost of contingency plans, will not exceed $500,000.
As of September 30, 1999, approximately $260,000 had already been incurred.
Risks of Non-Compliance. Although the Company believes it has
successfully completed all phases of its Year 2000 project, the Company may
discover additional Year 2000 problems, may not be able to develop
remediation and contingency plans for these additional problems, or may find
that the costs of these activities exceed current estimates of not more
than $500,000. To the extent the Company does not identify any material
non-compliant systems operated by the Company or by third parties, such as
the Company's suppliers, service providers or customers and does not develop
satisfactory remediation and contingency plans, the most reasonably likely
worst-case scenario is a systemic failure beyond the control of the Company,
such as a prolonged telecommunications or electrical failure, or a general
disruption in the United States or global business activities that could
result in a significant downturn. The Company believes that the primary
business risks, in the event of such failure or other disruption, would
include but not be limited to, loss of customers or orders, delays in
installation, increased operating costs, inability to obtain inventory on a
timely basis, disruptions in product shipments, payment delays or other
business interruptions of a material nature, as well as claims of
mismanagement, misrepresentation, or breach of contract, any of which could
have a material adverse effect on the Company's business, results of
operations and financial condition.
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<PAGE>
Part II. OTHER INFORMATION
Item 3. Legal Proceedings
On January 7, 1999, Vivid Technologies, Inc. ("Vivid") filed a summons
and complaint (the "Complaint") in Superior Court of the State of California
for the County of San Diego against InVision, Quantum, ESI International, Inc.
("ESI"), Robert Price and Sandra Price (collectively, "Defendants"). The
Complaint asserts causes of action for (1) misappropriation of trade secrets;
(2) inducing breach of contract; (3) interference with contractual relations;
(4) statutory unfair competition; (5) common law unfair competition; (6)
interference with prospective economic advantage; (7) defamation; and (8)
declaratory relief (declaring that Vivid has not misappropriated trade secrets
from Quantum). On February 8, 1999, defendants InVision and Quantum filed an
answer in which they denied all material allegations of the complaint and
asserted various affirmative defenses. Discovery has only recently commenced.
No specific amount of damages has been requested.
This complaint was filed by Vivid following efforts by Quantum and ESI,
a private investigator hired by Quantum, to investigate the alleged theft of
intellectual property from Quantum by a former key employee hired by Vivid and
to bring certain evidence to the attention of the Federal Bureau of
Investigation ("FBI") and the United States Attorney for the Southern District
of California. On February 10, 1999, defendants InVision and Quantum filed a
motion for a temporary stay of all civil proceedings. On March 5, 1999, the
judge granted the motion. The stay remains in effect until on or after
November 19, 1999 with a ruling by the judge as to whether to continue the
stay expected on that date. Management believes that the outcome of this
matter, even if adverse, will not have a material adverse effect on the
Company's business, financial condition or results of operations.
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<PAGE>
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on form 8-K
(a) Exhibits
10.34 Amendment No. 1 to Technology License
Agreement between the Company and Imatron Inc.
dated September 11, 1990
27 Financial Data Schedule.
(b) Reports on Form 8-K
The Registrant filed no Reports on Form 8-K during the
quarter ended September 30, 1999.
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<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 thereunto duly authorized.
INVISION TECHNOLOGIES, INC.
Date: November 11, 1999 /s/ Sergio Magistri
Dr. Sergio Magistri
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 11, 1999 /s/ Alfred V. Larrenaga
Alfred V. Larrenaga
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information
extracted from the Condensed Statement of Operations, the
Condensed Balance Sheet and the accompanying Notes To The
Condensed Financial Statements included in the Company's
Form 10-Q for the period ending September 30, 1999 and is
qualified in its entirety by reference to such.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<PERIOD-TYPE> 9-MOS
<CASH> 13,412
<SECURITIES> 5,608
<RECEIVABLES> 16,792
<ALLOWANCES> 195
<INVENTORY> 13,100
<CURRENT-ASSETS> 50,590
<PP&E> 13,936
<DEPRECIATION> 6,233
<TOTAL-ASSETS> 59,803
<CURRENT-LIABILITIES> 9,941
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 48,517
<TOTAL-LIABILITY-AND-EQUITY> 59,803
<SALES> 37,480
<TOTAL-REVENUES> 37,480
<CGS> 21,641
<TOTAL-COSTS> 14,675
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 176
<INCOME-PRETAX> 1,486
<INCOME-TAX> 223
<INCOME-CONTINUING> 1,263
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,263
<EPS-BASIC> 0.10
<EPS-DILUTED> 0.10
<PAGE>
</TABLE>
Amendment No. 1 to the Technology License Agreement
Pursuant to Section 9.4 ("Amendments and Waivers") of the Technology
License Agreement [between the Company and Imatron, Inc. dated September 11,
1990], the parties agree to amend the Technology License Agreement as
follows:
In Section 1.4 the following changes are made: Subparagraph (ii) is
deleted and replaced with the following: "(ii) detection equipment for
all applications related to locating weapons, explosives, currency,
narcotics or other similar items in checked baggage, carry-on baggage, mail,
freight, parcels and other containers or other similar applications; and
(iii) ***.
Add a new Section 1.9: "Acquiror" means any party or entity who, after
the Effective Date of this Agreement, directly or indirectly acquires or
obtains control of substantially all of the assets or capital securities of
a party, whether by merger, acquisition, or otherwise.
In Section 2.1, the following changes are made: (a) delete the word
"perpetual" in line 2. and (b) at the end of the first paragraph in Section
2.1 add "Notwithstanding anything herein to the contrary, nothing in this
Agreement shall be construed to grant to Licensee a license to the
Confidential Information or Patents of an Acquiror of Imatron or any
Affiliate of such Acquirior other than those held by Imatron or an Affiliate
of Imatron immediately prior to the effective date of the transaction by
which that party becomes an Acquiror."
In Section 2.2 the following changes are made: (a) delete the word
"perpetual" in line 2. and (b)at the end of the section add "Notwithstanding
anything herein to the contrary, nothing in this Agreement shall be
construed to grant to Imatron a license to the Confidential Information or
Patents of an Acquiror of Licensee or any Affiliate of such Acquirior other
than those held by Licensee or an Affiliate of Licensee immediately prior to
the effective date of the transaction by which that party becomes an
Acquiror."
In Section 6.1, the following changes are made: (a) after the words
"written sublicenses" and before the words "under the technology rights" in
the third line of the section, insert the following phrase (including the
punctuation): ", either royalty bearing or royalty-free, without the right
to sublicense further," and (b) delete the phrase "and shall require that
further sublicenses also contain such provisions" in the last two lines of
the section.
In Section 6.2, the following changes are made: (a) delete the phrase
"or by any sublicensee of the Sublicensing Party" in the section's fifth
line and (b) delete the phrase "and shall require that further sublicenses
also contain such provisions" in lines thirteen and fourteen.
In Section 6.3, the following change is made: delete the phrase "or by
any sublicensee of the Sublicensing Party" in the second and third lines of
the section.
Add a new Section 6.4: "Implied Sublicenses. Licensee may sell, lease
or give away a product that embodies the Confidential Information or the
Imatron Patents, and Imatron may sell, lease or give away a product that
embodies the Licensee Confidential Information or the Licensee Patents,
without granting a sublicense under Sections 6.1, 6.2 and 6.3 of this
Agreement; provided that the terms of such a sale, lease or gift limit the
use of any technology licensed under this Agreement solely to the operation
of the purchased product."
In Section 8.1 the following changes are made: Delete "Termination by
Mutual Agreement. This Agreement may be terminated at any time by and in
accordance with" and replace with "Termination. This Agreement shall
terminate ten years after the execution of the Joint Research Effort Between
InVision Technologies, Inc. and Imatron, Inc. Unless sooner terminated
by...."
In Section 8.3 the following changes are made: at the end of the
section add: "The termination of this Agreement shall not terminate any
sublicense implied by a product sale under Section 6.4 of this Agreement."
In Section 9.3, the following change is made: after the words "all of
its business or assets" in lines eight and nine insert the following phrase
(including punctuation): ", in which event no intellectual property of such
succeeding party other than the intellectual property acquired by such
succession shall be subject to the rights and licenses granted herein".
Signed and effective on July 12, 1999 by the parties named below.
InVision Technologies, Inc. Imatron, Inc.
By: /s/ Sergio Magistri By: /s/ S. Lewis Meyer
------------------- ----------------------
Sergio Magistri S. Lewis Meyer
President and Chief President and Chief
Executive Officer Executive Officer
*** Application for confidential treatment filed with the Freedom of
Information Act Office of the Securities and Exchange Commission
simultaneously with the filing of this redacted document.
