<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 OCTOBER 1, 2000 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 October 1, 2000, there were 12,333,600 shares of the Registrant's Common
Stock outstanding.
<PAGE>
INVISION TECHNOLOGIES, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
PART I: FINANCIAL INFORMATION ----
ITEM
----
<S> <C>
1. Consolidated Financial Statements (unaudited)
a. Consolidated Balance Sheets - October 1, 2000 and December 31, 1999*....................................3
b. Consolidated Statements of Operations - Three months and nine months ended October 1, 2000
and September 30, 1999 .............................................................................4
c. Condensed Consolidated Statements of Cash Flows - Nine months ended October 1, 2000
and September 30, 1999..............................................................................5
d. Notes to Consolidated Financial Statements..............................................................6
2. Management's Discussion and Analysis of Financial Condition and Results of Operations ......................11
3. Quantitative and Qualitative Disclosures about Market Risk..................................................18
PART II. OTHER INFORMATION
ITEM
----
1. Legal Proceedings...........................................................................................19
2. Changes in Securities and Use of Proceeds...................................................................19
3. Defaults Upon Senior Securities.............................................................................19
4. Submission of Matters to a Vote of Securities Holders.......................................................19
5. Other Information...........................................................................................19
6. Exhibits and Reports on Form 8-K............................................................................20
Signature Page...................................................................................................21
</TABLE>
* December 31, 1999 consolidated balance sheet is derived from the audited
financial statements included within the Company's Form 10-K filed on
March 30, 2000.
2
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INVISION TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
OCTOBER 1, DECEMBER 31,
2000 1999
----------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,659 $ 18,282
Short-term investments -- 5,887
Accounts receivable, net 21,044 10,633
Inventories 21,797 17,460
Other current assets 2,728 2,972
----------------- -----------------
Total current assets 57,228 55,234
Property and equipment, net 6,840 6,796
Intangible assets, net 3,666 --
Other assets 826 957
---------------- ----------------
Total assets $ 68,560 $ 62,987
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,270 $ 5,128
Accrued liabilities 10,769 5,566
Deferred revenue 3,198 3,194
Current maturities of long-term obligations 419 433
----------------- -----------------
Total current liabilities 20,656 14,321
----------------- -----------------
Long-term obligations 1,906 1,181
----------------- -----------------
Commitments and contingencies
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 authorized;
12,334,000 and 12,190,000 shares issued and outstanding 12 12
Additional paid-in capital 58,504 57,910
Deferred stock compensation expense (16) (63)
Accumulated deficit (11,303) (9,175)
Treasury stock, at cost (201,000 shares) (1,199) (1,199)
----------------- -----------------
Total stockholders' equity 45,998 47,485
----------------- -----------------
Total liabilities and stockholders' equity $ 68,560 $ 62,987
================= =================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
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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
-------------------------------- --------------------------
OCTOBER 1, SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30,
2000 1999 2000 1999
--------------- -------------- ------------- ----------
<S> <C> <C> <C> <C>
Revenues:
Product and service revenue $ 19,272 $ 10,233 $ 50,056 $ 37,480
Government contract revenue 2,869 2,801 7,746 7,955
--------- -------- -------- ----------
Total revenues 22,141 13,034 57,802 45,435
--------- -------- -------- ----------
Cost of revenues:
Product and service costs 12,851 6,375 34,052 21,641
Government contract costs 2,199 2,145 5,678 5,987
--------- -------- -------- ----------
Total cost of revenues 15,050 8,520 39,730 27,628
--------- -------- -------- ----------
Gross profit 7,091 4,514 18,072 17,807
--------- -------- -------- ----------
Operating expenses:
Research and development 3,129 2,648 8,074 7,850
Selling, general and administrative 4,006 2,772 12,764 8,793
--------- -------- -------- ----------
Total operating expenses 7,135 5,420 20,838 16,643
--------- -------- -------- ----------
Income (loss) from operations (44) (906) (2,766) 1,164
Interest expense (46) (49) (134) (176)
Interest and other income, net 287 180 772 498
--------- -------- -------- ----------
Income (loss) before provision for income taxes 197 (775) (2,128) 1,486
Provision (benefit) for income taxes -- (116) -- 223
--------- -------- -------- ----------
Net income (loss) $ 197 $ (659) $ (2,128) $ 1,263
========= ======== ======== ==========
Net income (loss) per share:
Basic $ 0.02 $ (0.05) $ (0.17) $ 0.10
========= ======== ======== ==========
Diluted $ 0.02 $ (0.05) $ (0.17) $ 0.10
========= ======== ======== ==========
Weighted average shares outstanding:
Basic 12,322 12,152 12,273 12,109
Diluted 12,833 12,152 12,273 12,757
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
INVISION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------------------
OCT. 1, 2000 SEPT. 30, 1999
----------------- -----------------
<S> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ (9,245) $ 11,626
----------------- -----------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,014) (1,694)
Proceeds from (purchases of) short-term investments, net 5,887 (3,613)
Purchase of subsidiary, net of cash acquired (1,519) --
----------------- -----------------
Net cash provided by (used in) investing activities 2,354 (5,307)
----------------- -----------------
CASH FLOW FROM FINANCING ACTIVITIES:
Repayments of short-term debt -- (2,967)
Repayments of long-term debt (326) (787)
Proceeds from issuance of common stock 594 385
----------------- -----------------
Net cash provided by (used in) financing activities 268 (3,369)
----------------- -----------------
Net change in cash and cash equivalents for the period (6,623) 2,950
Cash and cash equivalents at beginning of period 18,282 10,462
----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,659 $ 13,412
================= =================
Supplemental disclosures of cash flow information:
Interest paid $ 102 $ 178
Income taxes paid $ 187 $ 280
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
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INVISION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 a 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, 1999 and 1998 and for each of the three years in the period
ended December 31, 1999, including the notes thereto, included in the Company's
Annual Report on Form 10-K.
Operating results for the three and nine month periods ended October 1,
2000 may not necessarily be indicative of the results that may be expected
for the year ended December 31, 2000 or any other future period.
In 2000, the Company changed its fiscal reporting periods to thirteen week
quarters, with each quarter ending on the Sunday closest to a calendar quarter
end. The fiscal year end remains December 31. In prior years, the quarters ended
on a calendar quarter end date. The third quarters of 2000 and 1999 consisted of
91 and 92 days, respectively, and the first nine months of 2000 and 1999
consisted of 275 and 273 days, respectively. The effect of one less day in the
third quarter of 2000 compared to the third quarter of 1999 and the effect of
two more days in the nine months in 2000 compared to the same period a year ago
on revenues and net income (loss) were not deemed to be significant.
Certain prior period amounts have been reclassified to conform to the
current period presentation.
SEGMENT INFORMATION
Statement of Financial Accounting Standards No. 131 (SFAS 131),
"Disclosures about Segments of an Enterprise and Related Information," requires
disclosures of segment information under a "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS 131 also requires disclosures about products
and services, geographic areas, and major customers. The adoption of SFAS 131
did not affect results of operations or financial position of the Company. Prior
year's segment information has been presented to reflect the Company's
organizational structure in 2000.
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, warrants, convertible debt and
preferred stock (using the treasury stock method).
6
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INVISION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following is a reconciliation between the components of the basic and
diluted net income (loss) per share calculations for the periods presented below
(in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------
OCTOBER 1, 2000 SEPTEMBER 30, 1999
------------------------------ -------------------------------
PER PER
INCOME SHARE INCOME SHARE
(LOSS) SHARES AMOUNT (LOSS) SHARES AMOUNT
------- ------ ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Basic net income (loss) per share:
Income (loss) available to
common stockholders $197 $12,322 $ 0.02 $(659) 12,152 $(0.05)
Effect of dilutive securities:
Options -- 511 -- -- -- --
----- ------- -------- ------- ------- -----
Diluted net income (loss) per share:
Income (loss) available to common
stockholders plus assumed
conversions $197 $12,833 $ 0.02 $(659) 12,152 (0.05)
==== ======= ======= ===== ======= ======
<CAPTION>
NINE MONTHS ENDED
--------------------------------------------------------------
OCTOBER 1, 2000 SEPTEMBER 30, 1999
------------------------------- ------------------------------
PER PER
INCOME SHARE INCOME SHARE
(LOSS) SHARES AMOUNT (LOSS) SHARES AMOUNT
----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic net income (loss) per share:
Income (loss) available to
common stockholders $(2,128) 12,273 $ (0.17) $ 1,263 12,109 $ 0.10
Effect of dilutive securities:
Options -- -- -- -- 648 --
-------- ------- -------- ------- ------- --------
Diluted net income (loss) per share:
Income (loss) available to common
stockholders plus assumed
conversions $(2,128) 12,273 $ (0.17) $ 1,263 12,757 $ 0.10
======== ======= ======== ======= ======= ========
</TABLE>
The computation of diluted net income (loss) per share for the three and
nine months ended October 1, 2000 does not include shares issuable upon exercise
of options of 864,370 and 1,233,777, respectively, because their effect would
have been anti-dilutive.
REVENUE RECOGNITION
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the Securities and Exchange Commission. SAB 101 outlines
the basic criteria that must be met to recognize revenue and provides guidance
for disclosures related to revenue recognition policies. SAB 101 is effective
for the fiscal quarter beginning October 2, 2000, however earlier adoption is
permitted. The Company does not expect adoption to have a significant effect on
its consolidated results of operations or financial position.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
(SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." SFAS
133, as amended, establishes accounting and reporting standards for derivative
instruments and hedging activities and is effective for fiscal years beginning
after June 15, 2000. The Company is in the process of determining the impact, if
any, that adoption will have on its consolidated financial statements.
7
<PAGE>
INVISION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
2. INVENTORIES
The components of inventory consist of the following (in thousands):
OCTOBER 1, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
Inventories:
Raw material and purchased components $ 8,262 $ 6,416
Field service spare parts 7,005 4,412
Work-in-process 5,792 6,316
Finished goods 738 316
------------ ------------
Total $21,797 $17,460
============ ============
</TABLE>
3. ACCRUED LIABILITIES
The components of accrued liabilities consist of the following (in
thousands):
<TABLE>
<CAPTION>
OCTOBER 1, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
Accrued liabilities:
Warranty and other reserves $ 4,075 $ 2,478
Accrued employee compensation 3,196 1,492
Income taxes 710 906
Other 2,788 690
------------ ------------
Total $10,769 $ 5,566
============ ============
</TABLE>
4. ACQUISITION OF INOVEC, INC.
Effective January 1, 2000, the Company acquired Inovec, Inc. ("Inovec"), a
manufacturer of advanced optimization equipment for increasing the yield of the
forest products industry, for $2.4 million in cash and $2.8 million in stock
payable over the next two years. In addition, the purchase agreement provides
that Inovec shareholders will be paid up to an additional $1.4 million in cash
and stock over the next two years based on the achievement of certain
performance milestones. The acquisition was accounted for using the purchase
method of accounting effective January 1, 2000. The excess purchase price over
the fair market value of the underlying net assets of $4.1 million was allocated
to goodwill and other intangible assets. Amortization expense of $512,000 was
recorded during the nine months ended October 1, 2000.
8
<PAGE>
INVISION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. SEGMENT INFORMATION
Under the provisions of SFAS 131, the Company is reporting segment
information in the same format reviewed by the Company's management in 2000.
The Company has three reportable segments based on types of technology and
applications. The "InVision" segment is comprised of those business units
that deal with the development, manufacturing, marketing and support of
explosive detection systems based on advanced computed tomography ("CT")
technology. The "Quantum" segment is comprised of the business unit that
deals with the development of technology for inspection, detection and
analysis of explosives and other materials based on quadrupole resonance
technology and passive magnetic sensing. The "WoodVision" segment is
comprised of the business unit that deals with the development of technology
to optimize the value and yield of harvested timber based on different types
of scanning technologies, including CT technology. Prior year's segment
information has been presented to reflect the above structure of the
Company's organization.
Financial information by business segment is as follows (in thousands):
<TABLE>
<CAPTION>
INVISION QUANTUM WOODVISION TOTAL
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
THIRD QUARTER 2000
Revenues:
Product and service revenues $ 15,552 $ -- $ 3,720 $ 19,272
Government contract revenues -- 2,869 -- 2,869
------------ ------------ ------------ ------------
Total revenues $ 15,552 $ 2,869 $ 3,720 $ 22,141
Net income (loss) $ 821 $ 132 $ (756) $ 197
Total assets $ 56,867 $ 4,483 $ 7,210 $ 68,560
-------------------------------------------------------------------------------------------
THIRD QUARTER 1999
Revenues:
Product and service revenues $ 10,074 $ 159 $ -- $ 10,233
Government contract revenues -- 2,801 -- 2,801
------------ ------------ ------------ ------------
Total revenues $ 10,074 $ 2,960 $ -- $ 13,034
Net income (loss) $ (676) $ 17 $ -- $ (659)
Total assets $ 54,621 $ 5,182 $ -- $ 59,803
-------------------------------------------------------------------------------------------
FIRST NINE MONTHS 2000
Revenues:
Product and service revenues $ 39,326 $ - $ 10,730 $ 50,056
Government contract revenues - 7,746 -- 7,746
------------ ------------ ------------ ------------
Total revenues $ 39,326 $ 7,746 $ 10,730 $ 57,802
Net income (loss) $ (724) $ (29) $ (1,375) $ (2,128)
Total assets $ 56,867 $ 4,483 $ 7,210 $ 68,560
-------------------------------------------------------------------------------------------
FIRST NINE MONTHS 1999
Revenues:
Product and service revenues $ 37,321 $ 159 $ -- $ 37,480
Government contract revenues -- 7,955 -- 7,955
------------ ------------ ------------ ------------
Total revenues $ 37,321 $ 8,114 $ -- $ 45,435
Net income (loss) $ 1,493 $ (230) $ -- $ 1,263
Total assets $ 54,621 $ 5,182 $ -- $ 59,803
</TABLE>
9
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INVISION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. LITIGATION
In July 2000, the Company and Quantum entered into a settlement
agreement (the "Settlement Agreement") that settled an action brought on
January 7, 1999 by Vivid Technologies, Inc. ("Vivid") 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"). Vivid asserted 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. The 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 and the
United States Attorney for the Southern District of California. As part of
the Settlement Agreement, Vivid represented that it is no longer pursuing QR
technology and agreed not to pursue QR technology for two years from the date
of the agreement. Vivid further agreed to file a request for dismissal of the
complaint without prejudice which would automatically convert to a dismissal
with prejudice on the second anniversary of the Settlement Agreement.
Similarly, the Company and Quantum agreed that their voluntary dismissal of a
federal court action (which had been filed but not served) against Vivid
based on the alleged theft would also automatically convert to a dismissal
with prejudice in two years. Management believes that the terms of the
Settlement Agreement will not have a material adverse effect on the Company's
business, financial condition or results of operations.
10
<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 CONTRACTS
WITH THE FEDERAL AVIATION ADMINISTRATION ("FAA") OR THE FAILURE TO OBTAIN
ADDITIONAL DELIVERY ORDERS UNDER THOSE CONTRACTS, 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, THE COMPANY'S 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, THE RISK THAT THE COMPANY WILL NOT RECEIVE
CERTIFICATION OF CERTAIN OF THESE PRODUCTS, RISK OF CERTIFICATION OF
COMPETITORS' PRODUCTS, AND FLUCTUATIONS IN THE AMOUNT OF GOVERNMENT FUNDING
OF THE COMPANY'S RESEARCH AND DEVELOPMENT ACTIVITIES, AS WELL AS THOSE
DISCUSSED IN "BUSINESS RISKS" BELOW AND 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, 1999.
OVERVIEW
InVision Technologies, Inc. ("InVision," or together with its
subsidiaries, the "Company") develops, manufactures, markets and supports
systems based on advanced computed tomography ("CT") technology for explosive
detection systems ("EDS") for civil aviation security, for log scanning for
the wood products industry and for drug detection applications. 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 smaller and
lighter CTX 2500 system. In addition to these products, the Company has other
products in development. In 1999, the CTX 9000 and CTX 2500 systems
successfully completed FAA certification. The Company sold its first CTX 9000
system in the third quarter of 1999 and its first CTX 2500 system in the
second quarter of 2000. Since its first CTX sale in 1995 through October 1,
2000, the Company has received orders for a total of 222 CTX systems, of
which a total of 218 have been shipped.
InVision's wholly-owned 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, and detection of
concealed weapons and landmines. 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. In 1997, Quantum began
the development of a sophisticated prototype system, which combines QR
explosives detection with metal detection, and is thus capable of detecting
both plastic-cased and metal-cased landmines. In 1999, the unique
capabilities of this landmine detection system were successfully demonstrated
in a series of Department of Defense-sponsored, blind field tests, including
the detection of TNT at Fort Leonard Wood, Missouri in the fourth quarter of
1999. In October 2000, Quantum received an $11.9 million award from the U.S.
Office of Naval Research ("ONR") to develop a backpack-mounted landmine
detection system. Revenues and cost of revenues related to Quantum's
government contracts were previously reported as a reduction to research and
development expense. Prior year amounts have been reclassified to reflect the
gross revenues and cost of revenues associated with Quantum's contracts to
conform to the 2000 presentation.
In February 2000, the Company created WoodVision, a new division formed
to develop a new application for its CT technology to optimize the value and
yield of harvested timber. Additionally, in February 2000, the Company
acquired Inovec, Inc. ("Inovec"), a manufacturer of advanced optimization
equipment based on laser and optical scanning technology for increasing the
yield of the forest products industry for $5.2 million in cash and stock
payable over the next two years. In addition, the purchase agreement provides
that Inovec shareholders will be paid up to an additional $1.4 million in
cash and stock over the next two years based on the achievement of certain
performance milestones. The acquisition was accounted for using the purchase
method of accounting effective January 1, 2000. Inovec develops,
manufactures, markets and supports scanning, optimization and control systems
for the forest products industry. Over 600 systems have been installed in
mills worldwide to produce more lumber from each log and to control product
quality.
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 hardware and software. The Company
has also expended significant efforts in the development of new
11
<PAGE>
wood-scanning products in 2000. At October 1, 2000, the Company had 115
full-time employees engaged in research and development activities while also
using the services of 12 specialized contract employees and consultants in
this area. The Company spent $8.5 million during each of the nine month
periods ended October 1, 2000 and September 30, 1999, on research and
development activities. For the first nine months of 2000 and 1999, $0.4
million and $0.6 million, respectively, were funded by the FAA and other
government agencies under research and development contracts and grants. As
of October 1, 2000, the Company had in backlog research and development
contracts and grants of $7.9 million.
The Company's product and service 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 month periods ended
October 1, 2000 and September 30, 1999, $21.0 million and $30.0 million,
respectively, were generated from sales to the Company's largest customer,
the U.S. government, representing 41.9% and 80.0% of the Company's product
and service revenues, respectively. For the year ended December 31, 1999,
product and service revenues from the Company's largest customer, the U.S.
government, were approximately $37.1 million, or 77.8% of the Company's
product and service revenues.
The Company's government contract revenues have historically been
derived from funding provided by various U.S. government agencies. For the
nine month periods ended October 1, 2000 and September 30, 1999, $2.0 million
and $1.1 million of the Company's government contract revenues were related
to funding from the FAA for EDS research and development, representing 25.3%
and 13.8% of the Company's government contract revenues, respectively, and
$1.5 million and $5.2 million were associated with funding from the Defense
Advanced Research Projects Agency ("DARPA"), primarily for landmine
detection, representing 19.7% and 64.1% of the Company's government contract
revenues, respectively. Additionally, in the first nine months of 2000, $1.5
million of the Company's government contract revenues related to funding from
the U.S. Navy for landmine and EDS research and $1.2 million were from the
U.S Army for landmine detection, representing 19.7% and 15.5% of the
Company's government contract revenues, respectively. No other customer
accounted for more than 10% of revenues in the first nine months of 1999.
The Company markets its products and services both directly through
internal sales personnel and indirectly through authorized agents,
distributors and systems integrators. In the United States, the Company
markets its products and services 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 October 1,
2000 and September 30, 1999 and the year ended December 31, 1999,
international sales represented 28.6% and 15.5%, respectively, of the
Company's product and service revenues.
The sales cycle of the Company's CTX 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 integrate the
product. Typically, nine 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 product 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. Products typically carry a one-year
warranty.
The Company's government contract revenue is substantially derived from
Quantum activities performed under U.S. government contracts. These contracts
are typically in the form of cost-plus-fixed-fee or firm-fixed-price awards.
The Company recognizes revenue on these contracts using the
percentage-of-completion method based on costs incurred to date as a
percentage of total estimated costs at completion.
12
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain operating data expressed as a
percentage of total revenues for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------- --------------------------------
OCTOBER 1, SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30,
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Product and service revenue 87.0 % 78.5 % 86.6 % 82.5 %
Government contract revenue 13.0 21.5 13.4 17.5
-------------- -------------- -------------- --------------
Total revenues 100.0 100.0 100.0 100.0
-------------- -------------- -------------- --------------
Cost of revenues:
Product and service costs 58.0 48.9 58.9 47.6
Government contract costs 9.9 16.5 9.8 13.2
-------------- -------------- -------------- --------------
Total cost of revenues 67.9 65.4 68.7 60.8
-------------- -------------- -------------- --------------
Gross profit 32.1 34.6 31.3 39.2
-------------- -------------- -------------- --------------
Operating expenses:
Research and development 14.1 20.3 14.0 17.3
Selling, general and administrative 18.1 21.3 22.1 19.4
-------------- -------------- -------------- --------------
Total operating expenses 32.2 41.6 36.1 36.7
-------------- -------------- -------------- --------------
Income (loss) from operations (0.1) (7.0) (4.8) 2.5
Interest expense (0.2) (0.4) (0.2) (0.4)
Interest and other income, net 1.3 1.4 1.3 1.1
-------------- -------------- -------------- --------------
Income (loss) before provision for income taxes 1.0 (6.0) (3.7) 3.2
Provision (benefit) for income taxes - (0.9) - 0.5
-------------- -------------- -------------- --------------
Net income (loss) 1.0 % (5.1) % (3.7) % 2.7 %
============== ============== ============== ==============
</TABLE>
CURRENT QUARTER COMPARED TO PRIOR YEAR'S QUARTER
REVENUES. The Company's revenues are comprised of: (i) product and
service revenues, which include revenues from sales of CTX systems and
control and automation systems for material processing equipment, primarily
in the wood products industry, and related accessories, installation and
configuration, and maintenance contracts related to product support; and (ii)
government contract revenues, which include revenues primarily from research
and development contracts utilizing QR and passive magnetic technologies with
government agencies and private entities. Product and service revenues were
$19.3 million for the third quarter of 2000, an increase of 88.3% from the
$10.2 million in the third quarter of 1999. This increase was primarily
attributable to higher CTX system revenues in the third quarter of 2000
compared to the third quarter of 1999, primarily due to approximately $5
million of revenues for systems scheduled to ship in the second quarter of
2000 that were actually shipped in the third quarter of 2000, and also due to
increased service contract revenue for new support and maintenance agreements
for CTX systems whose warranty periods expired during the past twelve months.
The increase in revenues is also due to product and service revenue from the
Company's newly acquired subsidiary, Inovec, in the amount of $3.7 million.
The Company typically ships against a backlog of orders for its products. As
of October 1, 2000, the Company had in backlog equipment orders and service
agreements of $15.6 million.
Government contract revenues were $2.9 million in the third quarter of
2000, a increase of 2.4% from the $2.8 million in the third quarter of 1999.
This increase was primarily attributable to variations in services and
materials provided under government contracts in the third quarter of 2000
compared to the same quarter a year ago. As of October 1, 2000, the Company
had in backlog government contract revenue of approximately $19.4 million.
13
<PAGE>
GROSS PROFIT. Cost of product and service 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 for products and services may be affected by several factors,
including revenue mix, product configuration, location of the installation
and complexity of integration into various environments. Gross profit for
product and services was $6.4 million in the third quarter of 2000, an
increase of 66.4% from the $3.9 million in the third quarter of 1999. Gross
margins were 33.3% and 37.7%, respectively. The increase in gross profit is
primarily due to higher revenues in the quarter compared to the same quarter
a year ago and also due to gross profit generated from Inovec's sales in the
third quarter of 2000. The decrease in gross margins was primarily due to
lower margins on the sale of CTX 9000 systems in the third quarter of 2000,
primarily due to competitive pricing factors with international customers and
higher manufacturing costs related in the initial production process of the
CTX 9000 systems compared to the third quarter of last year.
Cost of government contract revenues primarily consists of direct labor,
purchased materials, subcontract labor and the applicable overhead required
to support government funded activities. Gross profit for government
contracts was $0.7 million in the third quarters of 2000 and 1999. Gross
margins were 23.4% in the third quarters of 2000 and 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 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 a cost basis.
Gross research and development expenses were $3.4 million in the third
quarter of 2000, an increase of 26.2% from the $2.7 million in the third
quarter of 1999. Of the these amounts, $255,000 and $10,000, respectively,
were funded by research and development contracts and grants from the FAA and
other government agencies and private entities, respectively. Net research
and development expenses were $3.1 million in the third quarter of 2000, an
increase of 18.2% compared to the $2.6 million in the same quarter a year
ago. As a percentage of revenues, net research and development expenses were
14.1% and 20.3% in the third quarter of 2000 and 1999, respectively. The
increase in gross research and development expenses is primarily due to
engineering services, materials and labor costs incurred for the development
of WoodVision products and also due to expenses incurred by the Company's
newly acquired subsidiary, Inovec. These increases are partially offset by
reduced expenses incurred by the Quantum segment due to more direct labor
efforts specifically for projects under government contracts and less
extended on internal activities. The decrease as a percentage of revenues is
primarily due to higher revenues in the third quarter of 2000 compared to the
same quarter a year ago. As of October 1, 2000, the Company had in backlog
research and development contracts and grants of $7.9 million.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses consist primarily of compensation paid to direct and indirect sales
and marketing personnel, administrative personnel, including directors,
consultant fees, professional service fees, insurance, travel, selling and
distribution costs, and other general expenses.
Selling, general and administrative expenses were $4.0 million in the
third quarter of 2000, an increase of 44.5% from the $2.8 million in the
third quarter of 1999. As a percentage of total revenues, selling, general
and administrative expenses were 18.1% and 21.3% in the third quarter of 2000
and 1999, respectively. The increase in selling, general and administrative
expenses was primarily the result of start-up operating costs of WoodVision
and also expenses incurred by Inovec in the third quarter of 2000. The
decrease as a percentage of revenues is primarily due to higher revenues in
the third quarter of 2000 compared to the third quarter of 1999.
INTEREST EXPENSE. Interest expense decreased to $46,000 in the third
quarter of 2000 from $49,000 in the third quarter of 1999. Interest expense
in the third quarter of 2000 and 1999 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,
increased to $287,000 in the third quarter of 2000 from $180,000 in the third
quarter of 1999. The 2000 amount consists primarily of interest income for
the quarter on cash equivalents and short-term investments of $197,000 and
other income (net) of $90,000. 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.
PROVISION FOR INCOME TAXES. No tax provision or benefit was recorded for
the third quarter of 2000 due to the cumulative net loss for the year. The
Company recorded a benefit for income taxes of $116,000 in the third quarter
of 1999, reflecting a provision adjustment based on an effective tax rate of
15% for the year, which is lower than the statutory tax rate primarily due to
the utilization of net operating loss carryforwards. At December 31, 1999,
the Company had federal net operating loss carryforwards of approximately $5
million available to reduce future federal taxable income. The Company's net
14
<PAGE>
operating loss carryforwards expire from 2007 to 2011.
CURRENT NINE MONTH PERIOD COMPARED TO PRIOR NINE MONTH PERIOD
REVENUES. Product and service revenues were $50.1 million for the first
nine months of 2000, an increase of 33.6% from $37.5 million in the first
nine months of 1999. This increase was primarily attributable to a different
mix of CTX systems sold in the first nine months of 2000 compared to the
first nine months of 1999. The increase is also due to increased service
revenue from new support and maintenance agreements for CTX systems whose
warranty periods expired during the past twelve months and product and
service revenue from the Company's newly acquired subsidiary, Inovec, in the
amount of $10.7 million. These increases are partially offset by fewer
accessories and upgrades sold in the first nine months of 2000 compared to
the same period a year ago.
Government contract revenues were $7.7 million in the first nine months
of 2000, a decrease of 2.6% from the $8.0 million in the first nine months of
1999. This decrease was primarily attributable to a significant material
purchase in the prior year that was billed to the customer in accordance with
terms in the landmine contract.
GROSS PROFIT. Gross profit for product and services was $16.0 million in
the first nine months of 2000, an increase of 5.1% from $15.8 million in the
first nine months of 1999. Gross margins were 32.0% and 42.3%, respectively.
The increase in gross profit is primarily due to higher CTX revenues in the
period and also due to gross profit generated from Inovec's sales. The
decrease in gross margins was primarily due to lower margins on the sale of
CTX 9000 systems in the first nine months of 2000, primarily due to
competitive pricing factors with international customers and higher
manufacturing overhead costs per unit resulting from the manufacture of fewer
units in the first nine months of 2000 compared to the same period a year ago.
Gross profit for government contracts was $2.1 million in the first nine
months of 2000 compared to $2.0 million in the first nine months of 1999.
Gross margins were 26.7% and 24.7%, respectively. The increase in gross
margins is primarily due to lower margins incurred in the prior year for a
significant material purchase in the first nine months of 1999, which
typically carries lower margins.
RESEARCH AND DEVELOPMENT. Gross research and development expenses were
$8.5 million in the first nine months of 2000 and 1999. Of these amounts,
$0.4 million and $0.6 million, respectively, were funded by research and
development contracts and grants from the FAA and other government agencies
and private entities. Net research and development expenses were $8.1 million
in the first nine months of 2000 compared to $7.9 million in the same period
in 1999. As a percentage of revenues, net research and development expenses
were 14.0% and 17.3% in the first nine months of 2000 and 1999, respectively.
Excluding the effects of research and development expense incurred for the
development of new products by WoodVision and also expenses incurred by
Inovec, the net decrease in gross research and development expenses is
primarily attributable to reduced expenses incurred by the Quantum segment
due to more direct labor efforts specifically for projects under government
contracts and less extended on internal activities for the first nine months
of 2000 compared to the same period a year ago.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were $12.8 million in the first nine months of 2000, an increase of
45.2% from the $8.8 million in the first nine months of 1999. As a percentage
of total revenues, selling, general and administrative expenses were 22.1%
and 19.4% in the first nine months of 2000 and 1999, respectively. The
increase in selling, general and administrative expenses was primarily the
result of start-up operating costs of WoodVision and selling, general and
administrative expenses of Inovec in the first nine months of 2000. The
increase is also due to an increase in commission expense due to commissions
paid to outside sales agents for international sales on the CTX 9000 systems
in the first nine months of 2000.
INTEREST EXPENSE. Interest expense decreased to $134,000 in the first
nine months of 2000 from $176,000 in the first nine months of 1999. Interest
expense in the first nine months of 2000 and 1999 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,
increased to $772,000 in the first nine months of 2000 from $498,000 in the
first nine months of 1999. The 2000 amount consists primarily of interest
income for the first nine months on cash equivalents and short-term
investments of $765,000 and other income (net) of $7,000. The 1999 amount
consists primarily of interest income for the period on cash equivalents and
short-term investments of $612,000 partially offset by other expense (net) of
$114,000.
PROVISION FOR INCOME TAXES. No tax provision or benefit was recorded for
the first nine months of 2000 due to the net loss incurred for the year. The
Company's effective tax rate for the first nine months of 1999 was 15%, which
was lower than statutory tax rates primarily due to the utilization of net
operating loss carry forwards. At December 31, 1999, the Company had
15
<PAGE>
federal net operating loss carry forwards of approximately $5 million
available to reduce future federal taxable income. The Company's net
operating loss carry forwards expire from 2007 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 in the Company's follow-on offering in
May 1997 and short-term borrowings under working capital lines of credit. At
October 1, 2000, the Company had $11.7 million in cash, cash equivalents and
short-term investments, compared to $24.2 million at December 31, 1999.
Working capital was $36.6 million at October 1, 2000 compared to $40.9
million at December 31, 1999.
Net cash used in operating activities was $9.2 million in the nine month
period ended October 1, 2000, compared to $11.6 million provided by operating
activities in the same period of 1999. Cash used in operating activities in
the first nine months of 2000 primarily resulted from a net loss of $2.1
million, a $9.0 million increase in accounts receivable, a $3.8 million
increase in inventories and a $1.8 million decrease in deferred revenues,
partially offset by a $3.5 million increase in accounts payable and accrued
liabilities, the $2.2 million non-cash effect of depreciation and
amortization, and a $0.9 million decrease in other current assets. Cash
provided by operating activities in the first nine months of 1999 primarily
resulted from net income of $1.3 million, the $2.0 million non-cash effect
from depreciation and amortization, a $10.2 million decrease in accounts
receivable and a $0.9 million decrease in other current assets for the
release of restricted cash, partially offset by a $1.3 million increase in
inventories and a $1.0 million decrease in deferred revenues.
Net cash provided by investing activities was $2.4 million in the nine
month period ended October 1, 2000, compared to $5.3 million used in
investing activities in the nine month period ended September 30, 1999. Net
cash provided by investing activities in the first nine months of 2000
primarily resulted from $5.9 million on sales of short-term investments
partially offset by the cash payment of $1.5 million for the purchase of
Inovec, net of cash acquired, and $2.0 million in acquisitions of capital
equipment. Net cash used in investing activities in the first nine months of
1999 primarily resulted from $1.7 million in acquisitions of capital
equipment and $3.6 million in purchases of short-term investments (net of
sales). The Company has no significant capital spending or purchase
commitments other than normal purchase commitments and commitments under
leases.
Net cash provided by financing activities was $268,000 in the nine month
period ended October 1, 2000, compared to $3.4 million used in financing
activities in the nine month period ended September 30, 1999. Net cash
provided by financing activities in the first nine months of 2000 was
primarily due to $594,000 in proceeds from sales under the employee stock
purchase plan and exercises of incentive stock options, partially offset by
$326,000 in repayments of debt financing. Net cash used in financing
activities in the first months of 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 $385,000 in proceeds from sales under
the employee stock purchase plan and exercises of incentive stock options.
In November 2000, the Company renewed its two line of credit agreements
with a bank. The first agreement provides for maximum borrowings in an amount
up to the lower of 80% of eligible receivables or $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:
(a) the sum of 80% of eligible export accounts receivable plus the lower of:
(i) 70% of eligible raw materials and work-in-process inventory designated
for export customers; (ii) 60% of outstanding loans under this agreement, or;
(iii) $2.0 million, or; (b) $5.0 million. Borrowings under both agreements
bear interest at the bank's prime rate plus 1.5% (11.0% at October 1, 2000)
and are secured by all of the Company's assets. The agreements expire in
November 2001 and require that the Company maintain certain levels of
tangible net worth and also prohibit the Company from paying cash dividends.
Proceeds of loans under both lines of credit may be used for general
corporate purposes. At October 1, 2000, the Company had outstanding
guarantees to customers through issuance of letters of credit secured by the
lines of credit totaling $1.6 million and foreign exchange contracts for
which a 10% reserve of $432,000 is secured by the lines of credit. There were
no outstanding borrowings under the lines of credit at October 1, 2000.
The Company previously borrowed against a committed equipment line of
credit agreement with a bank, which converted into a term loan after draw
down. Borrowings are secured by the assets purchased or financed. At October
1, 2000, the Company had an outstanding $364,000 term loan due June 2003 and
a $250,000 term loan due November 2001. The term loans bear interest at prime
plus 1.5% (11.0% at October 1, 2000).
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.
16
<PAGE>
BUSINESS RISKS
HISTORY OF LOSSES; NO ASSURANCE OF CONTINUED PROFITABILITY. The Company
commenced operations in September 1990, remained in the development stage
through 1994 and received its first revenues from product sales in the first
nine months of 1995. The Company experienced net losses for each year from
inception through December 31, 1996. The year ended December 31, 1997 was the
Company's first year of profitability. As of October 1, 2000, the Company had
an accumulated deficit of approximately $11.3 million. Although the Company
has been profitable on an annual basis for the past three years,
profitability in 1999 was below that of the prior two years, the Company has
experienced a net loss in each of the prior four quarters and there can be no
assurance that the Company will attain annual profitability for 2000 or in
the future. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."
FLUCTUATIONS IN OPERATING RESULTS. 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 size of orders
from, and shipments to, major customers; budgeting and purchasing cycles of
its customers; delays in product shipments caused by manufacturing delays
related to introduction of new products, custom requirements of customers or
ability of the customer to accept shipment; the timing of enhancements to the
CTX Series by InVision or introduction of new products by it or its
competitors and the market acceptance thereof; changes in pricing policies by
InVision, its competitors or suppliers, including decreases in average
selling prices of the CTX Series in response to competitive pressures; the
proportion of revenues derived from competitive bid processes; the mix
between sales to domestic and international customers and the mix between
sales of various CTX products; the availability and cost of key components;
and fluctuations in general economic conditions. InVision also may experience
decreases in spending reimbursed by government or third party contracts or
choose to increase spending which is not reimbursed by government or other
third party contracts in response to competition or as it pursues new market
opportunities in the areas of WoodVision, landmine detection and others, all
of which may have a material adverse effect on InVision's business, financial
condition or results of operations. InVision's EDS systems revenues in any
period are derived from sales of multiple CTX Series systems to a limited
number of customers and are recognized upon shipment which, in view of the
high sales price of units in the CTX Series, causes minor variations in the
number of orders, or the timing of shipments, to substantially affect the
Company's quarterly revenues. Because a significant portion of the Company's
quarterly operating expenses are, and will continue to be, relatively fixed
in nature, such revenue fluctuations will cause the Company's quarterly and
annual operating results to vary substantially. Accordingly, the Company
believes that period-to-period comparisons of its results of operations are
not meaningful and cannot be relied upon as indicators of future performance.
Because of all of the foregoing factors, the Company's operating results have
from time to time in the past been and may again in the future be below the
expectations of public market analysts and investors. This failure to meet
market expectations has in the past and may again in the future result in a
decline in the trading price of the common stock.
DEPENDENCE ON LARGE ORDERS; CUSTOMER CONCENTRATIONS; LENGTHY SALES
CYCLE. In any given fiscal year, the Company's product and service revenues
have principally consisted, and the Company believes will continue to
consist, of orders of multiple units from a limited number of customers.
While the number of individual customers may vary from period to period, the
Company is nevertheless dependent upon these multiple orders for a
substantial portion of its revenues. There can be no assurance that the
Company will obtain such multiple orders on a consistent basis. To date, all
orders for CTX Series systems from United States customers have been entirely
funded by the FAA, and the Company's largest sales contract to date, for 105
CTX Series systems, all of which have been shipped, was with the FAA. In
2000, the Company entered into several contracts with customers to purchase
CTX Series systems over a period of several years. These contracts have a
minimum and maximum number of units the customer can order, however, there
can be no assurance that the customer will order more than the minimum number
of units in accordance with the terms in the contract. The Company's
inability to obtain sufficient multiple orders or the failure of the FAA to
continue such purchases or funding would have a material adverse effect on
the Company's business, financial condition or results of operations.
Moreover, the timing and shipment of such orders could cause the operating
results in any quarter to differ from the projections of securities analysts,
which could adversely affect the trading price of the common stock.
PUBLIC AGENCY CONTRACT AND BUDGET CONSIDERATIONS. Substantially all of
InVision's EDS 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 which 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 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
17
<PAGE>
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. In addition, export of the Company's
landmine detection equipment currently in the prototype stage, which under
the U.S. Department of State regulations is deemed a regulated military
device subject to export restrictions, may be difficult or limited to a small
number of countries, even for purposes of demonstration and further data
collection and development.
WOOD INDUSTRY PURCHASING CYCLE; ACCEPTANCE OF NEW PRODUCTS. The
Company's revenues related to the WoodVision division, including optimization
systems manufactured by Inovec, will be subject to the ability and
willingness of customers in the wood industry to purchase capital equipment
to improve productivity, yield and finished product value. The factors that
affect the decision to purchase such capital equipment include the demand for
wood products, market prices for logs and finished wood products, labor
costs, interest rates and other general economic factors. In addition, the
revenues related to the Company's CT scanners for the wood industry will be
subject to the acceptance of new technology by customers in the wood
industry. There are no assurances that market conditions in the wood industry
will be favorable for the sale of capital equipment, or that the Company's
new products will be accepted by the industry in any particular time, or at
all.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. The Company's exposure to market risk for changes in
interest rates relates primarily to the increase or decrease in the amount of
interest income the Company can earn on its investment portfolio and on the
increase or decrease in the amount of interest expense the Company must pay
with respect to its various outstanding debt instruments with interest rates
which are tied to market rates. The Company does not use derivative financial
instruments in its investment portfolio. The Company ensures the safety and
preservation of its invested principal funds by limiting default risks,
market risk and reinvestment risk. The Company mitigates default risk by
investing in high credit quality securities.
FOREIGN EXCHANGE RISK AND IMPACT OF INFLATION. The Company's
international system sales and maintenance contracts are generally
denominated in U.S. dollars. In instances where there are significant
international system sales contracts denominated in a foreign currency, the
Company will enter into forward exchange contracts to mitigate foreign
exchange risk. In the first nine months of 2000, the Company entered into
forward exchange contracts of approximately $6.3 million to hedge against
foreign exchange risk for contracts with international customers. The Company
did not hedge any foreign exchange risk in 1999. Purchases of raw materials
and other inventory components are primarily denominated in U.S dollars and
when purchased in foreign currencies, are generally made on an as needed
basis. The Company has some advance purchase commitments in foreign
currencies with a few European suppliers. The Company currently does not
hedge against these purchase commitments, as the foreign exchange rate
fluctuations have not had a material adverse impact on these purchases;
however, the Company will continue to monitor the foreign exchange rates and
enter into forward exchange contracts to mitigate foreign exchange risk as
appropriate.
Certain costs of providing warranty and maintenance services for systems
sold to foreign countries are denominated in local currencies. To the extent
exchange rates fluctuate, it could become more expensive to provide these
services. To date, these costs have not been significant, however, the
Company expects they will increase as the Company's installed base increases.
The impact of inflation has not been material on the Company's
operations or liquidity to date.
18
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In July 2000, the Company and Quantum entered into a settlement
agreement (the "Settlement Agreement") that settled an action brought on
January 7, 1999 by Vivid Technologies, Inc. ("Vivid") 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"). Vivid asserted 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. The 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 and the
United States Attorney for the Southern District of California. As part of
the Settlement Agreement, Vivid represented that it is no longer pursuing QR
technology and agreed not to pursue QR technology for two years from the date
of the agreement. Vivid further agreed to file a request for dismissal of the
complaint without prejudice which would automatically convert to a dismissal
with prejudice on the second anniversary of the Settlement Agreement.
Similarly, the Company and Quantum agreed that their voluntary dismissal of a
federal court action (which had been filed but not served) against Vivid
based on the alleged theft would also automatically convert to a dismissal
with prejudice in two years. Management believes that the terms of the
Settlement Agreement will not have a material adverse effect on the Company's
business, financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
None.
19
<PAGE>
<TABLE>
<CAPTION>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<S> <C> <C>
(a) Exhibits
3.1 Amended and Restated Certificate of Incorporation of the Registrant
(1)
3.2 Bylaws of Registrant, as amended. (2)
10.38 Loan and Security Agreement, dated November 8, 2000, between the
Registrant and Silicon Valley Bank
10.39 Loan and Security Agreement (Exim Program), dated November 8, 2000,
between the Registrant and Silicon Valley Bank
27 Financial Data Schedule.
NOTES TO EXHIBITS
(1) Filed as an exhibit to Registrant's Registration Statement on Form S-1
(No. 333-380) or amendments thereto and incorporated herein by
reference.
(2) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1998 and incorporated herein by
reference.
</TABLE>
(b) The Registrant filed no Reports on Form 8-K during the quarter ended
October 1, 2000.
20
<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 14, 2000 /s/ SERGIO MAGISTRI
-------------------
Dr. Sergio Magistri
President and Chief Executive Officer
(PRINCIPAL EXECUTIVE OFFICER)
Date: November 14, 2000 /s/ ALFRED V. LARRENAGA
-----------------------
Alfred V. Larrenaga
Senior Vice President and Chief Financial Officer
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
21
