<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 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 June 30, 1999, there were 12,107,000 shares of the Registrant's Common Stock
outstanding.
<PAGE>
INVISION TECHNOLOGIES, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C>
Part I: FINANCIAL INFORMATION
1. Consolidated Financial Statements (unaudited)
a. Consolidated Balance Sheets - June 30, 1999 and December 31, 1998................................3
b. Consolidated Statements of Income - Three months and six months ended June 30, 1999 and 1998.....4
c. Consolidated Statements of Cash Flows - Six months ended June 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.......................................................................................20
4. Submission of Matters to a Vote of Security Holders....................................................21
5. Other Information.......................................................................................22
6. Exhibits and Reports on Form 8-K........................................................................22
Signature Page ................................................................................................23
</TABLE>
2
<PAGE>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, DECEMBER 31,
1999 1998
ASSETS ----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $14,752 $10,462
Short-term investments 998 1,995
Restricted cash - 1,056
Accounts receivable, net 20,105 26,933
Inventories 13,553 11,825
Other current assets 1,799 1,731
----------- ------------
Total current assets 51,207 54,002
Long-term restricted cash 230 200
Property and equipment, net 7,815 8,035
Other assets 1,301 1,249
----------- -----------
$60,553 $63,486
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,034 $ 3,402
Accrued liabilities 6,051 6,331
Deferred revenue 392 1,496
Short-term debt 37 2,967
Current maturities of long-term obligations 567 895
----------- -----------
Total current liabilities 10,081 15,091
----------- -----------
Long-term obligations 1,410 1,565
----------- -----------
Contingencies (Note 6)
Stockholders' 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 12 12
authorized; 12,107,000 and 12,067,000 issued and outstanding
Additional paid-in capital 57,648 57,372
Deferred stock compensation expense (97) (131)
Accumulated deficit (7,636) (9,558)
Treasury stock, at cost (115,000 shares) (865) (865)
----------- -----------
Total stockholders' equity 49,062 46,830
----------- -----------
$60,553 $63,486
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
INVISION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 11,732 $ 15,432 $ 27,247 $ 31,312
Cost of revenues 6,742 9,114 15,266 17,288
-------- -------- -------- --------
Gross profit 4,990 6,318 11,981 14,024
-------- -------- -------- --------
Operating expenses:
Research and development 2,241 1,622 3,890 3,309
Sales and marketing 1,162 1,576 2,465 3,238
General and administrative 1,562 1,621 3,556 3,430
-------- -------- -------- --------
Total operating expenses 4,965 4,819 9,911 9,977
-------- -------- -------- --------
Income from operations 25 1,499 2,070 4,047
Interest expense (55) (24) (127) (82)
Interest and other income, net 157 201 318 435
-------- -------- -------- --------
Income before provision for income taxes 127 1,676 2,261 4,400
Provision for income taxes 19 64 339 528
-------- -------- -------- --------
Net income $ 108 $ 1,612 $ 1,922 $ 3,872
-------- -------- -------- --------
-------- -------- -------- --------
Net income per share:
Basic $ 0.01 $ 0.13 $ 0.16 $ 0.32
-------- -------- -------- --------
-------- -------- -------- --------
Diluted $ 0.01 $ 0.13 $ 0.15 $ 0.30
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average shares outstanding:
Basic 12,090 12,050 12,074 12,036
Diluted 12,751 12,895 12,745 12,900
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
INVISION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1999 1998
-------- --------
<S> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 7,635 $ (3,385)
-------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from short-term investments, net 997 3,059
Purchases of property and equipment (1,103) (1,625)
Long-term restricted cash (30) 1,254
Capitalized software development costs - (494)
Noncurrent assets - (60)
-------- -------
Net cash provided by (used in) investing activities (136) 2,134
-------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Repayments of short-term debt, net (2,930) (179)
Repayments of long-term debt (555) (78)
Proceeds from issuance of common stock, net 276 422
Repurchase of common stock - (688)
-------- -------
Net cash used in financing activities (3,209) (523)
-------- -------
Net increase (decrease) in cash and cash equivalents for the period 4,290 (1,774)
Cash and cash equivalents at beginning of period 10,462 14,111
-------- --------
Cash and cash equivalents at end of period $ 14,752 $ 12,337
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 145 $ 114
Taxes paid $ 255 $ 733
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
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 six month periods ended June 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 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 JUNE 30,
-------------------------------------------------------------
1999 1998
----------------------------- ------------------------------
PER PER
SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic net income (loss) per share:
Income (loss) available to
common stockholders $ 108 12,090 $ 0.01 $ 1,612 12,050 $ 0.13
Effect of dilutive securities:
Options - 661 - - 845 -
--------- --------- --------- --------- --------- ---------
Diluted net income (loss) per share:
Income (loss) available to common
stockholders plus assumed
conversions $ 108 12,751 $ 0.01 $ 1,612 12,895 $ 0.13
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------
1999 1998
----------------------------- ------------------------------
PER PER
SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic net income (loss) per share:
Income (loss) available to
common stockholders $ 1,922 12,074 $ 0.16 $ 3,872 12,036 $ 0.32
Effect of dilutive securities:
Options - 671 (0.01) - 864 (0.02)
--------- --------- --------- --------- --------- ---------
Diluted net income (loss) per share:
Income (loss) available to common
stockholders plus assumed
conversions $ 1,922 12,745 $ 0.15 $ 3,872 12,900 $ 0.30
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
The computation of diluted net income per share for the three and
six months ended June 30, 1999 does not include shares inssuable upon exercise
of options in the amount of 879,404 shares and 868,587 shares, respectively
because to do so would have been anti-dilutive for the periods presented.
6
<PAGE>
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>
JUNE 30, DEC. 31,
1999 1998
------------ -----------
<S> <C> <C>
Accounts receivable, net:
Billed $ 7,185 $ 20,412
Unbilled 12,942 6,183
Other receivables 78 338
------------ ------------
Subtotal 20,205 26,933
Less: allowance for doubtful accounts (100) -
------------ ------------
Total $ 20,105 $ 26,933
------------ ------------
------------ ------------
</TABLE>
4. INVENTORIES
The components of inventory consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DEC. 31,
1999 1998
------------ ------------
<S> <C> <C>
Inventories:
Raw material and purchased components $ 7,572 $ 6,272
Work-in-process 5,705 4,365
Finished goods 276 1,188
------------ ------------
Total $ 13,553 $ 11,825
------------ ------------
------------ ------------
</TABLE>
5. PROPERTY AND EQUIPMENT
The components of property and equipment consist of the following
(in thousands):
<TABLE>
<CAPTION>
JUNE 30, DEC. 31,
1999 1998
------------ ------------
<S> <C> <C>
Property and equipment:
Machinery and equipment $ 4,875 $ 4,705
Self constructed assets 4,426 3,697
Furniture and fixtures 1,104 1,078
Leasehold improvements 2,945 2,939
------------ ------------
Subtotal 13,350 12,419
Less: accumulated depreciation and amortization (5,535) (4,384)
------------ ------------
Total $ 7,815 $ 8,035
------------ ------------
------------ ------------
</TABLE>
7
<PAGE>
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 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. The allegation of the Vivid complaint relating to the
alleged misappropriation of its trade secrets appears to stem from the
efforts to collect evidence of the alleged theft from Quantum, while the
other allegations, including the allegation relating to Quantum's alleged
defamation of Vivid, appear to relate to Quantum's alleged statements to the
FAA describing the alleged theft. The U.S. Attorney for the Southern District
of California has opened a grand jury investigation into the alleged theft of
intellectual property from Quantum. Although the Company is not privy to all
the activities of the grand jury in this matter, it is aware that two
subpoenas and a search warrant were issued and executed in the second half of
1998 and that the grand jury began hearing testimony from witnesses during
the second quarter of 1999. To the best of the Company's knowledge, this
investigation remains open. On February 10, 1999, defendants InVision and
Quantum filed a motion for a temporary stay of all civil proceedings,
including discovery, for a period of 90 days. On March 5, 1999, the court
granted the motion and ordered the entire case, including discovery, stayed
for 90 days. Based on the continuation of the grand jury investigation, the
stay has now been extended through October 22, 1999 with a status conference
set for 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.
7. STOCKHOLDERS' EQUITY
During the second quarter of 1998, the Company repurchased 81,000 shares of
its common stock at prevailing market prices.
8
<PAGE>
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 THE FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999.
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 and its next generation CTX 9000 system, and 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 flights. Additionally,
the Company's next generation CTX 9000 system successfully completed FAA
certification testing in April 1999. The Company expects the FAA to order
several CTX 9000 systems this year for installation and operational testing at
airports in the United States. In the international market, the Company has
already begun marketing the CTX 9000 system and is seeing interest from both
existing and potential customers. Since its first sale in 1995, the Company has
received orders for a total of 174 CTX 5000 Series systems, of which a total of
170 had been shipped as of June 30, 1999. For the three month and six month
periods ended June 30, 1999, the Company had revenues of $11.7 million and $27.2
million, respectively, and as of June 30, 1999 had in backlog equipment orders
and service agreements of $9.9 million.
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, 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 landmine detection. 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
5000 Series hardware and software as well as its next generation system, the CTX
9000 system. At June 30, 1999, the Company had 97 full-time employees engaged in
research and development activities while also using the services of 9
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 six months ended June
30, 1999 and 1998, the Company spent $9.7 million and $8.6 million,
respectively, on research and development activities. Of these amounts, $5.8
million and $4.8 million, respectively, were funded under research and
development contracts and grants. To the extent that research and development
contracts
9
<PAGE>
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 June 30, 1999, the Company had in backlog
research and development contracts and grants of $4.7 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 six months ended June 30, 1999 and 1998, $21.1 million, and
$20.3 million, respectively, were generated from sales to the Company's largest
customer, the U.S. government, representing 77.6% and 64.7% of the Company's
revenues, respectively. For the year ended December 31, 1998, revenues from the
Company's largest customer, the U.S. government, were approximately $37.9
million, or 59.9% of the Company's revenues.
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 CTX 5500 and CTX 9000
systems primarily through direct sales personnel. Internationally, the Company
utilizes both a direct sales force and authorized agents to sell its products.
For the six months ended June 30, 1999 and 1998, and the year ended December 31,
1998, international sales represented 19.4%, 35.2% and 33.7%, 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.
10
<PAGE>
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 ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenues 57.5 59.1 56.0 55.2
------------- ------------ ------------ -------------
Gross profit 42.5 40.9 44.0 44.8
------------- ------------ ------------ -------------
Operating expenses
Research and development 19.1 10.5 14.3 10.6
Sales and marketing 9.9 10.2 9.0 10.3
General and administrative 13.3 10.5 13.1 11.0
------------- ------------ ------------ -------------
Total operating expenses 42.3 31.2 36.4 31.9
------------- ------------ ------------ -------------
Income from operations 0.2 9.7 7.6 12.9
Interest expense (0.5) (0.2) (0.5) (0.3)
Income and other (expense), net 1.3 1.3 1.2 1.4
------------- ------------ ------------ -------------
Income before income taxes 1.0 10.8 8.3 14.0
Provision for income taxes 0.2 0.4 1.2 1.7
------------- ------------ ------------ -------------
Net income 0.8 % 10.4 % 7.1 % 12.3 %
------------- ------------ ------------ -------------
------------- ------------ ------------ -------------
</TABLE>
CURRENT QUARTER COMPARED TO PRIOR YEAR QUARTER
REVENUES. The Company's revenues are comprised of system revenues, which
include sales of the CTX 5000 Series, accessories, installation and
configuration, and maintenance related to product support. Revenues were
$11.7 million for the second quarter of 1999, a decrease of 24.0% from the
$15.4 million in the second quarter of 1998. This decrease was primarily
attributable to six fewer units shipped in the second quarter of 1999
compared to the same quarter a year ago, partially offset by the shipment of
six CTX 5500 upgrade kits to international customers and increased service
contract revenue primarily due to the commencement of additional support and
maintenance agreements in the domestic market. In the second quarter of 1999,
the Company shipped 11 units (9 units to the FAA and 2 units to international
customers). In the second quarter of 1998, the Company shipped 17 units
(10 units to the FAA and 7 units to international customers). The Company
typically ships against a backlog of orders for its products. As of June 30,
1999, the Company had in backlog equipment orders and service agreements of
$9.9 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 $5.0 million in the second quarter of 1999, a
decrease of 21.0% from the $6.3 million in the second quarter of 1998. Gross
margins were 42.5% and 40.9%, respectively. This percentage increase was
primarily due to more accessories (six CTX 5500 upgrade kits and other system
options) sold with slightly higher margins and increased service contract
revenue with improved margins from better utilization of the Company's service
organization in the second quarter of 1999.
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
11
<PAGE>
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 $2.2 million in the second
quarter of 1999. Net research and development expenses would have been $2.1
million in the same quarter in 1998 without the capitalization of software
development costs in the amount of $0.5 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 second quarter of 1999. Gross research and development
expenses were $5.1 million in the second quarter of 1999, an increase of 18.9%
from the $4.3 million in the second quarter of 1998, before considering the
impact of software capitalization. Of these amounts, $2.8 million and $2.1
million, respectively, were funded by research and development contracts and
grants from the FAA and other government agencies and private entities. As of
June 30, 1999, the Company had in backlog research and development contracts and
grants of $4.7 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. As a percentage of revenues, net research and development expenses
were 19.1% and 10.5% in the second 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 and higher net research and development
expenses due to less than anticipated external funding for EDS development in
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 $1.2 million in the second
quarter of 1999, a decrease of 26.3% from the $1.6 million in the second 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, and the
Company's efforts to reduce sales and marketing spending levels in 1999. As a
percentage of revenues, sales and marketing expenses were 9.9% in the second
quarter of 1999, compared to 10.2% in the second quarter of 1998. The decrease
is primarily the result of the decrease in sales and marketing expenses,
partially offset by the lower revenues in the quarter compared to the same
quarter last year.
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 $1.6 million in the second
quarter of 1999 and 1998. As a percentage of revenues, general and
administrative expenses were 13.3% in the second quarter of 1999, compared to
10.5% in the second 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. The Company plans to
continue its efforts to reduce general and administrative spending levels in
1999.
INTEREST EXPENSE. Interest expense increased to $55,000 in the second
quarter of 1999 from $24,000 in the second quarter of 1998. Interest expense
in the second 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 $157,000 in the second quarter of 1999 from $201,000 in the second quarter of
1998. The 1999 amount consists primarily of interest income for the quarter on
cash equivalents and short-term investments of $225,000, partially offset by
other expense (net) of $68,000. The 1998 amount consists primarily of interest
income for the quarter on cash equivalents and short-term investments.
PROVISION FOR INCOME TAXES. The Company's effective tax rate for the second
quarter of 1999 was 15%. The Company's effective tax rate for the second quarter
of 1999 was lower than statutory tax rates primarily due to the utilization of
net operating loss carryforwards. The provision for income taxes in the second
quarter of 1998 reflects the effects of the cumulative adjustment based on an
effective tax rate of 12.0% for the year. 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.
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CURRENT SIX MONTH PERIOD COMPARED TO PRIOR SIX MONTH PERIOD
REVENUES. Revenues were $27.2 million for the first six months of 1999, a
decrease of 13.0% from the $31.3 million in the first six months of 1998. This
decrease was primarily attributable to nine fewer units shipped in the first six
months of 1999 compared to the same six month period a year ago, partially
offset by the shipment of 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 first half of 1999, the Company shipped 24 units (20 units to the
FAA and 4 units to international customers), the remaining 27 CTX 5500 upgrade
kits purchased by the FAA, and six CTX 5500 upgrade kits to international
customers. In the first six months of 1998, the Company shipped 33 units
(22 units to the FAA and 11 units to international customers). The Company
typically ships against a backlog of orders for its products. As of June 30,
1999, the Company had in backlog equipment orders and service agreements of $9.9
million.
GROSS PROFIT. Gross profit was $12.0 million in the first six months of
1999, a decrease of 14.6% from the $14.0 million in the first six months of
1998. Gross margins were 44.0% and 44.8%, respectively. The decrease in gross
margins was primarily due to higher manufacturing costs per unit resulting from
the absorption of period costs over a lower sales base in the first six months
of 1999, partially offset by more accessories sold with slightly higher margins
and increased service contract revenue with improved margins from better
utilization of the Company's service organization.
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 $3.9 million in the first six
months of 1999. Net research and development expenses would have been $3.8
million in the first six months of 1998 without the capitalization of software
development costs in the amount of $0.5 million in accordance with SFAS 86.
Software development costs qualifying for capitalization were insignificant in
the first six months of 1999. Gross research and development expenses were $9.7
million in the first six months of 1999, an increase of 12.3% from the $8.6
million in the first six months of 1998, before considering the impact of
software capitalization. Of these amounts, $5.8 million and $4.8 million,
respectively, were funded by research and development contracts and grants from
the FAA and other government agencies and private entities. As of June 30, 1999,
the Company had in backlog research and development contracts and grants of $4.7
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. As a
percentage of revenues, net research and development expenses were 14.3% and
10.6% in the first six months of 1999 and 1998, respectively. The increase in
research and development expenses as a percentage of revenues is primarily the
result of lower revenues and higher net research and development expenses due to
less than anticipated external funding for EDS development in the period
compared to the same period last year.
SALES AND MARKETING. Sales and marketing expenses were $2.5 million in the
first six months of 1999, a decrease of 23.9% from the $3.2 million in the first
six months 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 for the first
six months of 1999, and the Company's efforts to reduce sales and marketing
spending levels in 1999. As a percentage of revenues, sales and marketing
expenses were 9.0% in the first six months of 1999, compared to 10.3% in the
first six months of 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
$3.6 million in the first six months of 1999, an increase of 3.7% from the $3.4
million in the first six months of 1998. As a percentage of revenues, general
and administrative expenses were 13.1% in the first six months of 1999,
compared to 11.0% in the first six months of 1998. The increase in general and
administrative expenses is primarily the result of lower revenues in 1999 and
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personnel additions, management bonuses and increased legal costs associated
with the Vivid litigation, partially offset by the Company's efforts to reduce
general and administrative spending levels in 1999.
INTEREST EXPENSE. Interest expense increased to $127,000 in the first six
months of 1999 from $82,000 in the first six months of 1998. Interest expense in
the first six months of 1999 and 1998 resulted primarily from debt financing
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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 $318,000 in the first six months of 1999 from $435,000 in the first six
months of 1998. The 1999 amount consists primarily of interest income for the
first six months on cash equivalents and short-term investments of $422,000,
partially offset by other expense (net) of $104,000. 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 first
six months of 1999 and 1998 was 15% and 12%, respectively. The Company's
effective tax rate for the first six months of 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 June 30,
1999, the Company had $15.8 million in cash, cash equivalents and short-term
investments, compared to $12.5 million at December 31, 1998. Working capital was
$41.1 million at June 30, 1999 compared to $38.9 million at December 31, 1998.
Net cash provided by operating activities was $7.6 million in the six month
period ended June 30, 1999, compared to $3.4 million used in operating
activities in the same period of 1998. Cash provided by operating activities in
the first six months of 1999 primarily resulted from net income of $1.9 million,
the $1.3 million non-cash effect from depreciation and amortization, the release
of restricted cash of $1.1 million, and a $6.7 million decrease in accounts
receivable, partially offset by a $1.7 million increase in inventories, a $1.1
million decrease in deferred revenues and a $0.6 million decrease in accounts
payable and accrued liabilities. Cash used in operating activities in the first
six months of 1998 primarily resulted from net income of $3.9 million and the
$1.0 million non-cash effect from depreciation and amortization, offset by a
$3.8 million increase in accounts receivable, a $2.9 million decrease in
deferred revenues, a $0.9 million increase in inventories, and a $0.6 million
increase in other current assets.
Net cash used in investing activities was $136,000 in the six month period
ended June 30, 1999, compared to $2.1 million provided by investing activities
in the same period of 1998. Net cash used in investing activities in the first
six months of 1999 primarily resulted from $1.1 million in acquisitions of
capital equipment, partially offset by $1.0 million in proceeds on sales of
short-term investments. Net cash provided by investing activities in the first
six months of 1998 primarily resulted from $3.1 million in proceeds on sales of
short-term investments (net of purchases) and a $1.3 million release of
long-term restricted cash, partially offset by $1.6 million in acquisitions of
capital equipment and $0.5 million of capitalized software costs. 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 $3.2 million in the six month
period ended June 30, 1999, compared to $523,000 in the same period of 1998.
Net cash used in financing activities in the first six months of 1999 was
primarily due to $3.5 million in repayments of debt financing (principally,
short-term borrowings under the lines of credit), partially offset by $276,000
in proceeds from sales under the employee stock purchase plan and exercises of
incentive stock options. Net cash used in financing activities in the first six
months of 1998 was primarily due to $668,000 from the repurchase of common stock
at prevailing market prices and $257,000 in repayments of debt financing
(principally, short-term borrowings under the lines of credit), partially offset
by $422,000 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 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 (7.75% at June 30,
1999) and are secured by all of the Company's assets other than its intellectual
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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 June
30, 1999, the Company was in compliance with the loan covenants. Proceeds of
loans under both lines of credit may be used for general corporate purposes. At
June 30, 1999, the Company had an outstanding guarantee to a customer through
issuance of a letter of credit secured by the lines of credit totaling $0.5
million. There were no outstanding borrowings under the lines of credit at June
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 (7.75% at
June 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 (5.7% at June 30, 1999) during the amortization period. Borrowings are
secured by the assets purchased or financed. At June 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. Although the Company has reported
a profit in each quarter since the first quarter of 1997, there can be no
assurance that the Company will continue to be profitable on a quarterly basis
or annual basis. 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
quarter of 1999, a company, whose competing CT-based system was certified by the
FAA in late 1998, obtained its first commercial order. This order was received
from an international purchaser and involves overseas installation. 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 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
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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 remediate 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 remediation and contingency
plans to mitigate these risks. The project, which is still in process,
comprises four phases: (1) identification of risks; (2) assessment of risks;
(3) development of remediation and contingency plans; and (4) implementation
and testing. During the second quarter the Company determined to delay
finalization of contingency plans until after completion of implementation
and testing, which were successfully concluded in early August, so that the
final contingency plans could take the results into account. The Company
anticipates that contingency planning for all items determined by the Company
to be mission critical, even if successfully tested and determined to be
compliant, will be completed by the end of the third quarter of 1999.
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. The Company expects to
receive the formal document from the FAA that the CTX 9000 is compliant with its
Year 2000 compliance definition by the end of the third quarter of 1999. The
Company has been advised that the delay in issuance of this certificate was due
to an agency-wide moratorium, now lifted, on the issuance of new Y2K compliance
certificates.
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. Although a compliance certificate on the
version without the PCS 50 has been received from the FAA, the compliance
certificate for the PCS 50 has been delayed
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due to the FAA moratorium described above. Receipt is expected by the end of
the third quarter. 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
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 BAA in June. The final version of CTX 5000 Year
2000 fix was released at the end of the second 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 except the finalization of contingency
plans. 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. The Company expects to have contingency plans for all mission
critical systems, including those tested or identified as compliant, by the end
of the third quarter.
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 our review of the responses
received, no significant problems have been identified. Where possible, the
information received has been verified by internal testing. Where the
information provided is not subject to verification by internal testing, the
Company has identified those suppliers and customers whose products or services
are mission critical and is focussing 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. Based on the status of the Company's efforts to date
to prepare for the Year 2000, the Company believes that the costs of compliance
with respect to both its products and its infrastructure, including third party
suppliers, will not exceed $350,000. As of June 30, 1999, approximately $190,000
had already been incurred.
RISKS OF NON-COMPLIANCE. Although the Company believes it has successfully
completed all phases of its Year 2000 project other than the completion of
contingency planning for mission critical items, the Company may discover
additional Year 2000 problems, may not be able to develop, contingency plans, or
may find that the costs of these activities exceed current estimates of not more
than $350,000. 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
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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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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. The allegation of the Vivid complaint relating to the
alleged misappropriation of its trade secrets appears to stem from the
efforts to collect evidence of the alleged theft from Quantum, while the
other allegations, including the allegation relating to Quantum's alleged
defamation of Vivid, appear to relate to Quantum's alleged statements to the
FAA describing the alleged theft. The U.S. Attorney for the Southern District
of California has opened a grand jury investigation into the alleged theft of
intellectual property from Quantum. Although the Company is not privy to all
the activities of the grand jury in this matter, it is aware that two
subpoenas and a search warrant were issued and executed in the second half of
1998 and that the grand jury began hearing testimony from witnesses during
the second quarter of 1999. To the best of the Company's knowledge, this
investigation remains open. On February 10, 1999, defendants InVision and
Quantum filed a motion for a temporary stay of all civil proceedings,
including discovery, for a period of 90 days. On March 5, 1999, the court
granted the motion and ordered the entire case, including discovery, stayed
for 90 days. Based on the continuation of the grand jury investigation, the
stay has now been extended through October 22, 1999 with a status conference
set for 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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1999 Annual Meeting of the Stockholders was held July 15, 1999. Matters
voted at that meeting were:
(i) The election of the Class III directors to hold office until 2002
Annual Meeting of Stockholders and until their successors are
elected and qualified.
(ii) The amendment of the Company's Equity Incentive Plan, to increase
the aggregate number of shares of Common Stock authorized for
issuance by 400,000 shares to 3,021,818 shares.
(iii) The ratification of the selection of PricewaterhouseCoopers LLP as
independent auditors of the Company for its fiscal year ending
December 31, 1999.
Tabulations for each proposal were as follows:
Proposal I. Election of Class III directors
<TABLE>
<CAPTION>
Director For Withheld
-------- --- --------
<S> <C> <C>
Dr. Bruno Trezza 7,344,008 788,820
Dr. Douglas Boyd 7,334,458 798,370
</TABLE>
Proposal II. Amendment of the Company's Equity Incentive Plan
<TABLE>
<CAPTION>
For Against Abstain Broker non-votes
--- ------- ------- ----------------
<S> <C> <C> <C>
6,318,442 1,592,808 42,947 178,631
</TABLE>
Proposal III. Ratification of the selection of
PricewaterhouseCoopers LLP
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
8,083,546 24,368 24,914
</TABLE>
Continuing Directors:
Dr. Sergio Magistri, the Class I director, and Dr. Giovanni Lanzara and
Ambassador Morris D. Busby, the Class II directors, continued as directors
following the Annual Meeting.
21
<PAGE>
PART II. OTHER INFORMATION
(CONTINUED)
ITEM 5. OTHER INFORMATION
Pursuant to the Company's bylaws, stockholders who wish to bring matters or
propose nominees for director at the Company's 2000 annual meeting of
stockholders must provide specified information to the Company between April 16,
2000 and May 16, 2000 (unless such matters are included in the Company's proxy
statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as
amended). However, if the date of the 2000 annual meeting of stockholders is
held on a date more than 30 days from July 15, 2000, such specified information
must be provided to the Company not earlier than the close of business on the
90th day prior to the 2000 annual meeting and not later than the close of
business on the later of the 60th day prior to such annual meeting or, in the
event public announcement of the date of such annual meeting is first made by
the Company fewer than 70 days prior to the date of the 2000 annual meeting, the
close of business on the 10th day following the day on which public announcement
of the date of the 2000 annual meeting is first made by the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule.
Reports on Form 8-K
The Registrant filed no Reports on Form 8-K during the quarter ended June
30, 1999.
22
<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: August 13, 1999 /s/ SERGIO MAGISTRI
-------------------
Dr. Sergio Magistri
President and Chief Executive Officer
(PRINCIPAL EXECUTIVE OFFICER)
Date: August 13, 1999 /s/ ALFRED V. LARRENAGA
-----------------------
Alfred V. Larrenaga
Senior Vice President and Chief Financial Officer
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS, STATEMENTS OF INCOME AND STATEMENTS OF CASH FLOWS
INCLUDED IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED
JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 14752
<SECURITIES> 998
<RECEIVABLES> 20205
<ALLOWANCES> 100
<INVENTORY> 13553
<CURRENT-ASSETS> 51207
<PP&E> 13350
<DEPRECIATION> 5535
<TOTAL-ASSETS> 60553
<CURRENT-LIABILITIES> 10081
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 49050
<TOTAL-LIABILITY-AND-EQUITY> 60553
<SALES> 27247
<TOTAL-REVENUES> 27247
<CGS> 15266
<TOTAL-COSTS> 9911
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 127
<INCOME-PRETAX> 2261
<INCOME-TAX> 339
<INCOME-CONTINUING> 1922
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1922
<EPS-BASIC> 0.16
<EPS-DILUTED> 0.15
</TABLE>
