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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 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: 0-20815
INVISION TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3123544
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7151 GATEWAY BOULEVARD, NEWARK, CALIFORNIA 94560
(Address of principal executive offices, including zip code)
(510) 739-2400
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
Based on the closing price of $7.00 on March 28, 2000, the aggregate
market value of the voting stock held by non-affiliates of the Registrant was
$62,905,493. For purposes of this computation, voting stock held by directors
and executive officers of the Registrant and stockholders holding 5% or more
of the Registrant's outstanding Common Stock has been excluded. Such
exclusion is not intended, and shall not be deemed, to be an admission that
such directors, executive officers and stockholders are affiliates of the
Registrant.
On March 28, 2000, there were 12,215,173 shares of the Registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement which will be
filed with the Securities and Exchange Commission in connection with the
Registrant's Annual Meeting of Stockholders to be held May 31, 2000 are
incorporated by reference in Part III, Items 10, 11, 12 and 13 of this report.
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INVISION TECHNOLOGIES, INC.
TABLE OF CONTENTS
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COVER PAGE
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TABLE OF CONTENTS i
PART I 1
Item 1. Business 1
Item 2. Properties 21
Item 3. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 21
PART II 22
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 22
Item 6. Selected Financial Data 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 24
Item 8. Financial Statements and Supplementary Data 31
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 31
PART III 31
Item 10.Directors and Executive Officers of the Registrant 31
Item 11.Executive Compensation 31
Item 12.Security Ownership of Certain Beneficial Owners and
Management 31
Item 13.Certain Relationships and Related Transactions 31
PART IV 31
Item 14.Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 31
SIGNATURES 34
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PART I.
ITEM 1. BUSINESS
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, FLUCTUATIONS IN THE COMPANY'S
QUARTERLY AND ANNUAL OPERATING RESULTS, THE LOSS OF ORDERS FOR THE COMPANY'S
MAIN PRODUCT, INCLUDING THE LOSS OF THE COMPANY'S ORDERS FROM THE FEDERAL
AVIATION ADMINISTRATION ("FAA") OR THE FAILURE TO OBTAIN ADDITIONAL ORDERS,
LOSS OF ANY OF THE COMPANY'S SOLE SOURCE SUPPLIERS, INTENSE COMPETITION,
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 AND THE CERTIFICATION OF CERTAIN OF THESE PRODUCTS, AND RISK OF
CERTIFICATION OF COMPETITORS' PRODUCTS, AS WELL AS THOSE DISCUSSED IN
"-COMPETITION," "-BUSINESS RISKS" AND IN "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"
AND ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K.
GENERAL
InVision Technologies, Inc. ("InVision" or together with its
subsidiaries, the "Company") is the worldwide leader in explosive detection
technology. InVision develops, manufactures, markets and supports explosive
detection systems ("EDS") for civil aviation security based on advanced
computed tomography ("CT") technology. The Company's current products, the
CTX 2500, CTX 5500 (including the CTX 5500 upgrade kit used to convert the
CTX 5000) and CTX 9000 systems (together, the "CTX Series"), all of which
have been certified by the Federal Aviation Administration ("FAA") as meeting
its stringent requirements for both throughput and detection, are designed,
through variation in price, size and throughput, to cover the broad spectrum
of needs of civil aviation around the world in responding to terrorist
threats through the inspection of checked luggage on commercial flights.
InVision is the only company to have more than one model certified by the FAA
and is the only supplier of certified technology to have systems deployed in
both the United States and around the world. Through December 31, 1999, the
Company shipped 187 CTX Series systems of which 114 of these systems (and 59
CTX 5500 upgrade kits) were to the FAA and U.S. airlines for installation at
the busiest U.S. airports and certain U.S. airlines foreign locations, and 73
CTX Series systems (and six CTX 5500 upgrade kits) were to international
customers for installation in Europe, the Middle East, Asia and Africa. For
the years ended December 31, 1999, 1998 and 1997, the Company had CTX product
and service revenues of $47.6 million, $63.3 million and $56.4 million,
respectively, and at December 31, 1999 had in backlog equipment orders and
service agreements of approximately $19.8 million. In the first quarter of
2000, the Company received orders valued at approximately $16.5 million from
the FAA and an international customer for multiple CTX Series systems,
accessories and service.
The Company believes that CT based EDS technology is the only type of
commercially deployed equipment capable of detecting all types of explosives
designated by the FAA to be a threat to commercial aviation and that the CTX
Series is superior to non-CT systems by virtue of its advanced detection
technology. The CT technology is capable of capturing and processing
substantially more data than such other non-CT explosive detection systems.
By combining heightened levels of data capture and diagnosis capabilities
with simple user interfaces, InVision's CTX Series is capable of providing
higher detection with low false alarm rates, as well as more advanced threat
resolution capability and increased operator efficiency than non-CT based EDS
competitors.
The Company also believes that its CTX Series EDS is superior to the
only other CT based EDS competitor, which entered the marketplace in 1999, due
to the proven superiority of its engineering designs based on its ten years of
experience in the airport security industry and its ability to offer a "family"
of products which provide a variety of certified solutions to the terrorist
problems faced by airports of various sizes and locations around the world. In
1999 the Company introduced the CTX 9000 model, designed to be significantly
faster and easier to integrate into airports' baggage handling systems. Unlike
the other CT based competitor which is new to the aviation security business,
InVision used its ten years of experience in the field to design a CT unit
which, with its larger belt-size and aperture and compact x-ray shielding
method, has a higher throughput, is more easily integrated into an airport's
baggage handling system and contains software which has been specifically
refined to respond to the needs of airport operational experience and customer
requirements. In addition, with its other new product introduction in 1999 of
the CTX 2500, a less expensive unit operating at slower throughputs with a
smaller footprint than the CTX 5500, but still offering a certified level of
detection and throughput, the Company believes that its approach of offering a
"family" of products with different price points, throughput, integrated versus
non-integrated
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applications and levels of detection, instead of only one, high-end model,
will allow it to retain its current customers and broaden its appeal to a
wider spectrum of potential purchasers of certified EDS.
During 1999 the Company also pursued development of new, non-EDS
applications for its CTX systems.
The Company applied its CTX technology to scanning wood for the forest
products industry to optimize the lumber value and yield of harvested timber.
After two successful field tests, one in the United States and one in Europe
during 1999, the Company launched the WoodVision Division in February 2000.
During the first phase of development of this market the Company expects to
sell principally to sawmills worldwide which will gain a significant
competitive advantage by using a CTX Series system to locate hidden defects
such as knots and cracks and thereby adjust the cutting pattern to increase
the quality and quantity of the sawn wood. To provide access to and
experience with wood optimization and the forest products industry,
especially in the areas of marketing and sales and software engineering, the
Company purchased, also in February, Inovec, Inc. ("Inovec"), a leading
manufacturer of advanced optimization equipment with over 600 laser scanners
and other optimization equipment installed in over 300 sawmills worldwide.
Inovec is based in Eugene, Oregon.
In October the Company entered into an agreement with the United States
Customs Service to evaluate the use of its CTX 2500 system for drug
detection. For this application the CTX 2500 was mounted on a truck. The
Company believes that truck mounted CTX Series systems could also be sold for
aviation security applications.
InVision's 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, primarily in the prototype stage, include
advanced detection systems for such markets as military and humanitarian
landmine detection, carry-on luggage screening, detection of concealed
weapons, drug detection, and postal inspection. During 1999 advances in the
development of its landmine detection equipment resulted in its successfully
demonstrating 100% detection of antipersonnel and antitank landmines during a
field test conducted at the Army Combat Engineering School test facility at
Fort Leonard Wood, MO. The current QR prototype system detects metal, RDX,
TNT and Composition B, and is thus able to detect the vast majority of all
landmines deployed throughout the world. 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. For the years ended
December 31, 1999, 1998 and 1997, the Company had government contract
revenues related to Quantum of $10.7 million, $7.2 million and $5.5 million,
respectively, and as of December 31, 1999, the Company had in backlog Quantum
government contracts of $3.2 million. In the first quarter of 2000, Quantum
received additional awards from several government agencies of $6.1 million,
including $3.2 million related to landmine detection and $2.3 million related
to EDS.
InVision was incorporated in Delaware in 1990. Its headquarters and
principal manufacturing facilities are located in Newark, California.
INDUSTRY BACKGROUND
MARKET SIZE. There are over 600 airports worldwide providing scheduled
service for an aggregate of approximately 2.5 billion passengers per year. Of
these airports, over 400 are located in the United States, and a substantial
portion of the remainder are located in Europe and the Asia/Pacific region.
THE TERRORIST THREAT. In recent years, incidents of bombings and airline
terrorism have contributed to an enhanced perception of the threat of terrorism
among the general public. According to a report of the President's Commission on
Aviation Security and Terrorism dated May 15, 1990, there were 41 bombings
against civilian aviation targets worldwide between 1975 and 1989. According to
Time Magazine, there were 10,222 bombings in the United States between 1983 and
1993. According to a CBS poll conducted in July 1996, airline passengers have
expressed a willingness to pay more for airline travel and endure delays if such
actions will decrease the threat of successful airline bombings.
THE EVOLUTION OF EXPLOSIVE DETECTION TECHNOLOGIES. In the 1970's, in
response to hijackings, airports worldwide began to install x-ray systems to
screen carry-on baggage for weapons such as guns and knives. In response to the
implementation of this technology, terrorists in some cases adopted the tactic
of airline bombings. The effort to develop automated explosive detection
capabilities was first established in the late 1970's by the FAA and was
predicated on the application of conventional x-ray technology. However, until
the advent of certified explosive detection systems in 1994, the Company
believes that EDS technology remained largely inadequate. Following the bombing
of Pan American Flight 103 over Lockerbie, Scotland in December 1988, certain
European countries hastened to implement explosive detection capabilities based
upon then-existing technologies. In order to placate immediate public safety
concerns, these conventional systems were designed to process 100% of checked
baggage. However, these conventional systems were and continue to remain
deficient in that they are unable to reliably detect and identify all of the
types and amounts of explosives determined by the FAA to be a threat to civil
aviation.
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Several advanced explosive detection technologies have been developed to
attempt to address the need for effective explosive detection. These systems
include CT, dual energy x-ray, QR, trace detection, x-ray diffraction, and
multi-view x-ray. CT technology uses a source of x-rays rotating around an
object to create multiple two-dimensional images, commonly known as
"slices," of the density distribution of the object's cross-section and
compares parameters derived from the analysis of the density images to a
database of explosives characteristics. Dual energy x-ray systems measure the
x-ray absorption properties of a bag's contents at two different x-ray
energies using one or two views to determine if any of the contents have the
physical characteristics of explosive materials. QR is an electromagnetic
field based detection system which examines volume without imaging by using
radio frequencies to detect the chemical make-up of an object. Trace
detection equipment, known as "sniffers," detect particulate and chemical
traces of explosive materials collected by an operator by wiping or vacuuming
the bag under inspection. Diffraction x-ray systems use a single energy
source to take hundreds of measurements of the angular scatter patterns of a
bag's contents to determine if any of the contents have the chemical
characteristics of explosive materials. Multi-view x-ray is like dual energy
x-ray, except that it uses three views in an effort to approximate
cross-sectional data. This method gathers more two dimensional data than
conventional single or double view dual energy x-ray systems which gather
data from one or two planes, but less data than CT which uses its multiple
slice technology to gather thousands of two dimensional views to reconstruct
a full three-dimensional, cross-sectional image of an object. To the best of
the Company's knowledge, both diffraction x-ray and multi-view technology are
not yet commercialized and still under development. Although other systems
based on non-CT technology have attempted certification in the past without
success and a multi-view system is currently undergoing FAA certification
testing, the only explosive detection systems certified by the FAA are based
on CT technology.
THE EMERGENCE OF WORLDWIDE STANDARDS AND FAA CERTIFICATION. Throughout
the history of civil aviation, the FAA has been a leader in setting the
standards for aviation security worldwide. In the 1970's, the FAA first
established standards for worldwide security by setting guidelines for
screening of carry-on baggage for guns and knives. These standards were
subsequently mandated by the United Nations for adoption by all of its member
states, leading to the installation of over 7,000 detection systems
worldwide. Following the December 1988 bombing of Pan American Flight 103,
the United States enacted the Aviation Security Improvement Act of 1990 (the
"Aviation Security Act"), in response to which the FAA increased research and
development funding for advanced explosives detection technology, security
technology integration and aircraft hardening to withstand bombs. In the last
two years alone, $95.4 million has been budgeted by Congress for spending by
the FAA on such activities and the FAA has requested another $42.6 million
for research and development in this area in fiscal year 2000. In Europe, the
European Civil Aviation Commission adopted a regulation which requires
airports to implement 100% checked baggage screening by 2002.
In 1993, as required by the Aviation Security Act, the FAA adopted a
certification protocol regarding explosive detection systems for use on checked
baggage. The FAA certification process was developed to certify equipment that,
alone or as part of an integrated system, can detect, under realistic air
carrier operating conditions, the amounts, configurations and types of explosive
material which would be likely to be used to cause catastrophic damage to
commercial aircraft. To do so, the FAA contracted with the National Academy of
Sciences to establish a scientifically valid protocol for certification. The FAA
also consulted with a variety of public agencies, including the Federal Bureau
of Investigation and the Central Intelligence Agency. The result of this
collaboration was the establishment of a detection protocol which focuses on (i)
the categories of explosive substances to be detected, (ii) the probability of
detection by explosive category, (iii) the minimum quantity of explosive that
must be detectable, (iv) the number of bags processed per hour, and (v) the
maximum acceptable false alarm rates. In 1994, the FAA certified the Company's
first EDS model, the CTX 5000 system. It has subsequently certified three more
of the Company's models, the CTX 5500 (including the CTX 5500 upgrade kit used
to convert CTX 5000 systems), CTX 9000 and CTX 2500, the last two of which were
certified in 1999. As of December 31, 1999, all of the systems are deployed in
airports around the world, except for the CTX 2500 model which was certified in
the third quarter. In order to meet the throughput criteria established in the
FAA protocol, the CTX Series models, other than the CTX 9000 system, were
certified with two units operating in parallel.
In late 1998, an EDS developed by L-3 Communications Corporation ("L-3")
was certified by the FAA as meeting the requirements of the protocol. However,
to the best of the Company's knowledge, this system has only been sold to one
customer other than the FAA. See "-Recent Developments" and "-Competition."
IMPLEMENTATION OF MULTI-LEVEL SCREENING PROCESSES. As the capabilities
of EDS technology have evolved and worldwide detection standards have become
more pervasive, certain airports around the world have sought to augment their
detection capabilities by implementing various multi-level screening processes.
To date, two distinct processes have become most prevalent: a system first
implemented in the United Kingdom (the "Throughput First Approach"); and a
system endorsed by the FAA (the "Detection First Approach"). Prior to the
development of certified detection technology and in recognition of the
deficiencies of existing x-ray technology in providing comprehensive detection,
certain European airports
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adopted the Throughput First Approach, which consists of the use of several
explosive detection systems operating in series in order to attempt to
increase detection rates while maintaining throughput rates. Since the
deployment of certified systems, some airports using the Throughput First
Approach have begun purchasing these more effective certified products to be
part of multi-level systems and using them to scan luggage identified as
suspect by faster but less discriminating types of EDS earlier in the series.
In airports using this approach, certified products compete with
non-certified products as well as with each other.
The Detection First Approach was developed following the advent of
certified detection technology. Currently, the Detection First Approach is
comprised of a process of computer-assisted passenger prescreening ("CAPPS")
combined with the use of certified EDS equipment for the detection of explosives
in baggage deemed to be high risk. CAPPS involves an initial determination of
whether a particular passenger represents a high threat based on certain
decision criteria which are believed to be reasonable predictors of risk. Based
on this determination, a passenger's baggage may undergo a higher level of
investigation, which will in most cases involve the baggage being screened with
the use of certified EDS equipment. In contrast to the Throughput First
Approach, in which the effectiveness of the entire detection process is
dependent on technologies with greater emphasis on throughput than detection,
the Detection First Approach is predicated on the use of high-detection
technology and is focused on the ability to accurately and effectively detect
explosives and to identify individuals believed to pose the greatest threat to
civil aviation. The Detection First Approach requires the purchase of certified
technology and limits the competition to sellers of certified technology. The
Company believes that the Detection First Approach, as it is currently being
implemented at major airports throughout the United States, has proven to be the
more effective process in reducing the dangers associated with the use of
explosives against civil aviation. The FAA has proposed rules which would make
the Detection First Approach mandatory at all United States airports above a
minimum size.
THE GORE COMMISSION. In response to the crash of TWA Flight 800 off Long
Island, New York in July 1996, President Clinton announced the formation of the
White House Commission on Aviation Safety and Security, chaired by Vice
President Gore (the "Gore Commission"), to review airline and airport security
and oversee aviation safety. The Gore Commission concluded that "the threat
against civil aviation is changing and growing, and that the federal government
must lead the fight against it" and recommended that "the federal government
commit greater resources to improving aviation security." The Gore Commission
released its initial report in September 1996, and in October 1996 the United
States enacted legislation which included a $144 million appropriation for
fiscal 1997 for the deployment of explosives detection systems and other
advanced security equipment for use by air carriers and airport authorities. Of
this amount, $52.2 million, or 36.2%, was allocated to the purchase of certified
CT technology. Although no money was appropriated for the deployment of
additional explosive detection systems in fiscal 1998, $17.3 million of funds
from the Department of Transportation were reprogrammed to purchase 15 of the
Company's new CTX 5500 systems and 59 kits to upgrade all of the FAA's CTX 5000
systems to CTX 5500 status. In fiscal 1999 $100.0 million was appropriated for
purchase of additional EDS and related products and services, of which $38.9
million was used to purchase systems and other services from the Company,
including products and services from Quantum. In fiscal 2000 $100.0 million was
appropriated for purchase of additional EDS systems of which $50.0 had been
allocated by December 31, 1999 for the purchase of certified EDS and related
products and services including TIP (threat image projection, a system of
checking operator performance under actual operating conditions), enhancement of
existing x-ray systems, integration and installation of the purchased systems
and coverage of some FAA operating expenses.
THE INVISION TECHNOLOGY ADVANTAGE
CT TECHNOLOGY
The Company believes that CT based EDS is the only EDS presently capable
in a commercial application of reliably detecting all types of explosives
designated by the FAA to be a threat to commercial aviation at certifiable
throughputs and that the CTX Series is superior to the other competing CT based
system by virtue of its advanced threat resolution capabilities, superior design
for integrated and non-integrated airport applications and its pioneering lead
in applying CT technology to aviation security.
The Company's CTX Series employs CT technology pioneered in the medical
field in the 1970s and enhanced for use in explosive detection by the Company's
engineers in the 1990s. As its principal detection vehicle, the CTX Series uses
a source of x-rays rotating around an object to create two-dimensional images of
the density distribution of the object's cross-section. These cross-sectional
images are commonly known as "slices." The CTX Series is capable of measuring
data from several contiguous slices of an object in order to capture the
three-dimensional characteristics of an object. The data gathered from the
slices is used to measure the physical characteristics of objects by determining
their linear attenuation coefficients
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(density), morphology (shape), and granularity (uniformity). Once measured,
each characteristic is automatically compared, using sophisticated image
processing algorithms, to a database of characteristics of compounds used in
explosive devices in order to assess the threat. If an object is determined
to contain the characteristics of an explosive, additional slices of the
object are collected in order to determine the mass discriminates (quantity)
of the threat. At this stage, potential threats that cannot be cleared
automatically by the CTX Series are submitted to an operator for threat
resolution. The operator is also presented with information regarding the
presence of detonators, power sources, proximity charges, metallic objects
and other characteristics of a potential bomb, and the suspicious objects are
highlighted in different colors.
The Company believes that there are three important technical
characteristics that lead to the superiority of the CTX Series over systems of
the Company's primary non-CT competitors' which are based on dual energy
technology. These characteristics are:
DATA QUALITY AND QUANTITY. Dual energy x-ray systems collect data from
one, two or three views of an object to determine the atomic number of
materials encountered during the scan. CT technology, with approximately 500
views per slice, yields more data and is capable of measuring the density of
an object. While explosives have well defined density ranges which are
generally distinct from those of the contents of checked baggage, certain
classes of explosives have atomic numbers which are similar to those of many
materials found in checked baggage. As a result, the CTX Series is better
able to distinguish between explosives and the benign contents of checked
baggage, resulting in higher detection and lower false alarm rates.
THREE DIMENSIONAL DATA. CT technology's ability to render
three-dimensional data concerning an object also contributes to its superior
detection compared to dual energy x-ray technology. By utilizing these data, CT
technology is able to map characteristics of an object, such as mass and
density, regardless of the object's position in the bag and the superposition of
other objects. Dual energy x-ray systems render only two-dimensional data
regardless of the number of views. As a result, if multiple objects are
superimposed over the potential explosive, the system's ability to calculate the
atomic number of the potential explosive is diminished. Given the inherent
limitations of the use of atomic numbers as a parameter for explosive detection,
this diminished capacity with regard to stacked objects is particularly
problematic.
ADVANCED THREAT RESOLUTION. Threat resolution refers to the process
following an alarm of determining whether checked baggage is safe or contains a
threat. Once an alarm occurs, the CTX Series presents its operators with images
and threat analysis tools that are unavailable in dual energy systems. For
example, the CTX Series simultaneously provides operators with both x-ray images
and CT images on separate screens. These data are cross-referenced with each
other to give the operator an overall image of a suitcase and detailed CT
information relating to the contents, and in particular relating to the
potential threat. In addition to the images, the CTX Series provides an
abundance of tools and data, designed to allow operators to determine whether a
bag is a threat requiring further action or is safe to clear to the plane. One
of these tools is the ability to take additional slices to provide more data and
focus in on the threat. In contrast, dual energy x-ray systems display a single
x-ray image of a potential threat and have a limited ability to provide
additional information to an operator who suspects that an explosive is present.
All of the other non-CT EDS technologies have not been routinely
deployed and have significant weaknesses, in addition to their strengths,
which have not only prevented them from being certified, but also have
prevented them from being sold in significant quantities for checked baggage
inspection. Two technologies under development, x-ray diffraction and
multi-view x-ray, based on information available to the Company from public
sources, offer substantial improvements over dual energy in the area of data
collection and detection. X-ray diffraction, when used alone, however,
appears to be too slow, large and expensive for airport application. Not as
much is known about the multi-view technology under development, but the
Company believes that three view, dual energy x-ray alone will not collect
sufficient data to meet or exceed the advantages of the Company's technology
described above.
The Company also believes that there are several important technical
reasons which lead to the superiority of the CTX Series over the system
offered by the Company's only CT based competitor. These competitive
advantages include:
SUPERIOR THREAT RESOLUTION CAPABILITIES. After an EDS unit automatically
identifies a potential explosive in a piece of baggage, the operator must
determine whether the item represents a real threat or a false alarm. The threat
resolution process is performed by the operator through a combination of image
and data analysis. Clear images and advanced detection software are critical to
this process. Unlike its competitor, the CTX Series offer both a standard x-ray
and a CT view of the suspicious object. This allows the operator to view the
entire outline of the object as well as a cross section. In addition, the CTX
series provides substantially better image quality than the competition through
use of a greater number of pixels. The detection software used by the CTX Series
includes all the advances and developments made for the Company's CTX products
over a period of ten years, including five years of operational experience after
the first FAA certification in
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December 1994, a number of subsequent re-certifications of various models in
the CTX Series and a number of refinements to the capabilities of the
software dictated by operational airport experience and customer requirements.
DESIGN FOR AIRPORT OPERATION AND INTEGRATION. All of the models in the
CTX Series (except the CTX 2500) were developed for high throughput airport
operation, and units in all models have been successfully integrated into
airports' baggage handling systems around the world as well as having been
installed in stand alone configurations. Past experience of the Company with
the CTX 5000 and 5500 demonstrated, however, that the units' smaller belt
width and the traditional method of x-ray shielding - passive curtains - were
making installation of these models in integrated settings more difficult and
preventing the units from operating at increased throughputs. As a result,
the Company designed its new, most advanced model, the CTX 9000, to address
these issues. The conveyor belt is one meter wide for ease of integration
with the luggage movement system of the airport whose width is standardized
world wide to one meter. In addition it created an entirely new type of
compact x-ray shielding called "active curtains," an automated set of lead
shielded sliding doors which allow the system to operate more effectively
while assuring proper x-ray shielding. The Company believes that the wide
conveyor belt and the use of "active curtains" are essential to achieve
operational performance at high rates of throughput in an airport
environment. The CTX 9000 has, in fact, been certified at a throughput rate
higher than the competition whose product uses the narrower belt and a
solution to the shielding problem which is not only slower but also greatly
enhances the total footprint of the unit, a significant disadvantage in the
crowded environment of an airport.
InVision believes that the strengths of the CTX Series over dual
energy-based systems with respect to the first three important technical
characteristics described above were central to the CTX Series meeting the
stringent FAA standards for certification and to gaining operational
acceptance by the commercial aviation industry. In addition, InVision
believes that the limitations of non-CT technologies with respect to these
important characteristics will limit these technologies' ability to attain
the high detection and low false alarm rates necessary to obtain FAA
certification. These limitations, as well as the strengths of the CTX Series
systems will be even more evident if the FAA supplements, as it is proposing
to do, its current certification testing with additional tests designed to
assess the capabilities of EDS to find lower quantities of explosives than
currently required. Furthermore, the Company believes that the limitations of
the design and technology of the Company's one CT based competitor will
inhibit such system's ability to achieve seamless integration with automated
baggage handling systems. However, there can be no assurance that future
technological innovations will not enable competing technologies, including
x-ray diffraction, multi-view x-ray and CT to overcome these limitations. As
the only EDS to be certified by the FAA, available in a variety of prices,
throughputs, sizes, configurations and detection levels, and deployed
worldwide, the Company believes its CTX Series is well positioned to be the
cornerstone of the advanced explosive detection process being promoted by the
FAA for implementation at airports around the world.
QR TECHNOLOGY
QR technology has a high detection rate for selected types of explosives
combined with one of the lowest false alarm rates for any type of technology.
In particular, QR technology has significant detection capabilities for
identifying components typically found in sheet explosive, which has been the
most difficult type of explosive to detect, as well as military plastic
explosives. Quadrupole resonance analysis is related to magnetic resonance
imaging ("MRI") technology commonly used in hospitals, but without a large
and expensive magnet. The characteristic signal emitted by each type of
explosive is unique and easily distinguished from harmless materials.
Different molecules have different resonance frequencies, even if they
contain the same atoms. QR directly measures the presence of the specific
target material, by identifying the explosive's characteristic signals. This
method is more accurate than other bulk detection techniques which predict
the explosives presence by measuring object density or atomic number. These
capabilities can form the basis of a stand-alone product for certain
applications, such as the carry-on baggage scanner the Company already offers
(the QSCAN-160), and the landmine detector and weapons tracking equipment
currently in the prototype stage. In addition, QR also provides advantages
when combined with x-ray or CT explosive detection technologies. The Company
believes that systems combining two or more technologies based on different
physical principles will be more robust and more difficult to defeat than
single technology systems.
GROWTH STRATEGY
The Company's objective is to be the leading provider of explosive
detection systems worldwide and to extend its technology expertise to address
broader applications for detection. Specific elements of the Company's growth
strategy are to:
BROADEN PRODUCT OFFERINGS TO EXPAND SIZE OF POTENTIAL MARKET. In 1999
the Company introduced its "family" concept of EDS products by completing
development and obtaining certification of two new CTX models, the CTX 9000 and
the CTX 2500, which together with the CTX 5500 provide certified explosive
detection at three different sizes, throughputs and price points. The Company
developed these additional models to be able to offer products designed with
<PAGE>
the various security needs and budgets of large and small airports throughout
the world. The Company continued its commitment to this approach later in the
year by commencing participation in the FAA's Argus program, a four-phase
competitive research and development program designed to develop a low-cost,
automated explosive detection system to scan checked luggage in small
airports which would be smaller and less expensive than the Company's CTX
2500 model. During Phase I of the program, InVision will develop an initial
system design to meet the FAA's criteria for weight, size, and cost. The
Company will compete to receive additional FAA grant awards for subsequent
phases of the Argus program with five other firms that were also awarded
Phase I funding. There can be no assurance that the FAA will continue to
award Argus grants to the Company although the Company believes that its
participation in Phase I and its long experience and leading position in the
field of certified EDS place it in good stead to receive additional grants
under the further phases of the program.
ENHANCE TECHNOLOGICAL LEADERSHIP. The Company believes that its
technological capabilities provide it with a significant competitive
advantage. Accordingly, the Company considers research and development to be
a vital part of its operating discipline, and continues to make substantial
investments to enhance the performance, functionality and reliability of its
CTX Series hardware and software. Among the Company's priorities in enhancing
its technological capabilities are to reduce false alarms while maintaining
throughput rates and certified detection capability and to increase threat
resolution capabilities. With respect to false alarm reduction, the Company
is working to develop more intelligent algorithms that determine the presence
of threats by looking at threat features not considered at present such as
detonators and texture. To improve threat resolution, the Company is
developing an advanced threat resolution operator interface which
incorporates artificial intelligence to enhance the ability of the operator
by providing clear, easy to understand instructions on how to resolve
threats. In addition the Company is exploring the use of additional sensors
to aid the alarm resolution process prior to any operator controlled threat
resolution step. These sensors could incorporate either QR technology
developed by Quantum with its increased ability to detect certain types of
explosives and its lower false alarm rate or other externally developed
technologies.
LEVERAGE TECHNOLOGY EXPERTISE TO ENTER NEW MARKETS FOR DETECTION. The
Company believes that its leadership and knowledge in the field of high
detection technology have placed it in an advantageous position from which to
enter new markets for detection based on the development of new applications
for its CTX Series systems and Quantum's QR technology.
WOOD SCANNING. The worldwide lumber industry (excluding pulp and paper)
is very large and competitive. Sawmills currently invest up to $1.0 million
for technology that increases the yield or value of lumber by 2-3%.
University studies over the past twenty years have shown double digit
percentage improvements in the yield of harvested timber based on CT
technology, but until the Company developed the CTX Series for airport
operation, no CT scanner was able to operate in the industrial conditions of
a sawmill. During the past two years the Company has renewed its research and
development efforts in this area by extending the application of the CTX
Series to wood scanning. Given the significant payback for sawmills when the
value of the lumber is increased by even a small percentage, the Company
believes there is a very significant market opportunity. When used for the
lumber industry, the Company's unique high throughput CT technology creates a
three dimensional image of the log, producing a virtual log which is an exact
representation of the log's internal structure, including all knots, cracks
and grain patterns. Through advanced and proprietary image processing, logs
are graded and optimized for the ideal cutting pattern, therefore allowing
the customer to mitigate the impact of previously unseen defects and maximize
the value of a log's yield. After two successful field tests involving major
forest products companies in the United States and Europe during 1999 showed
substantial increases in yield, the Company launched the WoodVision Division
in February 2000 to focus on the development of CT based products for this
industry. To provide access to and experience with wood optimization and the
forest products industry, especially in the areas of marketing and sales and
software engineering, the Company purchased, also in February, Inovec, a
leading manufacturer of advanced optimization equipment with over 600 laser
scanners and other optimization equipment installed in over 300 sawmills
worldwide. See "- Recent Developments."
LANDMINE DETECTION. According to the Defense Advanced Research Projects
Agency ("DARPA"), for the last 60 years, a sharply increasing percentage of
American soldiers have been killed or wounded by landmines. From World War II
to Somalia, the percentage of casualties caused by landmines has grown from
2.5 percent to 26 percent. Still today, mine detection methods continue to
depend primarily on soldiers manually probing the earth. Jane's Mines and
Mine Clearance, 3rd edition, 1998-99, estimates there are up to 50 million
landmines buried across four continents, making landmine detection a
humanitarian issue as well as a military issue. With funding from DARPA, the
Company's subsidiary, Quantum, which focuses its efforts in the field of QR,
has developed a cart-based prototype with a tethered, hand-held probe. The
probe emits radio frequency magnetic field pulses at the characteristic QR
frequency of the explosive. These pulses stimulate coherent signals from the
mine that are picked up by a tuned antenna, amplified in a sensitive
receiver, and analyzed digitally. Since the QR resonance frequency is highly
specific for individual compounds, tests have demonstrated a very high level
of detection and a very
<PAGE>
low incidence of false alarms. This prototype was tested in Bosnia in the
summer of 1999 and later in the year at the Army Combat Engineering School
test facility at Fort Leonard Wood, MO, where it successfully demonstrated
100% detection of antipersonnel and antitank landmines during extensive field
trials. This is the first time that plastic, low metal content, TNT landmines
have been detected with this level of performance by any system in actual
field conditions. The current QR prototype system detects metal, RDX, TNT and
Composition B, and is thus able to detect the vast majority of all landmines
deployed throughout the world. Future systems are expected to be able to
detect Tetryl as well. QR has the ability to operate in almost all soil
conditions including saturated soils, as well as through water.
Since commencement of the landmine detection program in April 1997
through December 31, 1999, Quantum has received $9 million in research and
development funding from various U.S. government departments and agencies. In
2000 Quantum received approximately an additional $3.2 million in funding to
begin to transition its DARPA mine detection program to the U.S. Army and the
Office of Naval Research ("ONR") and the United States Marine Corps ("USMC").
The new funding is comprised of $700,000 from ONR with an additional $750,000
from DARPA. These funds are for the start of work to miniaturize the current
prototype QR system into a man-portable, backpack system for the USMC.
Quantum is currently working with the Office of Naval Research to finalize a
two-year, $8 million follow-on program to address science and technology
issues, with a transition to a formal USMC acquisition program scheduled for
fiscal year 2002. Simultaneously, the U.S. Army has provided $1.6 million and
DARPA has provided an additional $1 million to begin a vehicle-based land
mine detection system. This initial funding is part of a potential 3-year,
$15 million program to further develop and field QR equipment for land mine
detection on roads.
DRUG DETECTION. With approximately 500 conventional x-ray systems
installed at border crossings and other points of entry into the U.S. and
more at locations around the world for the purpose of drug interdiction, the
Company believes that drug detection applications afford significant market
opportunities for the application of its certified detection technology. As a
result of working with customers in the aviation security market, the Company
discovered that its CTX Series EDS were able to locate illegal drugs and
currency in addition to explosives. By expanding the software library to
specifically include the characteristics of controlled substances, the
Company has developed a prototype CTX Series system for drug detection. In
October 1999 it entered into an agreement with the United States Customs
Service to evaluate the use of a truck-mounted version of the Company's CTX
2500 system for drug detection.
The Company believes that its leadership in high detection technology
will be a competitive advantage as all these markets develop. See "-The
InVision Technology Advantage"
PURSUE STRATEGIC RELATIONSHIPS AND ACQUISITIONS. From time to time the
Company reviews strategic relationship opportunities, including potential
acquisitions, that would complement its existing product offerings, augment
its market coverage, enhance its technological capabilities or otherwise
offer growth opportunities. The Company believes that the CTX Series is
suited to the integration of applications which are direct extensions of its
strength in explosive detection technology. The Company acquired Quantum in
September 1997 to gain access to QR technology, the application of which,
when applied to the explosive detection field, either in a stand alone system
or in combination with x-ray or CT, is still largely in the development
stage, but offers increased ability to detect certain types of explosives and
a lower false alarm rate and applications to products beyond the Company's
traditional aviation security market such a landmine and concealed weapons
detection. During 1999 the Company undertook discussion and negotiation of
the acquisition of Inovec, a leading manufacturer of advanced optimization
equipment for increasing the yield of the forest products industry, and
acquired the company in February 2000. See "-Growth Strategy - Leverage
Technology Expertise to Enter New Markets - Wood Scanning" and " - Recent
Developments."
PRODUCT DEVELOPMENT
The Company considers research and development to be a vital part of its
operating discipline and continues to dedicate substantial resources to
research and development. InVision's ongoing development efforts are
primarily focused on five areas: (a) new product development; (b) performance
enhancements; (c) feature enhancements; (d) cost reduction; and (e)
development of new applications.
NEW PRODUCT DEVELOPMENT. To pursue its goal of offering a broader range
of certified technology to reach a larger market, in 1999 the Company introduced
both the CTX 9000 and the CTX 2500 which, together with the CTX 5500, provide
certified levels of explosive detection at three different sizes, throughputs
and price points. The Company developed these additional models to be able to
offer products designed with the differing security needs and budgets of large
and small airports throughout the world. The CTX 9000 represents a completely
new system with improved detection, reduced false alarms, a factor of two higher
throughput, and an improved design with respect to both gantry size and x-ray
shielding which
<PAGE>
substantially improve integration of the unit into airport baggage handling
systems. The CTX 2500, which is based on the CTX 5500 platform but with the
standard x-ray prescanner replaced by a twisted image CT prescan, offers a
certified level of detection but with a smaller footprint and lower
throughput and price tag for airports with lower baggage volume, less space
and smaller security budgets. The Company continued its commitment to the
"family" approach later in the year by commencing participation in the FAA's
Argus program, a four-phase competitive research and development program
designed to develop a low-cost, automated explosive detection system to scan
checked luggage in small airports which would be smaller and less expensive
than the Company's CTX 2500 model. During Phase I of the program, InVision
will develop an initial system design to meet the FAA's criteria for weight,
size, and cost. The Company will compete to receive additional FAA grant
awards for subsequent phases of the Argus program with five other firms that
were also awarded Phase I funding. There can be no assurance that the FAA
will continue to award Argus grants to the Company although the Company
believes that its participation in Phase I and its long experience and
leading position in the field of certified EDS place it in a good stead to
receive additional grants under the further phases of the program.
PERFORMANCE ENHANCEMENTS. The Company continues to work on reducing
false alarms while maintaining throughput rates and certified detection
capability and on increasing threat resolution capabilities. Both of these
efforts are designed to reduce the time it takes operators to clear bags and
thus increase the overall throughput of the system. With respect to false
alarm reduction, the Company is looking to develop more intelligent
algorithms that determine the presence of threats by looking at threat
features not considered at present such as detonators and texture. To improve
threat resolution, the Company is developing an advanced threat resolution
protocol to enhance the ability of the operator by providing clear, easy to
understand instructions on how to resolve threats. In addition the Company is
exploring the use of additional sensors to aid the alarm resolution process
prior to any operator controlled threat resolution step. These sensors could
incorporate either QR technology developed by Quantum with its increased
ability to detect certain types of explosives and its lower false alarm rate
or other internal or external technologies.
FEATURE ENHANCEMENTS. The Company is completing development of the
threat image projection (a system of checking operator performance under
actual operating conditions) and field data reporting modules for the CTX
9000 model. These projects have been requested by the FAA and will benefit
other customers when completed.
During 1999, the Company also developed a training console in response
to concerns expressed by the FAA and other customers concerning the lack of
convenient "on the scanner" training methods available for initial and
recurrent training for CTX operators. The training console is a stand-alone
unit which looks and acts like a CTX 5500 operator's console in that it
displays real images from baggage with and without threats and allows the
operator to clear bags just like a real console but does not have a system
attached.
COST REDUCTION. Decreasing the manufacturing costs of the CTX Series
systems is an ongoing project which the Company turns to as each new CTX
model moves beyond prototype and into manufacturing mode. Cost reduction of
the CTX 5500 model and CTX 5500 upgrade kit which were introduced in late
1998 was completed in 1999, while cost reduction efforts for the CTX 9000 and
CTX 2500 models, introduced in 1999, began during the year. Cost reduction of
these systems is an important part of the Company's strategy to design EDS
which are affordable to a broader cross-section of airlines and airports
around the world.
NEW APPLICATIONS.
WOOD SCANNING; LANDMINE DETECTION; AND DRUG DETECTION. During 1999 the
Company focused on the development of new applications for its CT and QR
technologies outside of its traditional business of aviation security. The
major efforts in this arena concentrated on developing applications for wood
scanning, landmine detection and drug detection which are described elsewhere
in this report. See "- Growth Strategy - Leverage Technology Expertise to
Enter New Markets for Detection - Wood Scanning; Landmine Detection; Drug
Detection" and "-Recent Developments."
CONCEALED WEAPONS DETECTION. Quantum is developing a passive magnetic
concealed weapons detection technology with the support of the National
Institute of Justice (NIJ). This technology has the capability of real time
detection and tracking of concealed weapons. It can be used to pinpoint the
location of unexploded ordinances. Potential applications include law
enforcement and facilities security, including schools, courthouses, banks
and corporate headquarters.
OTHER AVIATION SECURITY APPLICATIONS. The Company continues to believe
that installations of advanced automated explosive detection systems at
airports will lead to the adoption of this technology for additional aviation
applications such as screening of carry-on baggage and trailer-mounted mobile
units for inspections at remote locations, as well as for other security
applications, including, the protection of government and private facilities,
and the screening of mail. In 1999, Quantum received a $1.9 million grant
from the FAA for additional research and development of Quantum's QR
technology for aviation security applications. Quantum is using the grant to
support development of hardware and software enhancements designed to improve
the sensitivity of the technology and increase the range of applications.
Also in the EDS field, Quantum is currently working to develop products that
combine QR with other screening technologies. Combining the strengths of each
technology, rather than pushing a single technology to its limit, produces
high performance products with improved performance/cost ratios. For example,
combining QR with dual-energy X-ray results in a system with the ability to
detect a wider range of explosives than an X-
<PAGE>
ray alone, and with greater reliability. In addition, the system provides
images to assist with threat resolution. Such products are in the early
stages of development.
At December 31, 1999 the Company had 113 full-time employees engaged in
research and development and product development activities, and also was
using the services of sixteen specialized contract employees and consultants
in this area. See "-The InVision Technology Advantage," "-Competition"
and "-Business Risks - No Assurance of Continued Certification; Risk of
Certification of Competing Technologies; Risk of Changing Standards."
During the years ended December 31, 1999, 1998 and 1997, respectively,
the Company spent $11.2 million, $12.9 million and $10.7 million on research
and development activities, of which $0.7 million, $3.6 million and $2.1
million, respectively, were funded by the FAA and other agencies under
development contracts and grants. In order to fulfill the objectives of its
growth strategy, the Company intends to continue to invest heavily in product
development.
CUSTOMERS
In December 1996, as an extension of legislation enacted upon the
recommendation of the Gore Commission, the Company received an order for 54
CTX 5000 systems from the FAA with the option to purchase up to 46 additional
systems. The government subsequently exercised its option, choosing at that
time to purchase the Company's improved CTX 5500 model which was then
available, and then reopened the contract to add an additional five units
bring the number of CTX Series units ordered to 105. In 1998 the FAA placed
an additional order for 59 kits to upgrade all of its CTX 5000 units to CTX
5500 status (covering the 54 units ordered under the contract and four units
delivered to the FAA under a prior research and development grant). Under the
terms of the FAA contract, these systems and upgrade kits were installed
during 1997, 1998 and 1999 at the United States' busiest airports. As of
December 31, 1999, all of these systems were shipped representing total
revenues of $98.3 million. In October 1999 the Company and the FAA entered
into a new letter agreement covering the purchase by the FAA of up to 60 of
the Company's CTX 9000 models with a potential value, including related
services and accessories of up to $80 million. At the same time, the Company
also received its first delivery order for systems and accessories with a
value of $5.6 million. The FAA may cancel this contract at any time and for
any reason, in which case the FAA would only be obligated to pay for units
delivered and to reimburse the Company for costs incurred and commitments
made by the Company in order to fulfill the contract. The $5.6 million order
is being funded by a $100 million appropriation for the purchase of aviation
security systems in the 2000 federal budget, which contains a $50 million
allocation for purchase of certified EDS, accessories and other related
costs. See "Industry Background - The Gore Commission," "- Recent
Developments" and " - Business Risks - Dependence on Large Orders; Customer
Concentrations; Lengthy Sales Cycle" and " - Business Risks - Public Agency
Contract and Budget Considerations."
In order to capitalize on the global opportunity for deployment of
explosive detection technology for civil aviation, the Company has
historically focused on three important markets: (i) installations at high
profile U.S. airports, (ii) installations at new airports under construction
worldwide and (iii) installations at international airports. Following the
introduction during 1999 of the new CTX 9000 and CTX 2500 models, the Company
revised its approach in the United States to focus its selling efforts on a
broader range of airports. As of December 31, 1999, the Company had sold 187
CTX Series systems worldwide, including 105 to the FAA. For reasons of
security, the FAA will not divulge the deployment schedule or locations of
the systems at this time. Other airports where the Company's systems are
deployed include major international airports in Belgium, England, France,
Hong Kong, Israel, Malaysia, Spain, South Africa, The Netherlands and The
Philippines.
The Company's drug detection, wood scanning and QR products including
landmine detection are still primarily in the prototype stage with the first
order for two QSCAN advanced technology systems delivered to the FAA in 1998
for deployment in undisclosed locations and a new order in 1999 for a QSCAN
system delivered to the U.S. Navy for deployment abroad.
The Company believes that customer service and support are critical to
its success and has committed significant resources to these functions.
Accordingly, the Company provides a high level of customer support to assist
in the site planning, installation and integration of the Company's products
into its customer's facilities in addition to field service for maintaining
the reliability of the Company's products once installed. InVision's service
organization includes customer service engineers, product application
specialists, operator training engineers and technical support engineers. As
of December 31, 1999, the Company had 50 individuals employed in customer
service and support roles. InVision typically hires and trains its own
support staff throughout the world rather than relying on third-party
maintenance providers although a number of third party relationships exist
outside the United States. In addition to providing generally a one year
parts and service warranty, InVision offers fee-based primary and back-up
service contracts to its customers to provide system maintenance, ongoing
technical support, documentation, training and, where no new hardware is
required, periodic software
<PAGE>
releases.
The Company believes that operator qualification and training is as
important to the explosives detection process as the CTX Series' automated
detection process. In this regard, the Company has developed and provides in
depth operator training and testing as a critical component of each sale and
installation. In 1999 it began licensing its training materials to FAA
approved customers for a nominal fee and developed a training console for
sale to customers for initial and recurrent training at airports "on the
scanner" without tying up a deployed CTX system. See "Business Risks-Limited
Field Operations; Dependence on Operator Performance" and "-Product
Development - New Product Development."
SALES AND MARKETING
The Company markets its products both directly through internal sales
personnel and indirectly through authorized agents, distributors and systems
integrators. As of December 31, 1999, the Company employed a total of 19
people in sales and marketing. In North America, the Company markets its CTX
Series primarily through direct sales personnel, which as of December 31,
1999, consisted of four individuals. Internationally, the Company utilizes
both a direct sales force and authorized agents to sell its products. As of
December 31, 1999, the Company had three direct international sales personnel
broadly covering Europe, Asia, the Middle East and Africa and additional
authorized agents representing the Company in specific countries. For sales
through its authorized agents and distributors, the Company generally is
directly involved in developing proposal documents and negotiating contract
terms. During the fiscal years ended December 31, 1999, 1998 and 1997
international product and service revenues represented 18.0%, 33.7% and
43.0%, respectively, of the Company's product and service revenues. See
"-Business Risks - International Business; Risk of Change in Foreign
Regulations; Fluctuation in Exchange Rates."
Support for the direct and indirect sales representatives includes
assistance in designing customer configurations, including the use of
computer modeling, educating customers on the system and technology and
supporting the implementation and integration process. In addition, the
Company provides its sales representatives with training, promotional
literature, a multi-media presentation, videos and competitive analysis.
The selling process often involves a team comprised of individuals from
sales, marketing, engineering, customer service and support, and senior
management. The team frequently engages in a multi-level sales effort
directed toward a variety of constituents, including government regulators,
the local airport operator or authority, systems and or conveyor integrators,
individual airlines and airline operating committees. The combination of the
high average selling prices, the time needed for various agencies to secure
funding for systems and the negotiation and execution of actual contracts
leads to a typical sales cycle lasting from six to twelve months, or more,
from initial contact with a customer. Often, local government regulators
become involved in the sales decision process or provide funds for the
purchase. For repeat orders from existing customers, the Company can
sometimes expedite the sales cycle by utilizing existing contracts and
contract extensions and thereby avoid lengthy procurement processes. See
"Business Risks-Dependence on Large Orders; Customer Concentrations; Lengthy
Sales Cycle" and "-Public Agency Contract and Budget Considerations."
BACKLOG
The Company measures its backlog of product and services revenues as
orders for systems and upgrades for which contracts or purchase orders have
been signed, but which have not yet been shipped; and as orders for
maintenance related to product support for which contracts have been signed,
but maintenance service has not yet been performed.The Company includes in
its backlog only those customer orders which are scheduled for delivery or
performance within the next 18 months. The Company typically ships its
products within three to twelve months after receiving an order. However,
such shipments may be affected by delays which occur in the delivery of
components to the Company or customers' readiness to accept delivery for
reasons of site preparation or otherwise. At December 31, 1999, the Company's
product and service revenues backlog was approximately $19.8 million. In the
first quarter of 2000, the Company received orders valued at approximately
$16.5 million from the FAA and an international customer for multiple CTX
series systems, accessories and service.
A majority of the Company's product backlog as of December 31, 1999 is
expected to be shipped during the first half of 2000. Any failure of the Company
to meet an agreed upon schedule could lead to the cancellation of the related
order. Variations in the size, complexity and delivery requirements of the
customer order may result in substantial fluctuations in backlog from period to
period. The Company believes that it is important for competitive reasons and to
better satisfy customer requirements to reduce order lead times and expects that
the Company's backlog may decrease on a relative basis over time. In addition,
all orders are subject to cancellation or delay by the customer and,
accordingly, there can be no
<PAGE>
assurance that such backlog will eventually result in revenues. For these
reasons, the Company believes that backlog cannot be considered a meaningful
indicator of the Company's performance on an annual or quarterly basis.
The Company measures its backlog of government contracts as awards from
government agencies which have been funded, but services have not yet been
performed. At December 31, 1999, the Company's government contracts backlog
was approximately $3.2 million. In the first quarter of 2000, the Company
received additional awards from several government agencies of approximately
$6.1 million.
MANUFACTURING
The Company seeks to focus its manufacturing resources on activities
which emphasize the Company's core competencies and distinctive value. The
Company's manufacturing operations consist primarily of: materials
management; assembly, test and quality control of parts and components
subassemblies; and final system testing. Using the Company's designs and
specifications, subcontractors assemble mechanical and electrical
sub-components. The Company performs final assembly and test of systems,
including configuration to customers orders and testing with current release
software, prior to shipment. The Company's manufacturing organization has
expertise in mechanical, electrical, electronic and software assembly and
testing. In addition, because quality and reliability over the life of the
Company's products are vital to customer satisfaction and repeat purchases,
the Company believes its quality assurance program to be a key component of
its business strategy.
The Company generally purchases major contracted assemblies from single
source suppliers in order to ensure high quality, prompt delivery and low
cost. The Company reviews its single source procurements on a case by case
basis, where feasible, and has qualified second sources for certain
contracted assemblies. The Company purchases components, materials and
electro-mechanical subsystems from single source suppliers pursuant to
purchase orders placed from time to time in the ordinary course of business
and has no guaranteed supply arrangements with such suppliers. Although to
date the Company has not experienced any significant delays in obtaining any
of its single source assemblies, there can be no assurance that the Company
will not face shortages of one or more of these systems in the future. See
"Business Risks - Dependence on Suppliers."
The Company outsources certain manufacturing processes, including
standard and build-to-print fabricated parts such as mechanical
sub-assemblies, sheet metal fabrication, cables and assembled printed circuit
boards. This strategy enables the Company to leverage product development,
manufacturing and management resources while retaining greater control over
product delivery, final product configuration and timing of new product
introductions, all of which the Company believes are critical to exceeding
customer expectations.
COMPETITION
The market for explosive detection systems is intensely competitive and
is characterized by continuously developing technology and frequent
introductions of new products and features. The Company expects competition
to increase as other companies introduce additional and more competitive
products in the EDS market and as the Company develops additional
capabilities and enhancements for the CTX Series and develops new
applications for its certified technology. Historically, the principal
competitors in the market for explosive detection systems have been the
Company, PerkinElmer, Inc. Detection Systems Group (formed by the merger of
Vivid Technologies, Inc., and EG&G Astrophysics), Heimann Systems GmbH,
Thermedics Detection Inc., and Barringer Technologies Inc. Each of these
competitors provides non-CT based EDS solutions and products for use in the
inspection of checked luggage, although to date none of them offer a product
certified by the FAA. The Company is aware of at least one other corporation
competing in other markets that may enter the EDS market with a non-CT based
product. Until recently, the Company has been the only competitor with a
CT-based product. However, in November 1998 L-3 Communications Corporation, a
spin-off of Lockheed Martin Corporation which had received substantial
funding from the FAA for the design and development of a certified CT based
EDS over a two-year period, entered the market with a EDS which passed the
FAA certification test. Each of the Company's non-CT and CT based competitors
may have substantially greater financial resources than the Company. There
can be no assurance that the Company will be able to compete successfully
with its competitors or with new entrants to the EDS market.
In addition to EDS, the Company's products also compete against more
manual methods of assuring the security of checked luggage such as "100%
system-wide bag match," where passengers and bags are matched not only at flight
origination but also in connection with layovers and connecting flights, and
"directed trace and hand search," where a conventional x-ray system is used to
identify suspicious bags which are then hand searched with the assistance of
trace detection. These methods are extremely slow and labor intensive and impose
inconveniences on the flying public which make them unpopular. Bag match is not
an explosive detection system at all but rather an explosive deterrent system
based on the assumption that a bomber does not want to commit suicide. Directed
trace and hand search relies on scanning
<PAGE>
technology that is not currently able to identify all types of explosives
even at the "suspicious" level and requires suitcases to be opened. The
ability of these types of methods to compete with the Company's products
depends on the local cost of labor, and the willingness of the airlines'
customers to put up with the longer pre-flight check-in requirements
necessary to implement these methods on a large scale and to accept the
increased invasion of privacy that more frequent hand searches of luggage
would entail.
The Company believes that its ability to compete in the EDS market is
based upon such factors as: product performance, functionality, quality and
features; quality of customer support services, documentation and training;
and the capability of the technology to appeal to broader applications beyond
the inspection of checked baggage. Although the Company believes that the CTX
Series is superior to its competitors' products in its explosive detection
capability and accuracy, the CTX Series must also compete on the basis of
price, throughput, the ability to handle all sizes of baggage, and the ease
of integration into existing baggage handling systems. Certain of the
Company's competitors may have an advantage over the Company's existing
technology with respect to these factors. Currently, the CTX Series has a
range of selling prices, depending upon model, accessories and features, in
excess of $1.0 million for the Company's most expensive version, compared to
substantially lower prices for systems offered by the Company's non-CT
competitors; has a throughput rate of approximately 600 bags per hour
("bph") for the CTX 9000 (up to 400 bph for the CTX 5500 and 120 bph for
the CTX 2500), compared to 1,000 bph by certain of the Company's non-CT
competitors; has a gantry size which, in all models other than the CTX 9000,
limits the ability of the unit to accept all sizes of baggage; and requires
that the baggage remain still while being scanned, making it more challenging
to integrate into the continuously moving baggage handling systems found in
most airports. There can be no assurance that the Company will be successful
in convincing potential customers that the CTX Series is superior to other
systems given all of the necessary performance criteria, that new systems
with comparable or greater performance, lower price and faster or equivalent
throughput will not be introduced, or that, if such products are introduced,
customers will not delay or cancel existing or future orders for the
Company's system. Further, there can be no assurance that the Company will be
able to enhance the CTX Series to better compete on the basis of cost,
throughput, accommodation of baggage size and ease of integration, or that
the Company will otherwise be able to compete successfully with existing or
new competitors. The failure of the Company to develop such enhancements or
otherwise successfully compete in the EDS market for any of the above reasons
would have a material adverse effect on the Company's business, financial
condition or results of operations.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company's performance depends in part upon its proprietary
technology. In the United States, InVision relies upon patents, copyrights and
trade secrets for the protection of the proprietary elements of the CTX Series
and InVision's CT technology. There can be no assurance, however, that InVision
could enforce such patents, trade secrets or copyrights. InVision has two United
States patents for automatic concealed object detection systems using a pre-scan
stage which expire in the years 2010 and 2011 (the "Patents") and has a patent
application pending covering a number of new features contained in the CTX 9000
model. There can be no assurance that the Patents would be effective in
preventing CT based competition, and, in fact have not prevented competition
from the only other competitor with a certified EDS because such system does not
use a pre-scan stage. In accordance with certain Federal Acquisition Regulations
included in InVision's development contract, dated September 27, 1991, with the
FAA (the "FAA R&D Contract"), the United States Government has rights to use
certain of InVision's proprietary technology developed after the award of the
FAA R&D Contract and funded by the FAA R&D Contract. The U.S. Government may use
such rights to produce or have produced for the U.S. Government competing
products using InVision's CT technology. In the event that the U.S. Government
were to exercise these rights, InVision's exclusivity in supplying the U.S.
Government with CTX Series and explosive detection systems could be materially
adversely affected.
Outside the United States, the time period for filing foreign
counterparts of the Patents has expired, and InVision did not seek or obtain
patent protection (except to the extent of licenses held under patents owned
by Imatron Inc. ("Imatron") and has relied to date primarily on software
copyrights and trade secrets for the protection of its proprietary technology.
The absence of foreign counterparts to the Patents could adversely affect
InVision's ability to prevent a competitor from using technology similar to
technology used in the CTX Series.
InVision also holds an exclusive, worldwide, and fully-paid license from
Imatron (obtained in connection with the formation of InVision) under Imatron's
patents and know-how to develop, manufacture and sell (a) systems for the
inspection of mail, freight, parcels and baggage, and (b) compact medical
scanner products for military field applications based on a different type of CT
technology than is currently incorporated in the Company's CTX Series. InVision,
in exchange, granted to Imatron an exclusive, worldwide, perpetual and fully
paid license under InVision's Patents or future patents and know-how to permit
Imatron to utilize such technology in medical scanner products (other than
compact medical scanner
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products for military field applications). In 1999, the parties amended the
license to add wood scanning to InVision's field of use while reducing the term
of the agreement from perpetual to ten years from the date of execution of the
amendment. Imatron is a manufacturer of medical scanning systems and holds a
portfolio of CT patents.
In the United States, Quantum relies upon licenses, patents, copyrights
and trade secrets held by Quantum for the protection of the proprietary elements
of its QSCAN products, other QR development stage products, including landmine
detection equipment, and its ability to obtain research and development
contracts in the areas of electromagnetic sensing and detection. In connection
with its QR technology, Quantum utilizes three key QR patents from the Naval
Research Laboratory and has been granted a ten-year exclusive license, recently
expanded to cover landmine detection applications and extended to 2009, to
commercialize the technology. Additionally, Quantum has been granted several key
patents, with additional patents pending, and has developed a significant amount
of know-how in the magnetic sensing and detection areas. These patents and
know-how enable field deployable security systems to be designed and
cost-effectively manufactured. The intellectual property and proprietary rights
held by Quantum are subject to the same risks and uncertainties as those held
directly by InVision, as described above.
The Company generally enters into confidentiality agreements with each
of its employees, and on a case-by-case basis enters into similar agreements
with distributors, customers, and potential customers. In addition, the Company
limits access to distribution of its software, documentation and other
proprietary information. There can be no assurance that these agreements will
not be breached, that the Company will have adequate remedies for any breach, or
that the Company's trade secrets will not otherwise become known to or
independently developed by others. There can be no assurance that the steps
taken by the Company to protect its proprietary technology will be adequate or
that its competitors will not be able to develop similar, functionally
equivalent or superior technology. See "Item 5. Legal Proceedings."
Although the Company believes that its intellectual property rights are
valuable, the Company also believes that because of the rapid pace of
technological change in the industry, as well as factors such as innovative
skills, technical expertise, the ability to adapt quickly to new technologies,
and evolving customer requirements, product support, and customer relations are
of greater competitive significance.
RECENT DEVELOPMENTS
FORMATION OF WOODVISION DIVISION; ACQUISITION OF INOVEC, INC. In
February 2000 the Company announced the formation of the WoodVision Division of
the Company to develop its CT technology to optimize the value and yield of
harvested timber. After two years of research and development and two successful
field tests, one in the United States one in Europe, the Company determined that
its CTX units and its detection software can be successfully modified to see
inside a log before it is sawn and that a market for the product exists. To
provide access to and experience with wood optimization and the forest products
industry, especially in the areas of marketing and sales and software
engineering, the Company purchased, also in February, Inovec, a leading
manufacturer of advanced optimization equipment with over 600 laser scanners and
other optimization equipment installed in over 300 sawmills worldwide. Inovec is
based in Eugene, Oregon. The Company purchased Inovec for approximately $5
million in cash and stock payable over 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. Inovec's 1999 revenues were approximately $8
million.
ADDITIONAL CTX ORDERS. In March 2000 the Company entered into a contract
with the FAA to sell from two to 60 units of its CTX 5500 explosive detection
systems. Also in March, the FAA definitized the letter agreement it had signed
with the Company in October 1999 to purchase from four to 60 of its CTX 9000
systems. Under these contracts with a total potential value of $140 million over
three years, the Company has to date received delivery orders for CTX 5500 and
CTX 9000 systems with a total approximate value of $13.0 million. The Company
will ship these systems and accessories to the FAA during the first two quarters
of 2000. The FAA may cancel one or more of these contracts at any time and for
any reason, in which case the FAA would only be obligated to pay for units
delivered and to reimburse the Company for costs incurred and commitments made
by the Company in order to fulfill the contracts. See "Industry Background - The
Gore Commission" and " - Business Risks - Dependence on Large Orders; Customer
Concentrations; Lengthy Sales Cycle" and " - Business Risks - Public Agency
Contract and Budget Considerations." Also in the first quarter of 2000, the
Company received an order from an international customer for multiple CTX 9000
systems with a value of $2.5 million.
EMPLOYEES
As of December 31, 1999, the Company directly employed 267 people, of
whom 97 were primarily engaged in
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<PAGE>
research and development activities, 63 in marketing and sales, customer
support and field service, 56 in manufacturing, seven in quality and 44 in
administration and finance. In addition, InVision utilized the services of 31
full-time consultants and temporary employees in 1999. Management believes
that the Company's relationship with its employees is good.
EXECUTIVE OFFICERS
The following sets forth certain information regarding the Company's
executive officers:
NAME AGE POSITION
Dr. Sergio Magistri 47 President and Chief Executive Officer,
Director
Tim Black 51 Senior Vice President and Chief Operating
Officer
Alfred V. Larrenaga 52 Senior Vice President and Chief Financial
Officer
David M. Pillor 45 Senior Vice President, Sales and
Marketing, Director
DR. SERGIO MAGISTRI has served as President, Chief Executive Officer and
Director of InVision since December 1992. From June 1991 to November 1992, he
was a Project Manager with AGIE, Switzerland, a manufacturer of high precision
tooling equipment, responsible for all aspects of a family of new products for
high precision electro-erosion machining with sub-micron precision. From 1988 to
June 1991, Dr. Magistri was a consultant to high technology companies, including
FI.M.A.I. Holding, S.A. As a consultant to FI.M.A.I., Dr. Magistri was involved
in the formation of InVision and the development of its business plan and of its
technology. From 1983 to 1988, Dr. Magistri held various positions with Imatron
Inc. ("Imatron"), a CT medical scanner company, including as an Engineering
Physicist and Manager of Advanced Reconstruction Systems, and Director of
Computer Engineering. Dr. Magistri holds a degree in Electrical Engineering and
a doctorate in Biomedical Engineering from the Swiss Institute of Technology,
Zurich, Switzerland.
TIM BLACK has served as Senior Vice President and Chief Operating
Officer since November 1998. From January 1995 until he joined InVision, Mr.
Black was first Deputy General Manager and later General Manager and a director
in the Tactical Systems Division of the Systems Integration Group at TRW Inc.
("TRW"), which develops, manufactures and markets military reconnaissance
systems. From 1975 until January 1995, he held a variety of management positions
at ESL Inc. ("ESL"), a subsidiary of TRW, most recently as Vice President of the
Surveillance Systems Division from July 1994 to January 1995. Before it was
merged into TRW, this division of ESL was also engaged in the military
reconnaissance business. Mr. Black holds a degree in Materials Engineering, and
a Masters of Science degree in Cybernetic Systems from San Jose State
University.
ALFRED V. LARRENAGA has served as Senior Vice President and Chief
Financial Officer since June 1999. Prior to joining InVision, Mr. Larrenaga
served as Executive Vice President and CFO of Integrated Packaging Assembly
Corporation, an independent semiconductor packaging foundry. From 1988 to 1996,
Mr. Larrenaga was Senior Vice President, CFO and Secretary of Southwall
Technologies Inc., a manufacturer of thin film materials. Prior to that, Mr.
Larrenaga served as Vice President and CFO of Asyst Technologies Inc., a
manufacturer of equipment for the semiconductor industry, and was Controller of
the Farinon Division of Harris Corporation. He is a Certified Public Accountant
and holds a bachelor's degree in accounting from Santa Clara University.
DAVID M. PILLOR joined InVision in July 1994 as Vice President, Sales
and Marketing, has served as Senior Vice President, Sales and Marketing since
November 1995 and as a director since 1999. From 1988 to July 1994, Mr. Pillor
held various positions including Area Sales Manager, National Sales Manager and
Vice President of Sales of Technomed International, a medical products company.
Mr. Pillor holds a Bachelor of Science degree in Chemistry from the University
of Maryland.
BUSINESS RISKS
IN ADDITION TO THE RISKS SET FORTH IN "COMPETITION," "INTELLECTUAL
PROPERTY AND PROPRIETARY RIGHTS" AND THE OTHER PORTIONS OF THIS "ITEM 1.
BUSINESS," AN INVESTMENT IN THE COMPANY HAS THESE ADDITIONAL 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
quarter 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 December 31, 1999, the Company had an
accumulated deficit of approximately $9.2 million. Although the Company has been
profitable on an annual basis the past
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<PAGE>
three years, profitability in 1999 was below that of the prior two years and
there can be no assurance that the Company will maintain profitability. The
Company experienced losses in each of the last two quarters of 1999. See
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
SINGLE PRODUCT LINE; UNCERTAINTY OF MARKET ACCEPTANCE. The CTX Series
currently is the only product line offered by the Company and the Company
derives substantially all of its revenues from the sale of CTX Series units for
installations in airports. The Company's orders to date have been received from
a limited number of customers and the substantial majority of these have been
from a single customer, the FAA. The commercial success of the CTX Series and
its successors in the field of aviation security, will depend upon its
acceptance by domestic and international airports, government agencies and
airlines as a useful and cost-effective alternative to less expensive, higher
throughput competing products employing different technologies. The large
capital commitment required to purchase units in the CTX Series (sold at various
prices depending upon model, accessories and features but in excess of $1
million for the Company's most expensive version) may limit the marketability of
the CTX Series. In addition, the Company's failure to compete successfully with
respect to throughput, the ability to scan all sizes of baggage, the ease of
integration of the CTX Series into existing baggage handling systems and other
factors could delay, limit or prevent market acceptance of the CTX Series and
its successors. Moreover, the market for EDS technology is largely undeveloped,
and the Company believes that the overall demand for EDS technology may vary
significantly depending upon public perception of the risk of terrorist attacks.
There can be no assurance that the public will always perceive the threat of
terrorist bombings to be substantial or that the airline industry and
governmental agencies will actively pursue EDS technology. As a result, there
can be no assurance the Company will be able to increase market penetration,
revenue growth or regain and maintain profitability. While the Company has taken
steps to diversify its product line and expand beyond aviation into new
applications, there can be no assurance that such new products or new
applications will lead to additional profitability and may in the short term
increase expenses as the Company invests for the future. See " - Growth
Strategy," "Competition" and "Industry Background."
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 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; changes in pricing policies by InVision, its competitors or
suppliers, including possible 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; market acceptance of enhanced versions of the CTX
Series and its successors; the availability and cost of key components; and
fluctuations in general economic conditions. InVision also may choose to reduce
prices or to increase spending in response to competition or to pursue new
market opportunities, all of which may have a material adverse effect on
InVision's business, financial condition or results of operations. InVision's
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 expectation has in the past and may again in the future result in a
decline in the trading price of the Common Stock.
DEPENDENCE ON SUPPLIERS. Certain key components used in the Company's
products have been designed by the Company to its specifications and are
currently available only from one or a limited number of suppliers. The
Company currently does not have long-term agreements with these suppliers.
Moreover, in view of the high cost of many of these components, the Company
does not maintain significant inventories of some necessary components. If
the Company's suppliers were to experience financial, operational, production
or quality assurance difficulties, the supply of components to the Company
would be reduced or interrupted. In the event that a supplier were to cease
operations, discontinue a product or withhold supply for any reason, the
Company may be unable to acquire such product from alternative sources within
a reasonable period of time. The Company also uses a variety of independent
third party manufacturers and subassemblers. The inability of the Company to
develop alternative sources for single or sole source components, to find
alternative third party manufacturers or subassemblers, or to obtain
sufficient quantities of these components could result in delays or
interruptions in product shipments, which could have a material adverse
effect on the Company's business, financial condition or results of
operations. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Year 2000 Compliance."
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<PAGE>
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. During the
year ended December 31, 1999, approximately $43.2 million, or 90.8%, of the
Company's product and service revenues were generated from sales to the
Company's five largest customers. During the year ended December 31, 1998,
revenues from the Company's five largest customers were approximately $53.0
million, or 83.7%, of the Company's product and service revenues. During the
year ended December 31, 1997, revenues from the Company's five largest
customers were approximately $50.2 million, or 80.9%, of the Company's
revenues. To date, all orders 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.
Although the FAA has signed two contracts with the Company (both in March
2000) to purchase up to 60 of each of the Company's CTX 5500 and CTX 9000
systems, there can be no assurance that the FAA will obtain funding to
purchase or will purchase more than the four CTX 9000 systems and eight CTX
5500 systems for which the Company has received orders to date. 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. Losses
arising from customer disputes regarding shipping schedules, product
condition or performance, or the Company's inability to collect accounts
receivable from any major customer could also have a material adverse effect
on the Company's business, financial condition or results of operations. See
"Industry Background - The Gore Commission."
The Company's revenues depend in significant part upon the decision of a
government agency or airport to upgrade and expand existing facilities, alter
workflows and hire additional technical expertise in addition to procuring the
CTX Series, all of which involve a significant capital commitment as well as
significant future support costs. The sales cycle of the CTX Series is often
lengthy due to the protracted approval process that typically accompanies large
capital expenditures and the time required to manufacture the CTX Series and
install and assimilate the CTX Series. Typically, six to twelve months may
elapse between a new customer's initial evaluation of the Company's systems and
the execution of a contract. Another three months to a year may elapse prior to
shipment of the CTX Series as the customer site is prepared and the CTX Series
is manufactured. During this period the Company expends substantial funds and
management resources but recognizes no associated revenue. See "Fluctuations in
Operating Results" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation - Overview."
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 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 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. See "Sales and Marketing."
LIMITED FIELD OPERATIONS; DEPENDENCE ON OPERATOR PERFORMANCE. As of
December 31, 1999, 187 CTX Series systems had been shipped to 52 airports in 17
countries around the world. A majority of these units were installed since
January 1997, and many of the Company's customers have only limited experience
with the operation of the CTX Series in high-volume airport operations. Many of
the factors necessary to make the overall baggage scanning system a success,
such as the CTX Series' integration with the baggage handling system, ongoing
system maintenance and the performance of operators, are beyond the control of
the Company. In particular, once the CTX identifies a threat, the operator must
make a
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<PAGE>
determination whether the threat is actual or a false alarm and,
therefore, whether or not to allow the bag to continue onto the aircraft.
Unsatisfactory performance of operators can lead to reduced efficacy of the CTX
Series. The failure of the CTX Series to perform successfully in deployments,
whether due to the limited experience of the Company's customers with the CTX
Series, operator error or any other reason, may have an adverse effect on the
market's perception of the efficacy of the CTX Series, which in turn could have
a material adverse effect on the Company's business, financial condition or
results of operations.
MANAGEMENT OF GROWTH. As a result of the FAA's initial order of 54 CTX
5000 systems, the Company substantially increased its rate of manufacture of the
CTX 5000 in 1997, which placed significant demands on the Company's management,
working capital and financial and management control systems The continued
success of the increase in production capability will depend in part upon the
Company's ability to continue to improve and expand its engineering and
technical resources and to attract, retain and motivate key personnel. The
failure of the Company to maintain such production capability or to increase its
revenues sufficiently to compensate for the increase in operating expenses
resulting from the past or any future expansion would have a material adverse
effect on the Company's business, financial condition or results of operations.
To accommodate the increase in the manufacturing rate, the Company entered into
a lease in 1997 for a new, substantially larger, manufacturing facility. The
operation of this new facility also requires the Company to incur substantially
larger fixed costs than it has experienced in the past. Failure of the FAA to
maintain an order rate sufficient to fully utilize this new manufacturing
facility each could have a material adverse effect on the Company's business,
financial condition or results of operations. See "Industry Background - The
Gore Commission," "Manufacturing" and "Item 2. Properties."
RISK OF CERTIFICATION OF COMPETING TECHNOLOGIES; NO ASSURANCE OF
CONTINUED CERTIFICATION; RISK OF CHANGING STANDARDS. There currently is no
requirement that U.S. airlines or airports (or international airlines or
airports) deploy FAA-certified explosive detection systems or that U.S. airlines
or airports (or most international airlines or airports) deploy explosive
detection systems at all. However, the FAA has the responsibility for setting
and maintaining performance standards for explosive detection systems for all
U.S. airlines, both in the United States and abroad. While CT based EDS are the
only systems to meet the FAA Final Criteria for Certification of EDS, published
in September 1993, the CT based systems of the Company and its competitor are
slower and more expensive than systems based on conventional and dual energy
x-ray technology. Should development of competitive systems based on dual energy
or other non-CT technology progress to the point where one or more such systems
become certified or should the FAA certification standards be lowered, the
result will be the entry into the market of lower priced, higher throughput
explosive detection systems and the Company would lose a significant competitive
advantage. Under such circumstances, there can be no assurance that the
Company's products would be able to compete successfully with these systems.
Accordingly, the certification by the FAA of any competing EDS could have a
material adverse effect on the Company's business, financial condition or
results of operations. Conversely, should the FAA increase its certification
standards, there can be no assurance that the CTX Series would meet such
standards. See "Industry Background." The Company intends to continue to
modify the CTX Series in an effort to make throughput enhancements, cost
reductions and other modifications to the CTX Series based upon the
availability of adequate funds. Any such modifications or updated versions of
the CTX Series may require FAA approval in order to retain certification or
may require re-certification. There can be no assurance that any such
modifications will be approved or, if required, certified by the FAA, and the
failure to gain approval or certification for such products could have a
material adverse effect on the Company's business, financial condition or
results of operations. In addition the Company plans to continue to develop
new models for its family of CTX Series systems, including through its
current participation in the FAA's Argus program. However, there can be no
assurance that any such new product, including the Argus system, if completed,
will be approved or, if required, certified by the FAA, and the failure to gain
approval or certification for such product could have a material adverse effect
on the Company's business, financial condition or results of operations.
See "-Product Development- Development of New Products."
COMPETITION FOR FAA GRANTS. The U.S. Government currently plays an
important role in funding the development of EDS technology and sponsoring
its deployment in U.S. airports. Through December 31, 1999, the Company had
received $19.4 million from FAA grants and contracts, and expects to receive
additional funding in 2000. The Company is also aware that certain other
competitors in the EDS market have received FAA development grants, including
a grant of approximately $8.5 million in January 1996 to its only CT based
competitor. There can be no assurance that additional research and
development funds from the FAA will become available in the future or that
the Company will receive any such additional funds. Failure by the FAA to
continue to sponsor the Company's technology could have a material adverse
effect on the Company's business, financial condition or results of
operations. In addition, any future grants to the Company's competitors may
improve such competitors' ability to develop and market high detection EDS
technology and cause the Company's customers to delay any purchase decisions,
which could have a material adverse effect on the Company's ability to market
the CTX Series and on the Company's business, financial
18
<PAGE>
condition or results of operations. See "-Product Development."
DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company in the past has
received, and from time to time in the future may receive, communications from
third parties alleging infringements by the Company or one of its suppliers of
patents or other intellectual proprietary rights owned by such third parties.
There can be no assurance that any infringement claims (or claims for
indemnification resulting from infringement claims against third parties, such
as customers) will not be asserted against the Company. If the Company's product
is found to infringe a patent, a court may grant an injunction to prevent
making, selling or using the product in the applicable country. Protracted
litigation may be necessary to defend the Company against alleged infringement
of others' rights. Irrespective of the validity or success of such claims,
defense of such claims could result in significant costs to the Company and the
diversion of time and effort by management, either of which by itself could have
a material adverse effect on the business, financial condition or results of
operations of the Company. Further, adverse determinations in such litigation
could result in the Company's loss of proprietary rights, subject the Company to
significant liabilities (including treble damages in certain circumstances), or
prevent the Company from selling its products. If infringement claims are
asserted against the Company, the Company may seek to obtain a license of such
third party's intellectual property rights, which may not be available under
reasonable terms or at all. In addition, litigation may be necessary to enforce
patents issued to or licensed exclusively to the Company and to protect trade
secrets or know-how owned or licensed by the Company and, whether or not the
Company is successful in defending such intellectual property, the Company could
incur significant costs and divert considerable management and key technician
time and effort with respect to the prosecution of such litigation, either of
which by itself could have a material adverse effect on the business, financial
condition or results of operations of the Company. See "-Intellectual Property
and Proprietary Rights."
INTERNATIONAL BUSINESS; RISK OF CHANGE IN FOREIGN REGULATIONS;
FLUCTUATION IN EXCHANGE RATES. The Company markets its products to customers
outside of the United States and, accordingly, is exposed to the risks of
international business operations, including unexpected changes in regulatory
requirements, changes in foreign control legislation, possible foreign currency
controls, uncertain ability to protect and utilize its intellectual property in
foreign jurisdictions, currency exchange rate fluctuations or devaluation,
tariffs or other barriers, difficulties in staffing and managing foreign
operations, difficulties in obtaining and managing vendors and distributors, and
potentially negative tax consequences. International sales are subject to
certain inherent risks including tariffs, embargoes and other trade barriers,
staffing and operating foreign sales and service operations and collecting
accounts receivable. The Company is also subject to risks associated with
regulations relating to the import and export of high technology products. The
Company cannot predict whether quotas, duties, taxes or other charges or
restrictions upon the importation or exportation of the Company's products in
the future will be implemented by the United States or any other country. In
particular, 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. Fluctuations in
currency exchange rates could cause the Company's products to become relatively
more expensive to customers in a particular country, leading to a reduction in
sales or profitability in that country. There can be no assurance that any of
these factors will not have a material adverse effect on the Company's business,
financial condition or results of operations.
PRODUCT LIABILITY RISKS; RISK OF FAILURE TO DETECT EXPLOSIVES;
AVAILABILITY OF INSURANCE. The Company's business exposes it to potential
product liability risks, which are inherent in the manufacturing and sale of
explosive detection systems. There are many factors beyond the control of the
Company that could lead to liability claims, such as the reliability of the
customer's operators, the training of the operators after the initial
installation and training period, and the maintenance of the units by the
customers. For these and other reasons, including software and hardware
limitations and malfunctions of the CTX Series, there can be no assurance that
the systems will detect all explosives hidden in the luggage scanned. The
Company does not believe that it would be liable for any such claims, but the
cost of defending any such claims would be significant and any adverse
determination may be in excess of the Company's insurance coverage. Moreover,
the failure of the CTX Series to detect an explosive would also result in
negative publicity which could have a material adverse effect on sales and may
cause customers to cancel orders already placed, either of which could have a
material adverse effect on the Company's business, financial condition or
results of operations. Many of the Company's customers require the Company to
maintain insurance at certain levels. The Company currently has product
liability insurance in the amount of $150 million. There can be no assurance
that additional insurance coverage, if required by customers or otherwise, could
be obtained on acceptable terms, if at all.
UNCERTAINTY OF PRODUCT DEVELOPMENT. The Company's success will depend
upon its ability to enhance its existing products, and to develop new products
and new applications to meet regulatory and customer requirements and to achieve
market acceptance. The enhancement and development of these products will be
subject to all of the risks associated with new product development, including
unanticipated delays, expenses, technical problems or other difficulties that
could result
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<PAGE>
in the abandonment or substantial change in the commercialization
of these enhancements or new products. Given the uncertainties inherent with
product development and introduction, there can be no assurance that the Company
will be successful in introducing products or product enhancements, including
products that meet FAA certification standards, on a timely basis, if at all, or
that the Company will be able to market successfully these products and product
enhancements once developed. In addition, if new products and new applications
are successfully introduced, there can be no assurance that the Company will be
able to expand quickly enough to meet market demand or that new competitors will
not enter the market.
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS. An element of the
Company's strategy is to review acquisition prospects that would complement its
existing product offerings, augment its market coverage, enhance its
technological capabilities or otherwise offer growth opportunities. Future
acquisitions by the Company could result in potentially dilutive issuances of
equity securities, the incurrence of debt and contingent liabilities, and
amortization expenses related to goodwill and other intangible assets, any of
which could have a material adverse effect on the Company's business, financial
condition or results of operations. Acquisitions entail numerous risks,
including difficulties in the assimilation of acquired operations, technologies
and products, diversion of management's attention from other business concerns,
risks of entering markets in which the Company has no or limited prior
experience and potential loss of key employees of acquired organizations. The
Company's management has limited experience in assimilating acquired
organizations. No assurance can be given as to the ability of the Company to
successfully integrate any businesses, products, technologies or personnel that
might be acquired in the future, and the failure of the Company to do so could
have a material adverse effect on the Company's business, financial condition or
results of operations.
CONCENTRATION OF OWNERSHIP; CONTROL BY MANAGEMENT. As of December 31,
1999, the Company's principal stockholder, HARAX Holding, S.A. ("HARAX"),
held approximately 20% of the Company's Common Stock, and the present
directors and executive officers of the Company and their affiliates, in the
aggregate, beneficially owned approximately 14% of the outstanding Common
Stock, in each case including shares issuable pursuant to stock options
exercisable within 60 days of December 31, 1999. Consequently, HARAX together
with the Company's directors and executive officers, acting in concert, have
the ability to significantly affect the election of the Company's directors
and have a significant effect on the outcome of corporate actions requiring
stockholder approval. In addition, HARAX, acting alone, will have the power
to significantly affect matters relating to the Company's affairs and
business.
ANTI-TAKEOVER PROVISIONS. The Company's Restated Certificate of
Incorporation contains certain provisions that may discourage bids for the
Company. This could limit the price that certain investors might be willing to
pay in the future for shares of the Common Stock.
YEAR 2000 COMPLIANCE.
DEFINITION. The Year 2000 issue arose as the result of a common computer
programming convention that represents years in two digits (e.g. "99" for
"1999"). Widespread concern was expressed that, beginning in the year 2000,
these date code fields might need to accept four digit entries to distinguish
21st century dates from 20th century dates. After the millennium date change
occurred, these date sensitive systems and products might recognize the year
2000 as the year 1900, or not at all. This inability to recognize or properly
treat the year 2000 might 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 the company reacted to this concern by determining to apply the FAA
definition of Year 2000 compliance as stated in the FAA's Year 2000 Certificate
of Compliance to all of its products and operations:
Year 2000 compliant means information technology that accurately
processes date/time data (including, but not limited to, calculating, comparing,
and sequencing) from, into, and between the twentieth and twenty-first
centuries, and the years 1998, 1999, 2000, and leap year calculations.
Furthermore, year 2000 compliant information technology, when used in
combination with other information technology, shall accurately process
date/time data if the other information technology properly exchanges date and
time data with it.
METHODOLOGY: ACHIEVING YEAR 2000 READINESS. In 1997, the Company began
Year 2000 product assessment and planning to identify and remedy any potential
compliance issues regarding product operation. In December 1998, the Company
instituted a more comprehensive Year 2000 project designed to identify and
assess the risks associated with its operations and infrastructure, information
systems, suppliers and customers that were not Year 2000 compliant, and to
develop, implement, and test, resolution and contingency plans to mitigate these
risks. The project, which was completed in
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1999, was comprised of four phases: (1) identification of risks; (2)
assessment of risks; (3) development of resolution and contingency plans; and
(4) implementation and testing.
RESULTS OF THE COMPANY'S YEAR 2000 READINESS PROGRAM
PRODUCTS. All of the Company's products were reviewed for Year 2000
issues and non-compliant products were upgraded to compliance before December
31, 1999. Products sold or offered for sale to the FAA (the CTX 5500, CTX 9000
and the CTX 2500) were officially certified as compliant by the FAA by applying
the 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 Year 2000 upgrade for the Company's other product (the CTX 5000) was
also designed to meet the FAA Year 2000 compliance definition and the Company
successfully conducted its own tests using a test plan similar to the one used
by the FAA in certifying the compliance of the other models. Following these
efforts, which were completed before the end of 1999, no problems of any type
related to Year 2000 issues have been experienced by any of the Company's
installed products through the date of filing of this report.
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 completed all phases of its Year 2000 project including the finalization
of contingency plans for all systems determined to be critical to the Company's
mission. As a result of its review, the Company did not identify any Year 2000
problems relating to systems operated by the Company which were not resolved
and, in fact, the Company's internal computerized systems have experienced no
Year 2000 problems through the date of filing of this report.
SUPPLIERS AND CUSTOMERS. Substantially all of the Company's current
suppliers of products and services completed a questionnaire regarding their
readiness for the Year 2000. Based on the Company's review of the responses
received, no significant problems were identified. Where the information
provided was not subject to verification by internal testing, the Company
identified those suppliers and customers whose products or services are mission
critical and focussed its efforts on the development of contingency plans. No
Year 2000 problems have been experienced with suppliers or customers through the
date of filing of this report.
COSTS OF COMPLIANCE. The Company's costs of compliance with respect to
both its products and its infrastructure, including third party suppliers, and
the cost of contingency plans were $285,000 through December 31, 1999. No
significant additional costs are anticipated to be incurred in connection with
this project which is now concluded.
ITEM 2. PROPERTIES
The Company's principal corporate office and manufacturing facility is
located in Newark, California, which consists of approximately 95,000 square
feet under a lease which expires in May 2007. The Company has an option to
extend the lease for five years. Approximately 16,000 square feet is subleased
to a tenant under an agreement which expires March 31, 2001. InVision relocated
to this new facility in October 1997. Management believes that the new facility
will be sufficient to satisfy InVision's administrative and manufacturing needs
for the foreseeable future.
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. No specific amount of damages has been
requested.
This complaint was filed by Vivid following efforts by Quantum and ESI,
a private investigator hired by Quantum, to investigate the alleged theft of
intellectual property from Quantum by a former key employee hired by Vivid and
to bring certain evidence to the attention of the Federal Bureau of
Investigation ("FBI") and the United States Attorney for the Southern District
of California. On February 10, 1999, defendants InVision and Quantum filed a
motion for a temporary stay of all civil proceedings. The stay remained in
effect until February 19, 2000. The Company is currently awaiting a response
from Vivid to its discovery requests propounded prior to the initial stay.
Management believes it has defenses to all
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<PAGE>
the allegations contained in the complaint. In addition, it 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
On April 23, 1996, the Company's Common Stock commenced trading on the
Nasdaq SmallCap Market under the symbol "INVN". Prior to that date, there
was no public market for the Common Stock. On May 15, 1997, the Company's
Common Stock commenced trading on the Nasdaq National Market and ceased to
trade on the Nasdaq SmallCap Market. The following table sets forth, for the
periods indicated, the high and low bid quotations of the Company Common
Stock as reported on the Nasdaq SmallCap Market/Nasdaq National Market giving
effect to the Company's 2-for-1 stock split effected on February 7, 1997 as
if the stock split had occurred on April 23, 1996. These over-the-counter
quotations reflect inter-dealer prices, without retail markup, markdown or
commission, and may not necessarily represent the sales prices in actual
transactions.
COMMON STOCK MARKET PRICE:
<TABLE>
<CAPTION>
QUARTER ENDED 1999 March 31 June 30 September 30 December 31
------------------ -------- ------- ------------ -----------
<S> <C> <C> <C> <C>
High $ 6 7/8 $ 6 7/16 $ 5 3/8 $ 5 3/8
Low $ 4 3/4 $ 4 3/8 $ 3 3/8 $ 3 5/16
QUARTER ENDED 1998 March 31 June 30 September 30 December 31
------------------ -------- ------- ------------ -----------
High $ 11 7/16 $ 9 15/16 $ 8 9/16 $ 7 9/16
Low $ 6 5/8 $ 7 3/8 $ 5 3/4 $ 3 13/16
</TABLE>
On March 28, 2000, the closing price of the Company's Common Stock on the
Nasdaq National Market was $7.00 per share. On March 14, 2000, there were
approximately 321 stockholders of record of the Company's Common Stock.
In May 1998, the Board of Directors of the Company adopted a stock
repurchase program, in which management of the Company is authorized to
repurchase up to 500,000 shares of the Company's Common Stock on the open market
at prevailing market prices or in negotiated transactions off the market. As of
December 31, 1999, the Company had repurchased approximately 200,500 shares of
its Common Stock. The Company has not repurchased any shares since December 1999
and there can be no assurance that all of such shares will ultimately be
repurchased by the Company.
DIVIDENDS
The Company has never declared or paid cash dividends on its Common
Stock and it is currently the intention of the Board of Directors not to pay
cash dividends in the foreseeable future. The Company plans to retain earnings,
if any, to finance its operations. In addition, the Company's bank credit
facility prohibits the payment of dividends without the lender's consent.
RECENT SALES OF UNREGISTERED SECURITIES
From January 1, 1998 through December 31, 1999, the Company neither
sold nor issued any unregistered securities.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth for the periods and the dates indicated
certain consolidated financial data, which should be read in conjunction with
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere herein. In September 1997, InVision acquired
Quantum in a stock-for-stock transaction accounted for as a pooling of
interests; accordingly, all prior periods have been restated to include
Quantum's results. 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 1999 presentation.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
OPERATIONS
Revenues:
Product and service revenue $47,742 $63,284 $56,427 $15,841 $ 9,066
Government contract revenue 10,694 7,210 5,533 3,444 2,743
------- ------- ------- ------- ------
Total revenues 58,436 70,494 61,960 19,285 11,809
------- ------- ------- ------- ------
Cost of revenues:
Product and service costs 28,564 34,946 28,027 9,736 6,777
Government contract costs 7,739 5,223 4,273 2,836 2,486
------- ------- ------- ------- ------
Total cost of revenues 36,303 40,169 32,300 12,572 9,263
------- ------- ------- ------- ------
Gross profit 22,133 30,325 29,660 6,713 2,546
------- ------- ------- ------- ------
Operating expenses
Research and development (a) 10,443 8,498 8,635 3,409 2,504
Selling, general and administrative 11,767 12,997 12,323 7,568 4,489
Acquisition costs - - 685 - -
------- ------- ------- ------- ------
Total operating expenses 22,210 21,495 21,643 10,977 6,993
------- ------- ------- ------- ------
Income (loss) from operations (b) (77) 8,830 8,017 (4,264) (4,447)
Interest expense (227) (390) (428) (1,599)(c) (482)
Interest and other income, net 754 697 242 187 34
------- ------- ------- ------- ------
Income (loss) before provision for income taxes 450 9,137 7,831 (5,676) (4,895)
Provision for income taxes 67 1,096 1,192 - -
------- ------- ------- ------- ------
Net income (loss) $ 383 $ 8,041 $ 6,639 $(5,676) $(4,895)
======= ======= ======= ======= =======
Net income (loss) per share:
Basic $ 0.03 $ 0.67 $ 0.60 $ (0.90) $(19.98)
======= ======= ======= ======= =======
Diluted $ 0.03 $ 0.63 $ 0.55 $ (0.90) $(19.98)
======= ======= ======= ======= =======
Weighted average shares outstanding:
Basic 12,133 12,046 11,141 6,338 245
Diluted 12,751 12,827 12,166 6,338 245
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- ------
(In thousands)
<S> <C> <C> <C> <C> <C>
FINANCIAL POSITION
Cash, cash equivalents and short-term investments $24,169 $12,457 $19,190 $ 2,471 $ 3,715
Working capital (deficit) $40,913 $38,911 $31,806 $ 6,875 $(2,785)
Total assets $62,987 $63,486 $57,251 $16,949 $ 9,863
Long-term obligations $ 1,181 $ 1,565 $ 1,336 $ 144 $ 95
Total stockholders' equity (deficit) $47,485 $46,830 $38,816 $ 8,875 $(1,619)
</TABLE>
- ------------------------------
(a) Net of amounts reimbursed under research and development contracts and
grants with governmental agencies of $0.7 million, $3.6 million, $2.1
million, $1.5 million and $0.4 million during 1999, 1998, 1997, 1996, and
1995 respectively. See Note 5 to the Consolidated Financial Statements.
(b) The Company recorded noncash charges related to grants of stock options
having exercise prices below the fair market value on the date of grant to
employees and directors in the amounts of $68,000, $68,000, $425,000,
$489,000 and $362,000 in 1999, 1998, 1997, 1996 and 1995, respectively. See
Note 8 to the Consolidated Financial Statements.
(c) The Company recorded a noncash charge resulting from amortization of a
discount in connection with Warrants in the amount of $1.3 million in 1996.
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ITEM 7. 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.
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. 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. In April 1999, the CTX
9000 system successfully completed FAA certification and the Company sold its
first CTX 9000 system in the third quarter of 1999. Additionally, in
September 1999 the CTX 2500 system successfully completed FAA certification
and the Company is already seeing interest for this product from both
existing and potential customers. Since its first CTX sale in 1995 through
December 31, 1999, the Company has received orders for a total of 196 CTX
systems, of which a total of 187 had been shipped. In October 1999, the
Company received a letter contract of $2.8 million with a potential value of
more than $80 million over three years from the FAA for CTX 9000 systems and
accessories. For the years ended December 31, 1999, 1998 and 1997, the
Company had CTX product and service revenues of $47.6 million, $63.3 million,
and $56.4 million, respectively, and as of December 31, 1999 the Company had
in backlog CTX equipment orders and service agreements of approximately $19.8
million. In January 2000, the Company received an order valued at
approximately $2.5 million from an international customer for multiple CTX
9000 systems, accessories and service.
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 the third
quarter of 1999, Quantum sold its first QScan 160 EDS to the United States
Navy for mail and other parcel screening applications at an international
location. 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
the fourth quarter of 1999, the unique capabilities of this landmine
detection system were successfully demonstrated in a series of Department of
Defense-sponsored, blind field tests carried out at Fort Leonard Wood,
Missouri. 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 1999 presentation. For the years ended December 31, 1999, 1998 and
1997, the Company had government contract revenues related to Quantum of
$10.7 million, $7.2 million and $5.5 million, respectively, and as of
December 31, 1999, the Company had in backlog Quantum government contracts of
$3.2 million. In the first quarter of 2000, Quantum received additional
awards from several government agencies of $6.1 million, including $3.2
million related to landmine detection and $2.3 million related to EDS.
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<PAGE>
In February 2000, the Company created WoodVision, a new division formed
to develop its CT technology to optimize the lumber value and yield of
harvested timber. Additionally, in February 2000, the Company acquired
Inovec, Inc. ("Inovec"), a manufacturer of advanced optimization equipment
for increasing the yield of the forest products industry for $5.2 million in
cash and stock payable over the next two years, and potentially an additional
$1.4 million in cash and stock payable over the next two years based on the
achievement of certain performance milestones. The transaction has been
accounted for as a purchase effective January 1, 2000.
The Company considers research and development to be a vital part of its
operating discipline and continues to dedicate substantial resources for
research to enhance the performance, functionality and reliability of its CTX
systems as well as the development of new products. At December 31, 1999, the
Company had 113 full-time employees engaged in research and development
activities while also using the services of 16 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 under research and development contracts and grants. For
the years ended December 31, 1999, 1998 and 1997, the Company spent $11.2,
$12.9 million, and $10.7 million, respectively, on research and development
activities. Of these amounts, $0.7 million, $3.6 million, and $2.1 million,
respectively, were funded under research and development contracts and
grants. To the extent that research and development contracts and grants
receipts decline in the future, research and development expenses borne by
the Company would increase, and the Company expects that its results of
operations would be adversely impacted. As of December 31, 1999, the Company
had in backlog research and development contracts and grants of approximately
$0.8 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 years ended December 31,
1999, 1998, and 1997, $37.1 million, $37.9 million and $32.1 million of the
Company's product and service revenues, were generated from sales to the
Company's largest customer, the FAA, representing 77.8%, 59.9%, and 56.9% of
the Company's product and service revenues, respectively. There were no other
significant customers who accounted for more than 10% of the Company's
product and service revenues in 1999, 1998 and 1997.
The Company's government contract revenue has historically been derived
from funding provided by various U.S. government agencies. For the years
ended December 31, 1999, 1998 and 1997, $6.1 million, $2.2 million and $1.2
million of the Company's government contract revenues were associated with
funding from the Defense Advanced Research Projects Agency ("DARPA"),
primarily for landmine detection, representing 57.4%, 30.8% and 22.0% of the
Company's government contract revenues, respectively. Additionally, in 1999,
1998 and 1997, $1.8 million, $2.4 million and $1.4 million related to funding
from the FAA for EDS research and development, representing 17.1%, 32.6% and
25.9% of the Company's government contract revenues, respectively. The
remaining revenue was related to contract work for other government agencies
and private entities, none of which individually accounted for more than 10%
of the Company's government contract revenues in 1999, 1998 and 1997.
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 years ended December 31,
1999, 1998 and 1997, international sales represented 18.0%, 33.7%, and 43.0%,
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 assimilate the
product. Typically, six to twelve months may elapse between a new customer's
initial evaluation of the Company's systems and the execution of a contract.
Another three months to a year may elapse prior to shipment of 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 on 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.
The Company's government contract revenue is substantially derived from
Quantum activities performed under U.S.
26
<PAGE>
government contracts. These contracts are typically in the form of
cost-plus-fixed-fee ("CPFF") or firm-fixed-price ("FFP") 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.
RESULTS OF OPERATIONS
The following table sets forth certain income and expenditure items from
the Company's consolidated statements of operations expressed as a percentage
of total revenues for the periods indicated.
INVISION TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(PERCENTAGE OF REVENUES)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Revenues:
Product and service revenue 81.7 % 89.8 % 91.1 %
Government contract revenue 18.3 10.2 8.9
------ ------ ------
Total revenues 100.0 100.0 100.0
------ ------ ------
Cost of revenues:
Product and service costs 48.9 49.6 45.2
Government contract costs 13.2 7.4 6.9
------ ------ ------
Total cost of revenues 62.1 57.0 52.1
------ ------ ------
Gross profit 37.9 43.0 47.9
------ ------ ------
Operating expenses:
Research and development 17.9 12.1 13.9
Selling, general and administrative 20.1 18.4 19.9
Acquisition costs - - 1.1
------ ------ ------
Total operating expenses 38.0 30.5 34.9
------ ------ ------
Income (loss) from operations (0.1) 12.5 13.0
Interest expense (0.4) (0.6) (0.7)
Interest and other income, net 1.3 1.0 0.4
------ ------ ------
Income before provision for income taxes 0.8 12.9 12.7
Provision for income taxes 0.1 1.6 1.9
------ ------ ------
Net income 0.7 % 11.3 % 10.8 %
====== ====== ======
</TABLE>
COMPARISON OF FISCAL YEARS 1999 AND 1998
REVENUES. The Company's revenues are comprised of product and service
revenues, which include sales of the CTX systems, accessories, installation and
configuration, and maintenance related to product support; and government
contract revenues, which include revenues primarily from research and
development contracts utilizing QR and passive magnetics technologies with
government agencies and private entities.
Product and service revenues were $47.7 million in 1999, a decrease of
24.6% from the $63.3 million in 1998. This decrease was primarily attributable
to fewer systems shipped in 1999 compared to the prior year, partially offset by
increased service contract revenues primarily due to the commencement of support
and maintenance agreements for systems whose warranty periods expired during the
year. The Company shipped 41 systems (36 CTX 5500 and 5 CTX 9000) in 1999
compared to 62 CTX 5500 systems in 1998. The Company typically ships against a
backlog of orders for its products. As of December 31, 1999, the Company had in
backlog equipment orders and service agreements of approximately $19.8 million.
Government contract revenues were $10.7 million in 1999, an increase of
48.3% from the $7.2 million in 1998. This increase was primarily attributable
to accelerated activities related to landmine detection technologies in 1999.
As of December 31, 1999, the Company had in backlog government contract
revenue of approximately $3.2 million.
27
<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 product and services 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
for product and services was $19.2 million in 1999 compared to $28.3 million
in 1998. Gross margins were 40.2% and 44.8%, respectively. The decrease in
gross margins was primarily the result of lower margins on the sale of the
CTX 9000 systems, which were made up of higher per unit costs related to the
start-up of the initial production process.
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 $3.0 million in 1999 compared to $2.0 million in 1998. Gross
margins were 27.6% in 1999 and 1998. The increase in gross profit is
primarily due to the increased level of work on funded landmine detection
technologies.
RESEARCH AND DEVELOPMENT. Research and development expenditures 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 under research and development contracts and grants. These services
are primarily provided on a cost basis.
Net research and development expenses were $10.4 million in the year
ended December 31, 1999. Net research and development expenses would have
been $9.3 million in 1998 without the capitalization of software development
costs of $0.8 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 1999. In the third quarter of 1999, the Company began
amortizing the capitalized software development costs using the straight-line
method over the forecasted units of production. Gross research and
development expenses were $11.2 million in 1999, a decrease of 13.4% from the
$12.9 million in 1998, before considering the impact of software
capitalization. Of these amounts, $0.7 million and $3.6 million,
respectively, were funded by research and development contracts and grants
from the FAA and other government agencies. As a percentage of total
revenues, net research and development expenditures were 17.9% in 1999
compared to 12.1% in 1998. The increase of net research and development costs
as a percentage of revenues was primarily the result of lower revenues in
1999 compared to the prior year. The decrease in gross research and
development expenditures in absolute dollars was primarily due to the
completion of two significant development products in early 1999,
specifically the development of the CTX 9000 and QScan 160, of which the
Company made its first sale of these products in 1999. As of December 31,
1999, the Company had in backlog research and development contracts and
grants of $0.8 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.
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 $11.8 million in 1999,
a decrease of 9.5% from the $13.0 million in 1998. As a percentage of total
revenues, selling, general and administrative expenses were 20.1% and 18.4%
in 1999 and 1998, respectively. The increase in selling, general and
administrative expenses as a percentage of revenues was primarily the result
of lower revenues in 1999 compared to the prior year. The decrease in
selling, general and administrative expenses in absolute dollars was
primarily the result of a decrease in commission expense due to changes in
the structure of sales incentive compensation plans and lower revenues in
1999 and continued efforts to reduce selling and administrative expenses
during the year.
INTEREST EXPENSE. Interest expense decreased to $227,000 in 1999 from
$390,000 in 1998. Interest expense in 1999 and 1998 resulted primarily from
debt financing associated with the Company's working capital lines of credit,
equipment term loans and capital leases. The decrease was primarily due to
payments made on term loans and capital lease obligations and no new
significant financing in 1999.
28
<PAGE>
INTEREST AND OTHER INCOME, NET. Interest and other income, net,
increased to $754,000 in 1999 from $697,000 in 1998. The 1999 amount consists
primarily of interest income on short-term investments and interest bearing
cash accounts of $813,000, partially offset by other expense of $59,000. The
1998 amount consists primarily of interest income on short-term investments
and interest bearing cash accounts of $754,000, partially offset by other
expense of $57,000.
INCOME TAXES. The Company's effective tax rate for 1999 and 1998 was 15%
and 12%, respectively. The Company's effective tax rate for 1999 and 1998 was
lower than statutory tax rates primarily due to the utilization of net
operating loss carryforwards. At December 31, 1999, the Company had federal
net operating loss carryforwards of approximately $5.0 million available to
reduce future federal taxable. The Company's net operating loss carryforwards
expire from 2007 to 2011.
COMPARISON OF FISCAL YEARS 1998 AND 1997
REVENUES. Product and service revenues were $63.3 million in 1998, an
increase of 12.2% from the $56.4 million in 1997. This increase was primarily
attributable to increased sales of the CTX 5000 Series, reflecting a 10.7%
increase in unit shipments to 62 units in 1998 from the 56 units in 1997,
plus the shipment of 32 of the 59 CTX 5500 upgrade kits purchased by the FAA
and the commencement of maintenance related revenues in the domestic market.
These factors were partially offset by lower average selling prices of
systems shipped in 1998 due to configurations of units shipped and volume
discounts in the second quarter of 1998.
Government contract revenues were $7.2 million in 1998, an increase of
30.3% from the $5.5 million in 1997. This increase is primarily attributable
to the growth in revenue associated with additional landmine detection
funding in 1998.
GROSS PROFIT. Gross profit for product and services was $28.3 million in
1998 compared to $28.4 million in 1997. Gross margins were 44.8% and 50.3%,
respectively. The decrease in gross margins was primarily due to higher
manufacturing overhead costs as a result of the Company's relocation to a new
facility in late 1997, and configurations of units shipped and volume
discounts in the second quarter of 1998 that resulted in lower average
selling prices of systems in 1998.
Gross profit for government contracts was $2.0 million in 1998 compared
to $1.3 million in 1997. Gross margins were 27.6% and 22.8% in 1998 and 1997,
respectively. The increase is primarily due to the growth in funding
activities in 1998, primarily additional landmine detection funding with
earned fees.
RESEARCH AND DEVELOPMENT. Net research and development expenses would
have been $9.3 million in 1998 without the capitalization of software
development costs of $0.8 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. In prior years, the period between achieving
technological feasibility and the availability of software included in the
Company's product was short and software development costs qualifying for
capitalization had been insignificant. Before considering the impact of
software capitalization, gross research and development expenditures were
$12.9 million in 1998, an increase of 20.0% from the $10.7 million in 1997.
Of these amounts, $3.6 million and $2.1 million, respectively, were funded by
research and development contracts and grants from the FAA and other
government agencies. As a percentage of total revenues, net research and
development expenditures were 12.1% in 1998 compared to 13.9% in 1997. The
increase in gross research and development expenditures was primarily the
result of personnel additions and increased spending on engineering materials
and services.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were $13.0 million in 1998, an increase of 5.5% from the $12.3
million in 1997. As a percentage of total revenues, selling, general and
administrative expenses were 18.4% and 19.9% in 1998 and 1997, respectively.
The increase in selling, general and administrative expenses in absolute
dollars for 1998 was primarily the result of personnel additions and
increased professional and consulting costs associated with the Company's
growth, increased insurance costs, increased selling costs associated with
the higher unit sales, including foreign travel, trade shows, public
relations and commission expense, and increased costs of operations
associated with being a publicly traded company.
ACQUISITION COSTS. In 1997, the Company incurred one-time costs for
professional fees and costs related to the acquisition of Quantum. The
acquisition costs were $685,000, or 1.1%, of the total revenues.
29
<PAGE>
INTEREST EXPENSE. Interest expense decreased to $390,000 in 1998 from
$428,000 in 1997. Interest expense in 1998 resulted primarily from debt
financing associated with the Company's working capital lines of credit,
equipment term loans and capital leases. Interest expense in 1997 resulted
primarily from short-term debt outstanding during the period.
INTEREST AND OTHER INCOME, NET. Interest and other income, net,
increased to $697,000 in 1998 from $242,000 in 1997. The 1998 amount consists
primarily of interest income on short-term investments and interest bearing
cash accounts of $754,000, offset by other expense of $57,000. The 1997
amount of $242,000 consists primarily of interest income on short-term
investments and interest bearing cash accounts of $724,000, offset by a loss
of $402,000 on the sale of Quantum stock prior to the Quantum acquisition and
other expense of $80,000.
INCOME TAXES. The Company's effective tax rate for 1998 and 1997 was
12.0% and 15.2%, respectively. The Company's effective tax rate for 1998 and
1997 was lower than statutory tax rates primarily due to the utilization of
net operating loss carryforwards.
NONCASH CHARGES
The Company recorded noncash charges related to grants of stock options
having exercise prices below the fair market value on the date of grant to
employees and directors in the amounts of $68,000, $68,000 and $425,000 in
1999, 1998 and 1997, respectively.
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 December 31, 1999, the Company had $24.2 million
in cash, cash equivalents and short-term investments, compared to $12.5
million at December 31, 1998. Working capital was $40.9 million at December
31, 1999 compared to $38.9 million at December 31, 1998.
Net cash provided by operating activities was $17.0 million in 1999
compared to $2.0 million used in operating activities in 1998. Net cash
provided by operating activities in 1999 was primarily due to net income of
$383,000, a $16.2 million decrease in accounts receivable, the $2.9 million
noncash effect of depreciation and amortization, a $1.7 million increase in
accounts payable and a $1.6 million increase in deferred revenue, partially
offset by a $5.6 million increase in inventories and a $0.8 million decrease
in accrued liabilities. Net cash used in operations in 1998 was primarily due
to net income of $8.0 million, a $2.3 million increase in accrued
liabilities, and the $2.0 million noncash effect of depreciation and
amortization, offset by a $10.1 million increase in accounts receivable due
to the timing of sales in the latter part of the fourth quarter of 1998, a
$1.7 million decrease in deferred revenues, a $1.7 million decrease in
accounts payable, and a $1.0 million increase in inventories.
Net cash used in investing activities was $5.5 million in 1999 compared
to $0.6 million in 1998. Net cash used in investing activities in 1999 was
primarily due to $3.9 million in purchases of short-term investments (net of
proceeds from sales) and $1.7 million in purchases of new equipment. Net cash
used in investing activities in 1998 was primarily due to $2.9 million in
purchases of new equipment and $0.8 million in additions to other noncurrent
assets related to the capitalization of software development costs, partially
offset by $3.1 million in proceeds on sales of short-term investments (net of
purchases).
Net cash used in financing activities was $3.7 million in 1999 compared
to $1.0 million in 1998. Net cash used in financing activities in 1999 was
primarily due to $3.0 million in net repayments of short-term debt financing
(principally, short-term borrowings under the lines of credit), $0.9 million
in repayments of long-term debt (principally term loans and capital lease
obligations) and $0.3 million for the repurchase of 85,600 shares of the
Company's Common Stock at prevailing market prices, partially offset by $0.5
million in proceeds from sales under the employee stock purchase plan and
exercises of incentive stock options. Net cash used in financing activities
in 1998 was primarily due to $1.2 million in net repayments of short-term
debt financing (principally, short-term borrowings under the lines of
credit), $0.9 million for the repurchase of 114,900 shares of the Company's
Common Stock at prevailing market prices and $0.3 million in repayments of
long-term debt, partially offset by $0.8 million in proceeds from sales under
the employee stock purchase plan and exercises of incentive stock options,
and $0.7 million in proceeds from long-term debt financing. Future
repurchases of the Company's Common Stock would be based on market conditions
and evaluated on a case by case basis.
30
<PAGE>
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 (8.5% at December 31, 1999) and are secured by all of
the Company's assets other than its intellectual property. The agreements
require that the Company maintain certain financial ratios and levels of
tangible net worth and profitability and also prohibit the Company from
paying cash dividends. At September 30 and December 31, 1999, the Company was
in default of a covenant set forth in the loan agreement. In October 1999 and
February 2000, the Company received waivers of the default under the loan
agreement from the bank for the periods ended September 30, 1999 and December
31, 1999, respectively. Proceeds of loans under both lines of credit may be
used for general corporate purposes. At December 31, 1999, the Company had
outstanding guarantees to customers through issuance of letters of credit
secured by the lines of credit totaling $2.2 million. There were no
outstanding borrowings under the lines of credit at December 31, 1999. The
remaining available borrowing capacity under the lines of credit was $4.3
million at December 31, 1999 based on eligible accounts receivable and
inventories as of that date. The agreements expire in April 2000 and the
Company is in the process of renewing the revolving line of credit agreements
with the bank.
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 provides for borrowings up to $0.5 million. Borrowings under this
agreement bear interest at the bank's prime rate (8.5% at December 31, 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 (6.14%
at December 31, 1999) during the amortization period. Borrowings are secured
by the assets purchased or financed. At December 31, 1999, the Company had an
outstanding $0.5 million term loan due June 2003 and a $0.4 million term loan
due November 2001 from drawdowns under a prior year line of credit. The term
loans bear interest of 8.99% and 9.03%, respectively. The Company had
remaining borrowing capacity of $0.5 million under the current year line of
credit as of December 31, 1999. The agreement expires in April 2000 and the
Company is in the process of renewing its equipment line of credit agreement
with the bank.
The Company believes that cash, cash equivalents and short-term
investments together with available borrowing under its lines of credit 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.
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. Purchases of raw materials and other
inventory components are primarily denominated in U.S dollars, however, when
purchased in foreign currencies, are generally made on an as needed basis.
The Company generally does not have material advance purchase commitments in
foreign currencies.
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 Company did not hedge foreign currency risks in 1999.
The impact of inflation has not been material on the Company's
operations or liquidity to date.
YEAR 2000 COMPLIANCE
31
<PAGE>
The Year 2000 issue arose as a result of computer programs being written
using two digits rather than four to define the applicable year. During the year
the Company evaluated the products it sells and its internal computerized
systems, taking corrective action, as appropriate, to avoid potential Year 2000
problems and to make all of its products and internal computerized systems
determined to be mission critical Year 2000 compliant. The Company knows of no
instances in which its products or its internal computerized systems failed to
operate as specified due to date formatting issues associated with calculating,
comparing, and sequencing from, into, and between the twentieth and twenty-first
centuries, and the years 1998, 1999, 2000, and leap year calculations.
Additionally, the Company identified those third party suppliers whose products
or services are mission critical and developed contingency plans. The Company
knows of no instances in which its third party suppliers have experienced Year
2000 problems.
The Company's costs of compliance with respect to both its products and
its infrastructure, including third party suppliers and the cost of contingency
plans, was $285,000 through December 31, 1999. No significant additional costs
are anticipated to be incurred in connection with this project.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements and Notes thereto appear
on pages F-1 to F-18 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated by reference to the
Proxy Statement to be filed no later than April 30, 2000 in connection with the
solicitation of proxies for the Company's Annual Meeting of Stockholders to be
held May 31, 2000 (the "Proxy Statement") under the caption "Proposal No.
1-Election of Directors-Nominees." For the information required as to Executive
Officers, see "Item 1. Business-Executive Officers", Part I.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to the
Proxy Statement under the captions "Proposal No. 1-Election of Directors"
and "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference to the
Proxy Statement under the caption "Security Ownership of Certain Beneficial
Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference to the
Proxy Statement under the captions "Proposal No. 1-Election of Directors" and
"Certain Transactions."
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS
The consolidated financial statements required by this item are
submitted in a separate section beginning on page F-1 of this report.
Report of PricewaterhouseCoopers LLP, Independent
Accountants...........................................................
<PAGE>
F-1
Consolidated Balance Sheets as of December 31, 1999 and 1998
.............................................................F-2
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997.......................
F-3
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997......................F-4
Consolidated Statements of
Stockholders' Equity for the Years Ended December 31, 1999, 1998 and
1997.................................................................F-5
Notes to Consolidated Financial
Statements...........................................................F-6
(A)(2) FINANCIAL STATEMENT SCHEDULES
II - Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are not
applicable or the required information is shown in the Consolidated
Financial Statements or in the notes thereto.
(A)(3) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Amended and Restated Certificate of Incorporation of the
Registrant. (1)
3.2 Bylaws of Registrant, as amended. (2)
4.1 Reference is made to Exhibits 3.1 and 3.2.
10.1 Technology License Agreement, dated September 11, 1990, by and
between the Registrant and Imatron, Inc. (1)
10.3 Representative's Warrant Agreement. (1)
10.4 Registrant's Equity Incentive Plan, as amended through February
19, 1999. (5) (6)
10.5 Registrant's 1996 Employee Stock Purchase Plan, dated March 9,
1996.(1) (5)
10.12 Lease, dated as of February 11, 1997, between the Registrant and
WHLNF Real Estate L.P. (4)
10.13 Purchase Agreement, dated as of December 24, 1996, between the
Registrant and the U.S. Federal Aviation Administration. (4)
10.17 Loan and Security Agreement, dated as of February 20, 1997,
between the Registrant and Silicon Valley Bank. (4)
10.18 Revolving Promissory Note, dated February 20, 1997, between the
Registrant and Silicon Valley Bank. (4)
10.19 Export-Import Bank Loan and Security Agreement, dated as of
February 20, 1997, between the Registrant and Silicon Valley
Bank. (4)
10.20 Intellectual Property Security Agreement, dated as of February
20, 1997, between the Registrant and Silicon Valley Bank. (4)
10.22 Key Employee Agreement, dated April 22, 1994, between the
registrant and Sergio Magistri, and amendment thereto, dated
October 16, 1995. (4) (5)
10.23 Key Employee Agreement, dated March 1, 1996, between the
Registrant and David M. Pillor. (4) (5)
10.25 Loan Modification Agreement, dated April 15, 1998, to the
Domestic Loan and Security Agreement, dated February 20, 1997,
and the Export-Import Bank Loan and Security Agreement, dated
February 20, 1997, between the Registrant and Silicon Valley
Bank. (2)
10.26 Release of Security Agreement, dated April 15, 1998, for the
release of security interest in the Registrant's trademarked
works set forth in the Intellectual Property Security Agreement,
dated February 20, 1997, between the Registrant and Silicon
Valley Bank. (2)
10.27 Release of Security Agreement dated April 15, 1998, for the
release of security interest in the Registrant's patented works
set forth in the Intellectual Property Security Agreement, dated
February 20, 1997, between the
<PAGE>
Registrant and Silicon Valley Bank. (2)
10.28 Negative Pledge Agreement, dated April 15, 1998, covering all of
the Registrant's Intellectual Property between the Registrant
and Silicon Valley Bank. (2)
10.29 Consent Letter, dated June 1, 1998, from Silicon Valley Bank for
the Registrant's Stock Repurchase Program in connection with the
Loan and Security Agreements, dated February 20, 1997, and as
amended by the Modification Agreement dated April 15, 1998,
between the Registrant and Silicon Valley Bank. (2)
10.30 Key Employee Agreement, dated October 23, 1998, between the
Registrant and Tim Black. (5)
10.31 Amended and Restated Loan and Security Agreement dated May
4, 1999, between the Registrant and Silicon Valley Bank. (7)
10.32 Amended and Restated Export-Import Bank Loan and Security
Agreement dated May 4, 1999, between the Registrant and Silicon
Valley Bank. (7)
10.33 Negative Pledge Agreement, dated May 4, 1999, covering all of
the Registrant's Intellectual Property between the Registrant
and Silicon Valley Bank. (7)
10.34 Amendment No. 1 to Technology License Agreement between the
Registrant and Imatron Inc. dated September 11, 1990
10.35 Key Employee Agreement dated May 27, 1999, between the
Registrant and Alfred V. Larrenaga. (5)
10.36 Form of Indemnity Agreement between the Registrant and each of
Sergio Magistri, Tim Black, Alfred V. Larrenaga, David Pillor,
Giovanni Lanzara, Bruno Trezza, Douglas Boyd and Morris Busby
dated November 1, 1999
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule for Fiscal Year 1999.
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.
(3) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended June 30,1997 and incorporated
herein by reference.
(4) Filed as an exhibit to Registrant's Registration Statement on
Form S-1 (No. 333-23413) and incorporated herein by reference.
(5) Items that are management contracts or compensatory plans or
arrangements required to be filed as exhibits pursuant to item
14(c) of Form 10-K.
(6) Filed as an appendix to the Company's Notice and Proxy Statement
for the Annual Meeting of Stockholders held July 15, 1999.
(7) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1999 and incorporated
herein by reference.
(b) REPORTS ON FORM 8-K
The Registrant filed no reports on Form 8-K for the year ended December
31, 1999.
(c) See Exhibits listed under Item 14(a)(3).
(d) The financial statement schedules required by the Item are listed
under Item 14(a)(2).
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
on the 30th day of March 2000.
INVISION TECHNOLOGIES, INC.
By: /s/ SERGIO MAGISTRI
-------------------------
Sergio Magistri
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ SERGIO MAGISTRI President, Chief Executive Officer and Director March 30, 2000
- ---------------------------
Sergio Magistri (PRINCIPAL EXECUTIVE OFFICER)
/s/ ALFRED V. LARRENAGA Senior Vice President and Chief Financial Officer March 30, 2000
- ---------------------------
Alfred V. Larrenaga (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
/s/ GIOVANNI LANZARA Chairman of the Board of Directors March 30, 2000
- ---------------------------
Giovanni Lanzara
/s/ DOUGLAS P. BOYD Director March 30, 2000
- ---------------------------
Douglas P. Boyd
/s/ BRUNO TREZZA Director March 30, 2000
- ---------------------------
Bruno Trezza
/s/ MORRIS BUSBY Director March 30, 2000
- ---------------------------
Morris Busby
/s/ DAVID M. PILLOR Senior Vice President, Sales and Marketing, and Director March 30, 2000
- ---------------------------
David M. Pillor
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors and Stockholders of
InVision Technologies, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of InVision Technologies, Inc. and its subsidiaries at December 31,
1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in
the United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
February 9, 2000
<PAGE>
INVISION TECHNOLOGIES, INC. Updated
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998
-------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18,282 $ 10,462
Short-term investments 5,887 1,995
Accounts receivable, net 10,633 26,933
Inventories 17,460 11,825
Other current assets 2,972 2,787
------------ -----------
Total current assets 55,234 54,002
Property and equipment, net 6,796 8,035
Other assets 957 1,449
------------ -----------
$ 62,987 $ 63,486
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,128 $ 3,402
Accrued liabilities 5,566 6,331
Deferred revenue 3,194 1,496
Short-term debt - 2,967
Current maturities of long-term obligations 433 895
------------ -----------
Total current liabilities 14,321 15,091
------------ -----------
Long-term obligations 1,181 1,565
------------ -----------
Commitments and contingencies (Notes 9, 12 and 13)
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; 12,190,000 and 12,067,000 shares issued and outstanding
Additional paid-in capital 57,910 57,372
Deferred stock compensation expense (63) (131)
Accumulated deficit (9,175) (9,558)
Treasury stock, at cost (201,000 and 115,000 shares) (1,199) (865)
------------ ----------
Total stockholders' equity 47,485 46,830
------------ ----------
$62,987 $63,486
============ ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-2
<PAGE>
INVISION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Product and service revenue $ 47,742 $ 63,284 $ 56,427
Government contract revenue 10,694 7,210 5,533
------------- ------------- -------------
Total revenues 58,436 70,494 61,960
------------- ------------- -------------
Cost of revenues:
Product and service costs 28,564 34,946 28,027
Government contract costs 7,739 5,223 4,273
------------- ------------- -------------
Total cost of revenues 36,303 40,169 32,300
------------- ------------- -------------
Gross profit 22,133 30,325 29,660
------------- ------------- -------------
Operating expenses:
Research and development 10,443 8,498 8,635
Selling, general and administrative 11,767 12,997 12,323
Acquisition costs - - 685
------------- ------------- -------------
Total operating expenses 22,210 21,495 21,643
------------- ------------- -------------
Income (loss) from operations (77) 8,830 8,017
Interest expense (227) (390) (428)
Interest and other income, net 754 697 242
------------- ------------- -------------
Income before provision for income taxes 450 9,137 7,831
Provision for income taxes 67 1,096 1,192
------------- ------------- -------------
Net income $ 383 $ 8,041 $ 6,639
============= ============= =============
Net income per share:
Basic $ 0.03 $ 0.67 $ 0.60
============= ============= =============
Diluted $ 0.03 $ 0.63 $ 0.55
============= ============= =============
Weighted average shares outstanding:
Basic 12,133 12,046 11,141
Diluted 12,751 12,827 12,166
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-3
<PAGE>
INVISION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 383 $ 8,041 $ 6,639
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,902 2,019 1,288
Amortization of capitalized software development costs 50 - -
Loss on disposal of fixed assets 12 50 -
Bad debt expense 131 15 25
Stock compensation expense 68 68 425
Write-off of purchased in-process research and development - - 230
Changes in assets and liabilities:
Accounts receivable 16,169 (10,101) (9,890)
Inventories (5,635) (1,044) (5,882)
Other current assets (185) (700) (1,925)
Other noncurrent assets 418 490 (800)
Accounts payable 1,726 (1,695) 2,036
Accrued liabilities (765) 2,299 2,850
Deferred revenue 1,621 (1,696) 701
Other long-term obligations 131 211 107
------------ ------------ ------------
Net cash provided by (used in) operating activities 17,026 ( 2,043) (4,196)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (purchases of) short-term investments, net (3,892) 3,084 (5,079)
Purchases of property and equipment (1,651) (2,894) (6,299)
Capitalized software development costs - (803) -
------------ ------------ ------------
Net cash used in investing activities (5,543) ( 613) (11,378)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayments of) short-term debt, net (2,967) (1,201) 2,996
Proceeds from long-term debt - 652 1,491
Repayments of long-term debt (900) (349) (94)
Proceeds from issuance of common stock, net 538 770 22,821
Repurchase of common stock (334) (865) -
------------ ------------ ------------
Net cash provided by (used in) financing activities (3,663) (993) 27,214
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents for the period 7,820 (3,649) 11,640
Cash and cash equivalents at beginning of period 10,462 14,111 2,471
------------ ------------ ------------
Cash and cash equivalents at end of period $ 18,282 $ 10,462 $ 14,111
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 256 $ 343 $ 215
Taxes paid $ 283 $ 842 $ 284
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING AND INVESTING ACTIVITIES:
Sale of fixed assets in exchange for note receivable $ - $ - $ 100
Purchase of intangibles and fixed assets for note payable $ - $ - $ 330
Warrants issued in connection with financing agreements $ - $ - $ 56
Issuance of common stock as compensation $ - $ - $ 240
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-4
<PAGE>
INVISION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
DEFERRED
COMMON STOCK ADDITIONAL STOCK
-------------------- PAID-IN COMPENSATION
SHARES AMOUNT CAPITAL EXPENSE
---------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 9,741 $ 10 $ 33,487 $ (384)
Issuance of common stock pursuant to secondary public offering, net 1,918 2 21,187 -
Issuance of common stock 25 - 686 -
Deferred stock compensation - - 240 185
Issuance of warrant - - 56 -
Exercise of common stock options and warrants 225 - 761 -
Shares issued under the employee stock purchase plan 23 - 185 -
Net income - - - -
---------- ---------- ------------- -------------
BALANCE AT DECEMBER 31, 1997 11,932 12 56,602 (199)
Issuance of common stock 18 - - -
Amortization of deferred stock compensation - - - 68
Exercise of common stock options 145 - 192 -
Shares issued under the employee stock purchase plan 87 - 578 -
Repurchase of common stock - - - -
Net income - - - -
---------- ---------- ------------- --------------
BALANCE AT DECEMBER 31, 1998 12,182 12 57,372 (131)
Amortization of deferred stock compensation - - - 68
Exercise of common stock options 105 - 98 -
Shares issued under the employee stock purchase plan 104 - 440 -
Repurchase of common stock - - - -
Net income - - - -
---------- ---------- ------------- ---------------
BALANCE AT DECEMBER 31, 1999 12,391 $ 12 $ 57,910 $ (63)
========== ========== ============= ===============
<CAPTION>
TREASURY STOCK TOTAL
ACCUMULATED ---------------------- STOCKHOLDERS'
DEFICIT SHARES AMOUNT EQUITY
------------- ---------- ---------- ---------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 $ (24,238) - $ - $ 8,875
Issuance of common stock pursuant to secondary public offering, net - - - 21,189
Issuance of common stock - - - 686
Deferred stock compensation - - - 425
Issuance of warrant - - - 56
Exercise of common stock options and warrants - - - 761
Shares issued under the employee stock purchase plan - - - 185
Net income 6,639 - - 6,639
------------ ----------- ------------ -----------------
BALANCE AT DECEMBER 31, 1997 (17,599) - - 38,816
Issuance of common stock - - - -
Amortization of deferred stock compensation - - - 68
Exercise of common stock options - - - 192
Shares issued under the employee stock purchase plan - - - 578
Repurchase of common stock - (115) (865) (865)
Net income 8,041 - - 8,041
------------ ----------- ------------ -----------------
BALANCE AT DECEMBER 31, 1998 (9,558) (115) (865) 46,830
Amortization of deferred stock compensation - - - 68
Exercise of common stock options - - - 98
Shares issued under the employee stock purchase plan - - - 440
Repurchase of common stock - (86) (334) (334)
Net income 383 - - 383
------------ ----------- ------------ -----------------
BALANCE AT DECEMBER 31, 1999 $ (9,175) (201) $ (1,199) $ 47,485
============ =========== ============ =================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-5
<PAGE>
INVISION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY
InVision Technologies, Inc. ("InVision" or together with its
subsidiaries, the "Company") is the worldwide leader in explosive detection
technology. 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's
wholly-owned subsidiary, Quantum Magnetics, Inc. ("Quantum"), develops and
commercializes patented and proprietary technologies, including key
quadrupole resonance ("QR") patents licensed from the Naval Research
Laboratory, that are based on a state-of-the-art, low-cost version of
magnetic resonance adapted for explosive detection. The Company's principal
facilities are located in Newark, California and San Diego, California, and
the corporate office and manufacturing facility are located in Newark,
California.
InVision was formed in 1990 to design and develop an EDS based on CT
technology and exited the development stage in 1995 upon the first commercial
sales 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. To date, the Company's CTX 5000
system and the CTX 5500 system (together, the "CTX 5000 Series") are the
only EDS certified by the Federal Aviation Administration ("FAA") currently
deployed for use in the inspection of checked luggage on commercial flights.
In April 1999, the CTX 9000 system successfully completed FAA certification
and the Company sold its first system in the third quarter of 1999.
Additionally, in September 1999, the CTX 2500 system successfully completed
FAA certification. The CTX systems are sold to airport and regulatory
authorities and airlines throughout the world.
In 1997, InVision acquired Quantum, a privately-held developer of
explosive detection equipment based on QR technology founded in 1987. With
the acquisition of Quantum, InVision added Quantum's portfolio of
complementary detection technologies. Quantum's 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. Quantum's
research and development activities have historically been funded by various
U.S. government agencies, including the FAA for EDS and the Defense Advanced
Research Projects Agency ("DARPA") for landmine detection. In the third
quarter of 1999, Quantum sold its first QScan 160 EDS to the United States
Navy for mail and other parcel screening applications at an international
location. 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
the fourth quarter of 1999, the unique capabilities of this landmine
detection system were successfully demonstrated in a series of Department of
Defense-sponsored, blind field tests carried out at Fort Leonard Wood,
Missouri.
In February 2000, the Company created WoodVision, a new division formed to
develop its CT technology to optimize the lumber value and yield of harvested
timber. Additionally, in February 2000, the Company acquired Inovec, Inc.
("Inovec"), a manufacturer of advanced optimization equipment for
increasing the yield of the forest products industry for $5.2 million in cash
and stock payable over the next two years, and potentially an additional $1.4
million in cash and stock payable over the next two years based on the
achievement of certain performance milestones. The transaction has been
accounted for as a purchase effective January 1, 2000 (see Note 15).
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the financial statements of
InVision and its wholly-owned subsidiaries, after elimination of intercompany
accounts and transactions. The Company's preparation of these consolidated
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
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
F-6
<PAGE>
INVISION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
revenues associated with Quantum's contracts to conform to the 1999
presentation. Certain other prior year amounts have also been reclassified to
conform to the current year presentation.
STOCK SPLIT
Share information for all periods presented has been retroactively
adjusted to reflect a 1-for-11 reverse stock split of Common Stock and
Preferred Stock effected on March 15, 1996, and a 2-for-1 Common Stock
dividend effected on February 7, 1997.
CASH EQUIVALENTS
The Company considers all liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
SHORT-TERM INVESTMENTS
Short-term investments consist primarily of commercial paper with original
maturities at date of purchase beyond three months and less than 12 months.
Such short-term investments are carried at cost, which approximates fair
market value, due to the short period of time to maturity.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment unless extended
acceptance criteria exist, in which case revenue is recognized upon
completion of such acceptance criteria. 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. Revenue
from maintenance service contracts is recognized ratably over the term of the
contract. Deferred revenue arises from advance payments received from
customers for systems to be delivered within the next year and for
maintenance service not yet performed.
Revenue from government contracts is recognized using the
percentage-of-completion method based on costs incurred to date as a
percentage of total estimated costs at completion. Deferred revenue is
recorded as advance payments are received for work not yet performed.
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 September 30, 2000,
however earlier adoption is permitted. The Company has not yet determined the
impact, if any, that adoption will have on the consolidated financial
statements.
INVENTORIES
Inventories are stated at the lower of cost or market; cost is determined
on a first-in, first-out basis, and includes materials, labor and overhead.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed
using the straight-line method based upon the estimated useful lives of the
assets, which range from two to five years, or the lease term of the
respective assets, if applicable.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes,"
which prescribes the use of the asset and liability method whereby deferred
tax asset or liability account balances are calculated at the balance sheet
date using current tax laws and rates in effect. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations as incurred.
Contractually reimbursable costs for certain research and development
activities are reflected as a reduction to research and development expense
in the period the related costs are incurred.
F-7
<PAGE>
INVISION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes internally generated software development costs 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." SFAS 86 requires capitalization of certain software
development costs after technological feasibility has been established.
Software development costs qualifying for capitalization were not significant
in 1999. In 1998, the Company capitalized software development costs of
$803,000, which are included in other current assets and other noncurrent
assets at December 31, 1999 and 1998. The Company began amortizing the
capitalized software development costs using the straight-line method over
the forecasted units of production. Amortization expense was $50,000 in 1999.
No amortization expense was recorded in 1998 because the product was not yet
available for general release to customers.
STOCK COMPENSATION
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for employee stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees." Accordingly, no compensation
expense has been recognized in the Company's consolidated statements of
operations.
In January 1996, the Company adopted the disclosure-only requirements of
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation" and, accordingly, will continue to account for
stock-based compensation for employees under APB 25.
DEPENDENCE ON SUPPLIERS
The Company's ability to timely deliver its products is dependent upon the
availability of quality components and subsystems used in these products. The
Company depends in part upon subcontractors to manufacture, assemble and
deliver certain items in a timely and satisfactory manner. The Company
obtains certain components and subsystems from single or a limited number of
sources. A significant interruption in the delivery of such items could have
a material adverse effect on the Company's financial condition and results of
operations.
COMPREHENSIVE INCOME
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130 ("SFAS 130"), "Reporting Comprehensive Income." This Statement
establishes standards for reporting and displaying comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. Such items may include foreign currency
translation adjustments, unrealized gains/losses from investing and hedging
activities, and other transactions. The Company has no comprehensive income
other than net income for the periods presented in these consolidated
financial statements.
SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about
Segments of an Enterprise and Related Information." This Statement
establishes standards for the way companies report information about
operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. In accordance with the provisions of SFAS 131, the
Company has determined that it does not have separately reportable operating
segments.
CONCENTRATION OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and accounts
receivable. The Company limits the amount of credit exposure of cash balances
by maintaining its accounts in high credit quality financial institutions.
The Company has accounts receivable from customers (including research and
development reimbursements from the FAA and other government agencies)
located in the United States, Europe, and the Pacific Rim of $7.5 million,
$1.6 million, and $1.5 million, respectively. The Company performs various
evaluations of its customers' financial condition and credit worthiness. At
December 31, 199 and 1998, the allowance for bad debt was $171,000 and
$40,000, respectively. At December 31, 1999, four customers accounted for
41.4%, 12.6%, 11.1% and 10.8% of total accounts receivable.
F-8
<PAGE>
INVISION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company believes the recorded value of financial instruments,
including cash, accounts receivable and long-term debt, approximate fair
value at each balance sheet date.
The Company's total revenues are denominated in U.S. dollars. Significant
customers which represented 10% or more of total revenues for the respective
periods were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
FAA 67% 57% 54%
DARPA 11% - -
</TABLE>
The Company markets its products both internationally and domestically.
Total revenues by geographic region are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
United States $49,830 $49,171 $35,767
Europe 3,084 12,907 10,197
Pacific Rim 2,979 2,792 11,175
Africa 2,093 - -
Middle East 450 5,624 4,821
------- ------- -------
Total Worldwide Sales $58,436 $70,494 $61,960
------- ------- -------
------- ------- -------
</TABLE>
NET INCOME PER SHARE
In 1997, the Company adopted Statement of Financial Accounting Standards
No. 128 ("SFAS 128"), "Earnings Per Share." All historical earnings per share
information has been restated as required by SFAS 128. 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 reflect 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).
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>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- ----------------------
PER PER PER
SHARE SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic net income per share:
Income available to common
stockholders $383 12,133 $0.03 $8,041 12,046 $ 0.67 $6,639 11,141 $ 0.06
Effects of dilutive securities:
Options - 618 - - 781 (0.04) - 1,025 (0.05)
------ ------ ------ ------ ------ ------ ------ ------ ------
Diluted net income per share:
Income available to common
stockholders plus assumed
conversions $383 12,751 $0.03 $8,041 12,827 $ 0.63 $6,639 12,166 $ 0.55
------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------
</TABLE>
NOTE 3. ACQUISITION OF QUANTUM MAGNETICS, INC.
F-9
<PAGE>
INVISION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On September 30, 1997, InVision acquired Quantum, a developer of explosive
detection equipment based upon quadrupole resonance technology. The
transaction has been accounted for as a pooling of interests effective
September 30, 1997; therefore, all prior periods have been restated to
include the historical results of Quantum. Non-recurring expenses associated
with the acquisition, comprised primarily of outside accounting and legal
fees, amounted to $685,000 and have been included in acquisition costs in the
consolidated statements of operations.
Revenues and net income (loss) for the separate companies through the date
of acquisition included in the Company's consolidated statements of
operations are as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1997
-------------
<S> <C>
Revenues:
InVision $38,243
Quantum 3,729
-------------
Total $41,972
-------------
-------------
Net income (loss):
InVision $4,368
Quantum (855)
-------------
Total $3,513
-------------
-------------
</TABLE>
NOTE 4. FEDERAL AVIATION ADMINISTRATION (FAA) CONTRACTS
In December 1996, the Company entered into a contract with the FAA to
deliver 54 CTX 5000 systems to various airports in the United States. The
minimum amount due from the FAA under this contract, including all related
products and associated installation and support services, was $52.2 million.
In 1998, the Company received modifications to the contract in the amount of
$17.3 million for an additional 15 CTX 5500 systems as well as an order to
upgrade all 59 CTX 5000 systems previously purchased by the FAA to the
Company's second-generation CTX 5500 system. In 1999, the Company received
further modifications to the contract in the amount of $32.4 million for an
additional 36 CTX 5500 systems. At December 31, 1999, this contract has been
completed and all units were shipped under the contract. The Company is
currently in negotiations for new CTX 5500 and CTX 2500 contracts.
In October 1999, the Company received a letter contract of $2.8 million
with a potential value of more than $80 million over three years from the FAA
for CTX 9000 systems and accessories.
NOTE 5. RESEARCH AND DEVELOPMENT CONTRACTS AND GRANTS
The Company has been awarded various research and development contracts
and grants by the FAA and other government agencies to share in the costs of
developing and enhancing the Company's products. During 1999, 1998 and 1997,
the Company was entitled to reimbursements of $0.7 million, $3.6 million and
$2.1 million, respectively, under research and development contracts and
grants. Such reimbursements have been reflected as a reduction to research
and development expense in each period presented. Billings under such
research and development contracts and grants are rendered monthly on the
basis of actual costs incurred. At December 31, 1999 and 1998, the related
receivable balances from these contracts and grants were $47,000 and $2.6
million, respectively.
NOTE 6. DEBT
LINES OF CREDIT
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
F-10
<PAGE>
INVISION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 (8.5% at December 31, 1999) and are secured by all of the
Company's assets other than its intellectual property. The agreements 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 December 31, 1999, the Company was in default of a covenant set
forth in the loan agreement. In February 2000, the Company received a waiver
of the default under the loan agreement from the bank for the period ended
December 31, 1999. Proceeds of loans under both lines of credit may be used
for general corporate purposes. At December 31, 1999, the Company had
outstanding guarantees to customers through issuance of letters of credit
secured by the lines of credit totaling $2.2 million. There were no
outstanding borrowings under the lines of credit at December 31, 1999. The
remaining available borrowing capacity under the lines of credit was $4.3
million at December 31, 1999. The agreements expire in April 2000 and the
Company is in the process of renewing the revolving line of credit agreements
with the bank.
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 provides for borrowings up to $0.5 million. Borrowings under this
agreement bear interest at the bank's prime rate (8.5% at December 31, 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 (6.14%
at December 31, 1999) during the amortization period. Borrowings are secured
by the assets purchased or financed. At December 31, 1999, the Company had an
outstanding $0.5 million term loan due June 2003 and a $0.4 million term loan
due November 2001 from drawdowns under a prior year line of credit. The term
loans bear interest of 8.99% and 9.03%, respectively. The Company had
remaining borrowing capacity of $0.5 million under the current year line of
credit as of December 31, 1999. The agreement expires in April 2000 and the
Company is in the process of renewing the line of credit agreement with the
bank.
NOTE 7. STOCKHOLDERS' EQUITY
COMMON STOCK
In 1999, the Company repurchased 85,600 shares of its Common Stock at
prevailing market prices for a total of $334,000. In 1998, the Company
repurchased 114,900 shares of its Common Stock at prevailing market prices
for a total of $865,000.
Under the terms of the acquisition of Quantum in September 1997, 777,000
shares of Common Stock have been either issued to Quantum shareholders in
exchange for all the Quantum capital stock outstanding or reserved for
issuance in connection with Quantum common stock options outstanding prior to
the acquisition which were converted into options to purchase InVision Common
Stock.
In 1997, the Company sold 1,875,000 shares of Common Stock in an
underwritten public offering at $12.00 per share. The offering generated net
proceeds to the Company of approximately $21.2 million including proceeds
from the underwriters over-allotment option.
In connection with the Company's IPO, Donald & Co. Securities Inc., the
underwriter, received, under the terms of the underwriting agreement, a
four-year warrant to purchase 180,000 shares of the Company's Common Stock at
a price of $6.60 per share commencing April 23, 1997. As of December 31,
1999, no shares of the Company's Common Stock had been purchased under the
warrant.
NOTE 8. EMPLOYEE STOCK AND BENEFIT PLANS
EQUITY INCENTIVE PLAN
In March 1996, the Board of Directors approved the amended and restated
1991 Stock Option Plan, which was renamed the Equity Incentive Plan (the
"Equity Plan"). The Equity Plan provides for the granting of incentive and
non-qualified stock options, stock bonus awards, rights to purchase
restricted stock and stock appreciation rights (together "Stock Awards") for
the purchase of up to an aggregate of 2,621,818 shares of the Company's
Common Stock by officers,
F-11
<PAGE>
INVISION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
employees, consultants and directors of the Company. The Board of Directors
is responsible for administration of the Equity Plan. The Board of Directors
determines the terms of each Stock AwardOptions granted under the Equity Plan
generally vest over a four year period. In the event of a "change in control"
transaction (as defined in the Equity Plan), Stock Awards then outstanding
shall be continued or assumed by the surviving entity or similar awards shall
be substituted therefor. If the surviving entity refuses to do so, then the
vesting of or rate of lapse of repurchase rights on such Stock Awards shall
accelerate in full to the date immediately prior to the effective date of
such change in control transaction. With respect to officers and directors
only, even if the surviving entity continues, assumes or substitutes Stock
Awards, the vesting or rate of lapse of repurchase rights on such Stock
Awards shall accelerate in full upon an involuntary termination without
"cause" or a "constructive termination" as those terms are defined in the
officers' and directors' respective option agreements within a year following
the effective date of the change in control transaction.
Incentive and non-qualified stock options may be granted at an exercise
price per share of not less than 85% of the fair value per common share on
the date of the grant (not less than 110% of the fair value in the case of
holders of more than 10% of the Company's voting stock). Options granted
under the Equity Plan generally expire ten years from the date of the grant
(five years for incentive stock options granted to holders of more than 10%
of the Company's voting stock). Options granted generally vest 25% one year
after issuance and 1/16th each quarter thereafter for three years.
In October 1998, the Company offered employees and consultants the
opportunity to participate in an option repricing program. Under the program,
each employee and consultant could elect on or before November 9th that his
or her existing option issued under the Company's Equity Plan be converted
into a repriced option. The per share exercise price of each repriced option
would be equal to the greater of the fair market value of the Company's
Common Stock on the conversion date (November 9, 1998) or $6.93. In return
for the lower exercise price, the repriced options issued would be subject to
a blackout period whereby no options could be exercised between November 9,
1998 and May 8, 1999. The number of shares vested under the converted option
would vest immediately under the repriced option. All remaining shares
subject to the repriced option will vest over a period that is equivalent to
the vesting period remaining under the converted option. On November 9, 1998,
the fair market value of the Company's Common Stock was $6.50 and options for
a total of 313,986 shares were repriced at $6.93 per share. No officers of
the Company repriced options under the program. The weighted average per
share exercise price of the outstanding shares subject to the options prior
to conversion was $10.55 and the range of exercise prices was $7.69 - $14.56.
In connection with grants of stock options to employees and directors, the
Company recorded $240,000 of deferred compensation representing the
difference between the deemed fair value of the Company's Common Stock and
the exercise price at the date of grant in 1997. No such deferred stock
compensation was recorded in 1998 and 1999. Amortization of deferred stock
compensation was $68,000, $68,000, $425,000 in 1999, 1998, and 1997,
respectively. The remaining deferred stock compensation balance of $63,000 is
being amortized over the remaining vesting period of the related options.
The activity under the Equity Plan was as follows (in thousands, except
per share data):
F-12
<PAGE>
INVISION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 1998 1997
--------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 1,759 $4.09 1,737 $4.44 1,152 $1.93
Granted 504 $4.98 635 $6.89 735 $7.96
Exercised (105) $0.93 (145) $1.34 (109) $1.05
Canceled (un-vested) (97) $6.33 (357) $9.82 (41) $6.09
Expired (vested) (84) $6.89 (111) $10.85 - $3.33
------ ------ ------
Outstanding at end of period 1,977 $4.25 1,759 $4.09 1,737 $4.44
------ ------ ------
------ ------ ------
Options exercisable at period end 1,260 $3.65 1,094 $2.70 853 $1.17
Weighted average grant date fair value of
options granted during the year $2.74 $3.68 $4.34
Weighted average grant date fair value of
options granted during the year at exercise
prices above market prices $- $6.93 $-
Weighted average grant date fair value of
options granted during the year at exercise
prices below market prices $- $- $7.30
</TABLE>
In February 2000, options for a total of 411,400 shares were granted under
the Equity Plan.
Information relating to stock options outstanding under the Equity Plan at
December 31, 1999 is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- -----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.55 - 0.55 330 5.0 $ 0.55 330 $ 0.55
$0.97 - 1.10 312 5.8 $ 1.10 312 $ 1.10
$3.30 - 4.50 288 9.0 $ 4.10 62 $ 3.86
$5.06 - 6.94 1,043 8.3 $ 6.38 554 $ 6.89
$8.75 - 11.25 4 7.5 $ 9.51 2 $ 9.61
----------- -----------
1,977 7.5 $ 4.25 1,260 $ 3.65
----------- -----------
----------- -----------
</TABLE>
2000 NON-OFFICER EQUITY INCENTIVE PLAN
In February 2000, the Board of Directors approved the 2000 Non-Officer
Equity Incentive Plan (the "Non-Officer Equity Plan"). The Non-Officer Equity
Plan provides for the granting of non-qualified stock options, stock bonuses
and rights to purchase restricted stock ("Stock Awards") up to an aggregate
of 400,000 shares of the Company's Common Stock to employees and consultants
of the Company who are not officers, directors or persons subject to Section
16 of the Securities Exchange Act of 1934. The Board of Directors is
responsible for administration of the Non-Officer Equity Plan. The Board of
Directors determines the terms of each Stock Award. With respect to
non-qualified stock options, which are the only Stock Awards to be granted to
date, the Board determines the term of each option, option exercise price,
number of
F-13
<PAGE>
INVISION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
shares for which each option is granted and the rate at which each option is
exercisable. Options granted under the Option Plan generally vest over a four
year period. In the event of a "change in control" transaction (as defined in
the Non-Officer Equity Plan), Stock Awards then outstanding shall be
continued or assumed by the surviving entity or similar awards shall be
substituted therefor. If the surviving entity refuses to do so, then the
vesting of or rate of lapse of repurchase rights on such Stock Awards shall
accelerate in full to the date immediately prior to the effective date of
such change in control transaction.
Non-qualified stock options are granted at an exercise price per share of
not less than 85% of the fair market value per common share on the date of
the grant. Options granted under the 2000 Non-Officer Equity Plan generally
expire ten years from the date of the grant. Options granted generally vest
25% one year after issuance and 1/16th each quarter thereafter for three
years. In February 2000, options for a total of 306,910 shares were granted
under the Non-Officer Equity Plan.
1996 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted in March 1996. A total of 300,000 shares of Common Stock has been
reserved for issuance under the Purchase Plan. In December 1999, an
amendment, as approved by the Board of Directors and subject to stockholders'
approval, increased the number of reserved shares to 450,000. As of December
31, 1999, 207,000 shares have been issued under the Purchase Plan.
<PAGE>
INVISION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FAIR VALUE DISCLOSURES
Had compensation cost for options granted in 1999, 1998, and 1997 under
the Company's Option Plan been determined based on the fair value at the
grant dates, as prescribed in SFAS 123, the Company's net income and pro
forma net income (loss) per share would have been as follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Net income (loss):
As reported $ 383 $8,041 $6,639
Pro forma $(1,223) $6,481 $6,233
Pro forma net income (loss) per share:
Basic:
As reported $ 0.03 $ 0.67 $ 0.60
Pro form $ (0.10) $ 0.54 $ 0.56
Diluted:
As reported $ 0.03 $ 0.63 $ 0.55
Pro forma $ (0.10) $ 0.51 $ 0.51
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the minimum value method with the following assumptions used for grants
during the applicable period:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
Risk free rate of return 5.10- 5.31% 4.43 - 4.79% 5.74 - 6.29%
Weighted average expected option term 4.3 years 3.8 years 4.3 years
Volatility rate 65 % 72 % 70 %
Dividend yield 0% 0% 0%
</TABLE>
1997 EMPLOYEE 401(K) PLAN
The InVision Technologies, Inc. 401(k) Plan (the "401(k) Plan") was
established in 1992 to provide retirement and incidental benefits for its
employees. As allowed under Section 401(k) of the Internal Revenue Code, the
401(k) Plan provides tax-deferred salary deductions for eligible employees.
Employees may contribute up to 20% of their annual compensation to the 401(k)
Plan, limited to a maximum amount as set periodically by the Internal Revenue
Service. Beginning in July 1997, the Company began matching employee
contributions at the rate of $0.50 on the dollar up to a maximum of 6% of the
employee's gross compensation. All matching contributions vest immediately.
Company matching contributions to the 401(k) Plan totaled $351,000, $294,000
and $170,000 in 1999, 1998 and 1997, respectively.
NOTE 9. COMMITMENTS
The Company leases facilities and equipment under non-cancelable leases
expiring at various times through 2007. The existing facilities lease
includes an option to renew for an additional five years through 2012. Future
minimum lease payments under these leases at December 31, 1999 are as follows
(in thousands):
F-15
<PAGE>
INVISION TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDING DECEMBER 31, LEASES LEASES
-------------------------------------- --------- -------
<S> <C> <C>
2000 $ 1,460 $ 106
2001 1,504 73
2002 1,362 34
2003 1,266 -
2004 1,227 -
Years thereafter 3,326 -
--------- -------
$ 10,145 213
=========
Less: amount representing interest (30)
-------
Present value of net minimum lease payments 183
Less: current portion of capital lease obligations (86)
-------
Long-term capital lease obligations $ 97
=======
</TABLE>
Rent expense for 1999, 1998, and 1997 was $1,445,000, $1,357,000, and
$1,105,000, respectively.
The lease on the corporate office and manufacturing facility in Newark,
California includes scheduled base rent increases over the term of the lease.
The total amount of base rent payments is being charged to expense on the
straight-line method over the term of the lease. In addition to the base rent
payment, the Company pays a monthly allocation of the building's operating
expenses. At December 31, 1999 and 1998, the Company has recorded long-term
deferred rent of $449,000 and $318,000, respectively, to reflect the excess of
rent expense over cash payments since inception of the lease.
The Company has received an advance payment from a customer for a
maintenance service contract covering two years of service beyond the one-year
warranty period. Revenue from this contract was deferred and will be recognized
ratably over the term of the contract. At December 31, 1999 and 1998, the
Company has recorded long-term deferred revenue of $107,000 and $184,000,
respectively.
NOTE 10. INCOME TAXES
<TABLE>
<CAPTION>
For 1999, 1998 and 1997, the provision for income taxes consists of the following (in thousands):
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal $ 188 $ 756 $ 927
State 4 200 200
Foreign 9 140 65
-------- -------- --------
201 1,096 1,192
Deferred:
Federal benefit (134) - -
-------- -------- --------
Total provision $ 67 $ 1,096 $ 1,192
======== ======== ========
The Company's actual effective tax rate for 1999, 1998 and 1997 differs
from the U.S. statutory income tax rate as follows:
F-16
<PAGE>
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
-------- -------- --------
U.S. federal statutory rate 35.0 % 35.0 % 35.0 %
State taxes, net of federal tax benefit 0.3 0.9 2.6
Acquisition related tax benefit - - 3.8
Utilization of operating loss carryovers (35.1) (23.5) (25.3)
Other 14.8 (0.4) (0.9)
-------- -------- --------
Effective tax rate 15.0 % 12.0 % 15.2 %
-------- -------- --------
</TABLE>
F-17
<PAGE>
<TABLE>
<CAPTION>
Deferred tax assets (liabilities) consist of the following:
DECEMBER 31,
---------------------
1999 1998
-------- --------
<S> <C> <C>
Assets:
Net operating loss carry forward $ 1,654 $ 2,345
Research and development credits 1,384 941
Reserves 2,242 1,670
Other 690 159
-------- --------
5,970 5,115
Liabilities:
Other (422) (339)
-------- --------
Valuation allowance (5,414) (4,776)
-------- --------
Net deferred tax assets $ 134 $ -
======== ========
</TABLE>
The Company provides a valuation allowance for deferred tax assets when
it is more likely than not, based upon currently available evidence including
its prior history of losses, that some portion or all of the deferred tax assets
will not be realized.
At December 31, 1999, the Company had federal net operating loss
carryforwards of approximately $5.0 million available to reduce future federal
taxable income. The Company's net operating loss carryforwards expire from 2007
to 2011. The tax benefit of the net operating loss and credit carryforwards may
be limited due to the impact of the Tax Reform Act of 1986. Events which may
cause the tax benefit to be limited include, but are not limited to, a
cumulative stock ownership change of more than 50%, as defined, over a three
year period.
NOTE 11. RELATED PARTY TRANSACTIONS
In 1999, 1998, and 1997, the Company recorded professional and
consulting fees of $199,000, $205,000, and $165,000, respectively, as
compensation to the Company's directors for services provided as members of the
Board of Directors as well as consulting services rendered to the Company not in
connection with their services as directors.
In August 1996 and as amended in September 1999, the Company entered
into a consulting agreement with BGI, Inc. ("BGI"), a Virginia-based
international consulting firm engaged to assist the Company with enhancing its
methods, strategies and contacts to support the marketing of the CTX 5000 Series
to the U.S. Government. In March 1998, Ambassador Busby, a controlling
shareholder of BGI, was elected to the Company's Board of Directors. The Company
paid consulting fees of $120,000, $240,000 and $240,000 1999, 1998 and 1997,
respectively, for BGI consulting services. BGI also received, in August 1996, an
option for 6,586 shares of the Company's Common Stock with vesting of these
shares based on the achievement of certain milestones. Based on these milestones
2,684 and 3,902 shares vested in 1998 and 1997, respectively.
NOTE 12. LICENSE AGREEMENTS
In April 1999, Quantum entered into a Technology License Agreement with
International Business Machines (IBM). This agreement is a 10-year,
non-exclusive, non-transferable, worldwide license for certain detection
technology. A one-time license fee was paid to IBM. Quantum is subject to
royalty payments based upon the net sales price of certain products sold or
otherwise transferred by Quantum. There was no minimum royalty payment and no
sales that would have resulted in a royalty payment to IBM in 1999.
In October 1994, Quantum entered into a twelve-year license agreement
with a third party. As amended in May 1997, the agreement provides Quantum with
a non-exclusive, irrevocable license to certain in-process detection technology
(the "Superconductor Technology"), as well as equipment with a fair value of
$100,000 in exchange for a $330,000 note payable due in unequal quarterly
payments plus 11% interest. The fair value of the technology license of $230,000
was charged to operations in May 1997. The balance of the note payable was paid
in full in January 1998.
F-18
<PAGE>
In June 1997, Quantum entered into a joint venture to perform research
and development related to certain detection technologies. In exchange for a 38%
ownership interest in the joint venture, Quantum granted a non-exclusive,
royalty free, perpetual, transferable sub-license on the Superconductor
Technology, agreed that the joint venture will be the sole source of fabrication
and testing of products developed by the joint venture, and agreed to guarantee
one-half of a $200,000 working capital loan to the joint venture. In connection
with the formation of the joint venture, Quantum sold equipment to the joint
venture in exchange for an eleven-year note receivable of $100,000, bearing
interest at 6.7% per annum. In January 1999, Quantum sold sufficient shares to
reduce its ownership in the joint venture to 10%, was released from its
obligation to guarantee one-half of the working capital loan to the joint
venture and agreed to extend the payment holiday under its note receivable from
the joint venture to July 10, 2001.
In March 1995, Quantum executed a ten-year exclusive license agreement
with a third party. Quantum is subject to royalty payments based on a percentage
of the net sales price of certain products made, used or sold. Minimum annual
royalties of $20,000 are due beginning in calendar year 1997 through the
remaining term of the agreement. Quantum did not incur royalty expense under
this agreement in 1995 or 1996, and paid the minimum royalty of $20,000 for 1997
and 1998. In January 1999, Quantum and the licensor agreed to modify the license
by expanding the field of use, increasing the minimum annual royalty to $70,000
and extending the term until January 2009. Quantum paid a one-time fee of
$50,000 to obtain such modification and extension and paid the minimum annual
royalty of $70,000 for 1999.
In recognition of development costs incurred by Quantum Design, Inc.
("QD") prior to the spin-out of Quantum, Quantum agreed to pay QD a royalty
rate of 4% of net sales of certain products, whether sold by Quantum or any
licensee, for a period of six years from the effective date of the agreement,
April 15, 1994. Quantum paid the minimum royalty of $50,000 in each of the
years 1997 and 1998. In 1999, there was no minimum royalty payment and no
sales that would have resulted in a royalty payment to QD.
NOTE 13. 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. No specific amount of damages has been requested.
This complaint was filed by Vivid following efforts by Quantum and ESI,
a private investigator hired by Quantum, to investigate the alleged theft of
intellectual property from Quantum by a former key employee hired by Vivid and
to bring certain evidence to the attention of the Federal Bureau of
Investigation ("FBI") and the United States Attorney for the Southern District
of California. On February 10, 1999, defendants InVision and Quantum filed a
motion for a temporary stay of all civil proceedings. On March 5, 1999, the
judge granted the motion. The stay remained in effect until February 19, 2000.
The Company is currently awaiting a response from Vivid to its discovery
requests served prior to the initial stay. Management believes it has defenses
to all the allegations contained in the complaint. In addition, it 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.
F-19
<PAGE>
<TABLE>
<CAPTION>
NOTE 14. BALANCE SHEET COMPONENTS (IN THOUSANDS)
DECEMBER 31,
---------------------
1999 1998
-------- --------
<S> <C> <C>
Accounts receivable, net:
Billed $ 6,845 $ 20,452
Unbilled 3,877 6,183
Other receivables 82 338
-------- --------
Subtotal 10,804 26,973
Less: allowance for doubtful accounts (171) (40)
-------- --------
Total $ 10,633 $ 26,933
======== ========
Inventories:
Raw material and purchased components $ 10,325 $ 6,272
Work-in-process 6,819 4,365
Finished goods 316 1,188
-------- --------
Total $ 17,460 $ 11,825
======== ========
Property and equipment, net:
Machinery and equipment $ 5,144 $ 4,705
Self constructed assets 4,316 3,697
Furniture and fixtures 1,113 1,078
Leasehold improvements 2,965 2,939
-------- --------
Subtotal 13,538 12,419
Less: accumulated depreciation and amortization (6,742) (4,384)
-------- --------
Total $ 6,796 $ 8,035
======== ========
</TABLE>
Self-constructed assets are manufactured by the Company for use in
system testing and support, and include the cost of parts and materials, and an
overhead allocation. The Company depreciates self-constructed assets over their
respective estimated useful lives which range from three to five years.
At December 31, 1999 and 1998, the Company had $343,000 and $614,000,
respectively, of capitalized lease equipment and related accumulated
amortization of $134,000 and $273,000, respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
Accrued liabilities:
Warranty and other reserves $ 2,478 $ 2,426
Accrued employee compensation 1,492 1,425
Income taxes 906 1,377
Other 690 1,103
--------- ---------
Total $5,566 $6,331
========= =========
</TABLE>
NOTE 15. SUBSEQUENT EVENT
In February 2000, the Company acquired Inovec, Inc. ("Inovec"), a
manufacturer of advanced optimization equipment 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 transaction has been accounted for as a purchase effective
January 1, 2000.
F-20
<PAGE>
<TABLE>
<CAPTION>
InVision Technologies, Inc.
Schedule II-Valuation and Qualifying Accounts
Years Ended December 31, 1999, 1998 and 1997
(in thousands)
Additions
--------------------------------
Balance at Charged to Charged to Balance at
beginning costs and other end of
of period expenses accounts Deductions period
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
1999 $ 40 $ 170 $ - $ 39 $ 171
1998 $ 25 $ 15 $ - $ - $ 40
1997 $ - $ 25 $ - $ - $ 25
Reserves for inventory
1999 $ 630 $ 549 $ - $ - $ 1,179
1998 $ 438 $ 240 $ - $ 48 $ 630
1997 $ 174 $ 334 $ - $ 70 $ 438
</TABLE>
<PAGE>
AMENDMENT NO. 1 TO THE TECHNOLOGY LICENSE AGREEMENT
Pursuant to Section 9.4 ("Amendments and Waivers") of the Technology License
Agreement, the parties agree to amend the Technology License Agreement as
follows:
IN SECTION 1.4 THE FOLLOWING CHANGES ARE MADE: Subparagraph (ii) is
deleted and replaced with the following: "(ii) detection equipment for all
applications related to locating weapons, explosives, currency, narcotics or
other similar items in checked baggage, carry-on baggage, mail, freight,
parcels and other containers or other similar applications; and (iii) log
scanning.
ADD A NEW SECTION 1.9: "Acquiror" means any party or entity who, after
the Effective Date of this Agreement, directly or indirectly acquires or
obtains control of substantially all of the assets or capital securities of a
party, whether by merger, acquisition, or otherwise.
IN SECTION 2.1, THE FOLLOWING CHANGES ARE MADE: (a) delete the word
"perpetual" in line 2. and (b) at the end of the first paragraph in Section
2.1 add "Notwithstanding anything herein to the contrary, nothing in this
Agreement shall be construed to grant to Licensee a license to the
Confidential Information or Patents of an Acquiror of Imatron or any
Affiliate of such Acquirior other than those held by Imatron or an Affiliate
of Imatron immediately prior to the effective date of the transaction by
which that party becomes an Acquiror."
IN SECTION 2.2 THE FOLLOWING CHANGES ARE MADE: (a) delete the word
"perpetual" in line 2. and (b)at the end of the section add
"Notwithstanding anything herein to the contrary, nothing in this Agreement
shall be construed to grant to Imatron a license to the Confidential
Information or Patents of an Acquiror of Licensee or any Affiliate of such
Acquirior other than those held by Licensee or an Affiliate of Licensee
immediately prior to the effective date of the transaction by which that
party becomes an Acquiror."
IN SECTION 6.1, THE FOLLOWING CHANGES ARE MADE: (a) after the words
"written sublicenses" and before the words "under the technology rights"
in the third line of the section, insert the following phrase (including the
punctuation): ", either royalty bearing or royalty-free, without the right
to sublicense further," and (b) delete the phrase "and shall require that
further sublicenses also contain such provisions" in the last two lines of
the section.
IN SECTION 6.2, THE FOLLOWING CHANGES ARE MADE: (a) delete the phrase
"or by any sublicensee of the Sublicensing Party" in the section's fifth
line and (b) delete the phrase "and shall require that further sublicenses
also contain such provisions" in lines thirteen and fourteen.
IN SECTION 6.3, THE FOLLOWING CHANGE IS MADE: delete the phrase "or by
any sublicensee of the Sublicensing Party" in the second and third lines of
the section.
ADD A NEW SECTION 6.4: "IMPLIED SUBLICENSES. Licensee may sell, lease
or give away a product that embodies the Confidential Information or the Imatron
Patents, and Imatron may sell, lease or give away a product that embodies the
Licensee Confidential Information or the Licensee Patents, without granting a
sublicense under Sections 6.1, 6.2 and 6.3 of this
<PAGE>
Agreement; provided that the terms of such a sale, lease or gift limit the
use of any technology licensed under this Agreement solely to the operation
of the purchased product."
IN SECTION 8.1 THE FOLLOWING CHANGES ARE MADE: Delete "TERMINATION BY
MUTUAL AGREEMENT. This Agreement may be terminated at any time by and in
accordance with" and replace with "TERMINATION. This Agreement shall
terminate ten years after the execution of the Joint Research Effort Between
InVision Technologies, Inc. and Imatron, Inc. Unless sooner terminated
by...."
IN SECTION 8.3 THE FOLLOWING CHANGES ARE MADE: at the end of the section
add: "The termination of this Agreement shall not terminate any sublicense
implied by a product sale under Section 6.4 of this Agreement."
IN SECTION 9.3, THE FOLLOWING CHANGE IS MADE: after the words "all of
its business or assets" in lines eight and nine insert the following phrase
(including punctuation): ", in which event no intellectual property of such
succeeding party other than the intellectual property acquired by such
succession shall be subject to the rights and licenses granted herein".
Signed and effective on July 12, 1999 by the parties named below.
INVISION TECHNOLOGIES, INC. IMATRON, INC.
By: /s/ Sergio Magistri By: /s/ S. Lewis Meyer
- -------------------------------- -----------------------
Sergio Magistri S. Lewis Meyer
President and Chief President and Chief
Executive Officer Executive Officer
<PAGE>
INVISION TECHNOLOGIES, INC. Exhibit 10.35
KEY EMPLOYEE AGREEMENT
FOR
ALFRED V. LARRENAGA
This Employment Agreement ("Agreement") is entered into as of the 27th
day of May, 1999, by and between Alfred Larrenaga ("Executive") and INVISION
TECHNOLOGIES, INC. (the "Company").
WHEREAS, the Company desires to employ Executive to provide personal
services to the Company, and wishes to provide Executive with certain
compensation and benefits in return for his services; and
WHEREAS, Executive wishes to be employed by the Company and provide
personal services to the Company in return for certain compensation and
benefits;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, it is hereby agreed by and between the parties hereto as
follows:
1. EMPLOYMENT BY THE COMPANY.
--------------------------
1.1 The effective date of this Agreement shall be
June 21, 1999.
1.2 Subject to terms set forth herein, the Company agrees to
employ Executive in the position of Senior Vice President and Chief Financial
Officer and Executive hereby accepts such employment effective as of June 21,
1999 (the "Employment Date"). During the term of his employment with the
Company, Executive will devote his best efforts and substantially all of his
business time and attention (except for vacation periods as set forth herein
and reasonable periods of illness or other incapacity permitted by the
Company's general employment policies) to the business of the Company.
1.3 Executive shall serve in an executive capacity and shall
perform such duties as are customarily associated with his then current
title, consistent with the Bylaws of the Company and as required by the
Company's Board of Directors (the "Board") and Chief Executive Officer.
Executive shall perform his duties at such place or places, as the Company
shall reasonably designate.
1.4 The employment relationship between the parties shall also
be governed by the general employment policies and practices of the Company,
including those relating to protection of confidential information and
assignment of inventions, except that when the terms of this Agreement differ
from or are in conflict with the Company's general employment policies or
practices, this Agreement shall control.
1.
<PAGE>
2. COMPENSATION.
-------------
2.1 SALARY. Executive shall receive for services to be
-------
rendered hereunder an annualized base salary of $170,000, payable in accordance
with the Company's regular payroll schedule. Such compensation is subject to
change in accordance with the policies of the Company, as determined by its
Board of Directors, in force from time to time.
2.2 BONUS. Executive shall be eligible to receive a 1999
------
annualized target bonus, pro-rated by number of months remaining, in the
amount of $75,000.00, less standard deductions, payable first quarter 2000.
Such bonus is based on reaching the corporate and personal objectives as
outlined in the executive compensation plan. Personal objectives are to be
determined within 2 months from start date. The bonus program is subject to
change in accordance with the policies of the Company, as determined by the
Board of Directors in force from time to time.
2.3 STOCK OPTIONS. The Company will grant to Executive under
--------------
the InVision Technologies, Inc. Equity Incentive Plan ("the Plan") options to
purchase 60,000 shares of the Company's common stock at an exercise price
determined by the fair market value at the time of the Board's approval of
the grant. An additional 30,000 options will be granted on or before January
1, 2000 pending Shareholder approval of additional allocation of shares to
the Plan. Executive acknowledges that there are no further commitments on
behalf of the Company to grant to Executive any additional options. The Board
shall, however, consider granting additional options on an annual basis at
its discretion.
3. PROPRIETARY INFORMATION OBLIGATIONS.
------------------------------------
3.1 AGREEMENT. Executive agrees to execute and abide by the
----------
Proprietary Information and Inventions Agreement attached hereto as Exhibit A
as a condition of employment.
3.2 REMEDIES. Executive's duties under the Proprietary
---------
Information and Inventions Agreement shall survive termination of his
employment with the Company. Executive acknowledges that a remedy at law for
any breach or threatened breach by him of the provisions of the Proprietary
Information and Inventions Agreement would be inadequate, and he therefore
agrees that the Company shall be entitled to injunctive relief in case of any
such breach or threatened breach.
4. OUTSIDE ACTIVITIES.
-------------------
4.1 Except with the prior written consent of the Company's
Board of Directors, Executive will not during the term of this Agreement
undertake or engage in any other employment, occupation or business enterprise,
other than ones in which Executive is a passive investor. Executive may engage
in civic and not-for-profit activities so long as such
2.
<PAGE>
activities do not materially interfere with the performance of his duties
hereunder.
4.2 Except as permitted by Section 4.3, Executive agrees not
to acquire, assume or participate in, directly or indirectly, any position,
investment or interest known by him to be adverse or antagonistic to the
Company, its business or prospects, financial or otherwise.
4.3 During the term of his employment by the Company, except
on behalf of the Company, Executive will not directly or indirectly, whether as
an officer, director, stockholder, partner, proprietor, associate,
representative, consultant, or in any capacity whatsoever engage in, become
financially interested in, be employed by or have any business connection
with any other person, corporation, firm, partnership or other entity
whatsoever which were known by him to compete directly with the Company,
throughout the world, in any line of business engaged in (or planned to be
engaged in) by the Company; provided, however, that anything above to the
contrary notwithstanding, he may own, as a passive investor, securities of
any competitor corporation, so long as his direct holdings in any one such
corporation shall not in the aggregate constitute more than 1% of the voting
stock of such corporation.
4.4 FORMER EMPLOYMENT. Executive represents and warrants that his
------------------
employment by the Company will not conflict with and will not be constrained by
any prior employment or consulting agreement or relationship. Executive
represents and warrants that he does not possess confidential information
arising out of prior employment which, in his best judgement, would be utilized
in connection with his employment by the Company, except in accordance with
agreements between his former employer and the Company.
5. TERMINATION OF EMPLOYMENT.
--------------------------
5.1 TERMINATION WITHOUT CAUSE.
--------------------------
(A) The Company and Executive shall have the right to
terminate Executive's employment with the Company at any time without cause.
(B) In the event Executive's employment is terminated
without cause, the Company shall continue to pay Executive his base salary,
less standard deductions and withholdings, from the date of termination for
six (6) months, or until he obtains other employment, whichever occurs earlier.
5.2 TERMINATION FOR CAUSE.
----------------------
(A) In the event Executive's employment is terminated
at any time with cause, he will not be entitled to severance pay, pay in lieu
of notice or any other such compensation.
(B) "Cause" for termination shall mean: (a) indictment or
3.
<PAGE>
conviction of any felony or of any crime involving dishonesty; (b)
participation in any fraud against the Company; (c) breach of Executive's
duties to the Company, including persistent unsatisfactory performance of job
duties; (d) intentional damage to any property of the Company; or (e) conduct
by Executive which in the good faith and reasonable determination of the
Board demonstrates gross unfitness to serve.
5.3 VOLUNTARY OR MUTUAL TERMINATION.
--------------------------------
(A) Executive may voluntarily terminate his employment
with the Company upon sixty (60) days' notice, after which no further
compensation will be paid to Executive.
(B) In the event Executive voluntarily terminates his
employment, he will not be entitled to severance pay, pay in lieu of notice
or any other such compensation.
6. NONINTERFERENCE.
----------------
While employed by the Company, and for two (2) years
immediately following the Termination Date, Executive agrees not to interfere
with the business of the Company by:
(A) soliciting, attempting to solicit, inducing, or
otherwise causing any employee of the Company to terminate his or her
employment in order to become an employee, consultant or independent
contractor to or for any competitor of the Company; or
(B) directly or indirectly soliciting the business of
any customer of the Company which at the time of termination or one year
immediately prior thereto was listed on the Company's customer list.
7. GENERAL PROVISIONS.
-------------------
7.1 NOTICES. Any notices provided hereunder must be in writing
--------
and shall be deemed effective upon the earlier of personal delivery (including
personal delivery by telex) or the third day after mailing by first class mail,
to the Company at its primary office location and to Executive at his address
as listed on the Company payroll.
7.2 SEVERABILITY. Whenever possible, each provision of this
-------------
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provisions had never been contained herein.
7.3 WAIVER. If either party should waive any breach of any
-------
provisions of
4.
<PAGE>
this Agreement, he or it shall not thereby be deemed to have
waived any preceding or succeeding breach of the same or any other provision of
this Agreement.
7.4 COMPLETE AGREEMENT. This Agreement and its Exhibit,
-------------------
constitute the entire agreement between Executive and the Company and it is the
complete, final, and exclusive embodiment of their agreement with regard to this
subject matter. It is entered into without reliance on any promise or
representation other than those expressly contained herein, and it cannot be
modified or amended except in a writing signed by an officer of the Company.
7.5 ASSIGNMENT. Neither this Agreement nor any rights or
-----------
obligations hereunder may be assigned by the Company or by you.
7.6 COUNTERPARTS. This Agreement may be executed in separate
-------------
counterparts, any one of which need not contain signatures of more than one
party, but all of which taken together will constitute one and the same
Agreement.
7.7 HEADINGS. The headings of the sections hereof are inserted
---------
for convenience only and shall not be deemed to constitute a part hereof nor to
affect the meaning thereof.
7.8 SUCCESSORS AND ASSIGNS. This Agreement is intended to bind
-----------------------
and inure to the benefit of and be enforceable by Executive and the Company,
and their respective successors, assigns, heirs, executors and administrators,
except that Executive may not assign any of his duties hereunder and he may not
assign any of his rights hereunder without the written consent of the Company,
which shall not be withheld unreasonably.
7.9 ATTORNEYS' FEES. If either party hereto brings any action
----------------
to enforce his or its rights hereunder, the prevailing party in any such action
shall be entitled to recover his or its reasonable attorneys' fees and costs
incurred in connection with such action.
7.10 CHOICE OF LAW. All questions concerning the construction,
--------------
validity and interpretation of this Agreement will be governed by the law of
the State of California.
7.11 FORUM. Any legal action, suit or proceeding arising from
------
or relating to this Agreement shall be brought and maintained in the United
States District Court for the Northern District of California and the parties
hereby submit to the jurisdiction thereof.
5.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first above written.
INVISION TECHNOLOGIES, INC.
By: /s/ TIM BLACK Date: 5/27/99
------------------------------------ -------------------
Tim Black
Chief Operating Officer
Accepted and agreed this 27 th day of May, 1999.
/s/ ALFRED V. LARRENAGA
------------------------------------
Alfred V. Larrenaga
6.
<PAGE>
Exhibit 10.36
INDEMNITY AGREEMENT
THIS AGREEMENT is made and entered into this ____ day of __________,
1999 by and between INVISION TECHNOLOGIES, INC., a Delaware corporation (the
"Corporation"), and [NAME OF INDEMNITEE] ("Agent").
RECITALS
WHEREAS, Agent performs a valuable service to the Corporation in
__________ capacity as __________ of the Corporation;
WHEREAS, the stockholders of the Corporation have adopted bylaws (the
"Bylaws") providing for the indemnification of the directors, officers,
employees and other agents of the Corporation, including persons serving at the
request of the Corporation in such capacities with other corporations or
enterprises, as authorized by the Delaware General Corporation Law, as amended
(the "Code");
WHEREAS, the Bylaws and the Code, by their non-exclusive nature, permit
contracts between the Corporation and its agents, officers, employees and other
agents with respect to indemnification of such persons; and
WHEREAS, in order to induce Agent to continue to serve as __________ of
the Corporation, the Corporation has determined and agreed to enter into this
Agreement with Agent;
NOW, THEREFORE, in consideration of Agent's continued service as
__________ after the date hereof, the parties hereto agree as follows:
AGREEMENT
1. SERVICES TO THE CORPORATION. Agent will serve, at the will of the
Corporation or under separate contract, if any such contract exists, as
__________ of the Corporation or as a director, officer or other fiduciary of an
affiliate of the Corporation (including any employee benefit plan of the
Corporation) faithfully and to the best of [HIS/HER] ability so long as [S/HE]
is duly elected and qualified in accordance with the provisions of the Bylaws or
other applicable charter documents of the Corporation or such affiliate;
PROVIDED, HOWEVER, that Agent may at anytime and for any reason resign from such
position (subject to any contractual obligation that Agent may have assumed
apart from this Agreement) and that the Corporation or any affiliate shall have
no obligation under this Agreement to continue Agent in any such position.
2. INDEMNITY OF AGENT. The Corporation hereby agrees to hold harmless
and indemnify Agent to the fullest extent authorized or permitted by the
provisions of the Bylaws andthe Code, as the same may be amended from time to
time (but, only to the extent that such amendment permits the Corporation to
provide broader indemnification rights than the Bylaws or the Code permitted
prior to adoption of such amendment).2.
3. ADDITIONAL INDEMNITY. In addition to and not in limitation of the
indemnification otherwise provided for herein, and subject only to the
exclusions set forth in Section 4 hereof, the Corporation hereby further agrees
to hold harmless and indemnify Agent:
(A) against any and all expenses (including attorneys' fees),
witness fees, damages, judgments, fines and amounts paid in settlement and any
other amounts that Agent becomes legally obligated to pay because of any claim
or claims made against or by him in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, arbitrational,
administrative or investigative (including an action by or in the right of the
Corporation) to which Agent is, was or at any time becomes a party, or is
threatened to be made a party, by reason of the fact that Agent is, was or at
any time becomes a director, officer, employee or other agent of Corporation,
<PAGE>
or is or was serving or at any time serves at the request of the Corporation
as a director, officer, employee or other agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise;
and
(B) otherwise to the fullest extent as may be provided to Agent by
the Corporation under the non-exclusivity provisions of the Code and Section 41
of the Bylaws.
4. LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity pursuant to
Section 3 hereof shall be paid by the Corporation:
(A) on account of any claim against Agent solely for an accounting
of profits made from the purchase or sale by Agent of securities of the
Corporation pursuant to the provisions of Section 16(b) of the Securities
Exchange Act of 1934 and amendments thereto or similar provisions of any
federal, state or local statutory law;
(B) on account of Agent's conduct that is established by a final
judgment as knowingly fraudulent or deliberately dishonest or that constituted
willful misconduct;
(C) on account of Agent's conduct that is established by a final
judgment as constituting a breach of Agent's duty of loyalty to the Corporation
or resulting in any personal profit or advantage to which Agent was not legally
entitled;
(D) for which payment is actually made to Agent under a valid and
collectible insurance policy or under a valid and enforceable indemnity
clause, bylaw or agreement, except in respect of any excess beyond payment
under such insurance, clause, bylaw or agreement;
(E) if indemnification is not lawful (and, in this respect, both
the Corporation and Agent have been advised that the Securities and Exchange
Commission believes that indemnification for liabilities arising under the
federal securities laws is against public policy and is, therefore,
unenforceable and that claims for indemnification should be submitted to
appropriate courts for adjudication); or
(F) in connection with any proceeding (or part thereof) initiated
by Agent, or any proceeding by Agent against the Corporation or its directors,
officers, employees or other agents, unless (i) such indemnification is
expressly required to be made by law, (ii) the proceeding was authorized by the
Board of Directors of the Corporation, (iii) such indemnification is provided by
the Corporation, in its sole discretion, pursuant to the powers vested in the
Corporation under the Code, or (iv) the proceeding is initiated pursuant to
Section 9 hereof.
5. CONTINUATION OF INDEMNITY. All agreements and obligations of the
Corporation contained herein shall continue during the period Agent is a
director, officer, employee or other agent of the Corporation (or is or was
serving at the request of the Corporation as a director, officer, employee or
other agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise) and shall continue thereafter so
long as Agent shall be subject to any possible claim or threatened, pending
or completed action, suit or proceeding, whether civil, criminal,
arbitrational, administrative or investigative, by reason of the fact that
Agent was serving in the capacity referred to herein.
6. PARTIAL INDEMNIFICATION. Agent shall be entitled under this
Agreement to indemnification by the Corporation for a portion of the expenses
(including attorneys' fees), witness fees, damages, judgments, fines and amounts
paid in settlement and any other amounts that Agent becomes legally obligated to
pay in connection with any action, suit or proceeding referred to in Section 3
hereof even if not entitled hereunder to indemnification for the total amount
thereof, and the Corporation shall indemnify Agent for the portion thereof to
which Agent is entitled.
7. NOTIFICATION AND DEFENSE OF CLAIM. Not later than thirty (30) days
after receipt
<PAGE>
by Agent of notice of the commencement of any action, suit or proceeding,
Agent will, if a claim in respect thereof is to be made against the
Corporation under this Agreement, notify the Corporation of the commencement
thereof; but the omission so to notify the Corporation will not relieve it
from any liability which it may have to Agent otherwise than under this
Agreement. With respect to any such action, suit or proceeding as to which
Agent notifies the Corporation of the commencement thereof:
(A) the Corporation will be entitled to participate therein at its own
expense;
(B) except as otherwise provided below, the Corporation may, at its
option and jointly with any other indemnifying party similarly notified and
electing to assume such defense, assume the defense thereof, with counsel
reasonably satisfactory to Agent. After notice from the Corporation to Agent of
its election to assume the defense thereof, the Corporation will not be liable
to Agent under this Agreement for any legal or other expenses subsequently
incurred by Agent in connection with the defense thereof except for reasonable
costs of investigation or otherwise as provided below. Agent shall have the
right to employ separate counsel in such action, suit or proceeding but the fees
and expenses of such counsel incurred after notice from the Corporation of its
assumption of the defense thereof shall be at the expense of Agent unless (i)
the employment of counsel by Agent has been authorized by the Corporation, (ii)
Agent shall have reasonably concluded, and so notified the Corporation, that
there is an actual conflict of interest between the Corporation and Agent in the
conduct of the defense of such action or (iii) the Corporation shall not in fact
have employed counsel to assume the defense of such action, in each of which
cases the fees and expenses of Agent's separate counsel shall be at the expense
of the Corporation. The Corporation shall not be entitled to assume the defense
of any action, suit or proceeding brought by or on behalf of the Corporation or
as to which Agent shall have made the conclusion provided for in clause (ii)
above; and
(C) the Corporation shall not be liable to indemnify Agent under this
Agreement for any amounts paid in settlement of any action or claim effected
without its written consent, which shall not be unreasonably withheld. The
Corporation shall be permitted to settle any action except that it shall not
settle any action or claim in any manner which would impose any penalty or
limitation on Agent without Agent's written consent, which may be given or
withheld in Agent's sole discretion.
8. EXPENSES. The Corporation shall advance, prior to the final
disposition of any proceeding, promptly following request therefor, all expenses
incurred by Agent in connection with such proceeding upon receipt of an
undertaking by or on behalf of Agent to repay said amounts if it shall be
determined ultimately that Agent is not entitled to be indemnified under the
provisions of this Agreement, the Bylaws, the Code or otherwise.
9. ENFORCEMENT. Any right to indemnification or advances granted by
this Agreement to Agent shall be enforceable by or on behalf of Agent in any
court of competent jurisdiction if (i) the claim for indemnification or advances
is denied, in whole or in part, or (ii) no disposition of such claim is made
within ninety (90) days of request therefor. Agent, in such enforcement action,
if successful in whole or in part, shall be entitled to be paid also the expense
of prosecuting [HIS/HER] claim. It shall be a defense to any action for which a
claim for indemnification is made under Section 3 hereof (other than an action
brought to enforce a claim for expenses pursuant to Section 8 hereof, PROVIDED
THAT the required undertaking has been tendered to the Corporation) that Agent
is not entitled to indemnification because of the limitations set forth in
Section 4 hereof. Neither the failure of the Corporation (including its Board of
Directors or its stockholders) to have made a determination prior to the
commencement of such enforcement action that indemnification of Agent is proper
in the circumstances, nor an actual determination by the Corporation (including
its Board of Directors or its stockholders) that such indemnification is
improper shall be a defense to the action or create a presumption that Agent is
not entitled to indemnification under this Agreement or otherwise.
10. SUBROGATION. In the event of payment under this Agreement, the
Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of Agent, who shall execute all documents required and shall
do all acts that may be necessary to secure such rights and to enable the
Corporation effectively to bring suit to enforce such rights.
<PAGE>
11. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on Agent by this
Agreement shall not be exclusive of any other right which Agent may have or
hereafter acquire under any statute, provision of the Corporation's Certificate
of Incorporation or Bylaws, agreement, vote of stockholders or directors, or
otherwise, both as to action in [HIS/HER] official capacity and as to action in
another capacity while holding office.
12. SURVIVAL OF RIGHTS.
(A) The rights conferred on Agent by this Agreement shall continue
after Agent has ceased to be a director, officer, employee or other agent of the
Corporation or to serve at the request of the Corporation as a director,
officer, employee or other agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise and shall inure to the
benefit of Agent's heirs, executors and administrators.
(B) The Corporation shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Corporation, expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Corporation would be required to perform if no such succession
had taken place.
13. SEPARABILITY. Each of the provisions of this Agreement is a
separate and distinct agreement and independent of the others, so that if any
provision hereof shall be held to be invalid for any reason, such invalidity or
unenforceability shall not affect the validity or enforceability of the other
provisions hereof. Furthermore, if this Agreement shall be invalidated in its
entirety on any ground, then the Corporation shall nevertheless indemnify Agent
to the fullest extent provided by the Bylaws, the Code or any other applicable
law.
14. GOVERNING LAW. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Delaware.
15. AMENDMENT AND TERMINATION. No amendment, modification, termination
or cancellation of this Agreement shall be effective unless in writing signed by
both parties hereto.
16. IDENTICAL COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original
but all of which together shall constitute but one and the same Agreement. Only
one such counterpart need be produced to evidence the existence of this
Agreement.
17. HEADINGS. The headings of the sections of this Agreement are
inserted for convenience only and shall not be deemed to constitute part of this
Agreement or to affect the construction hereof.
18. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given (i)
upon delivery if delivered by hand to the party to whom such communication was
directed or (ii) upon the third business day after the date on which such
communication was mailed if mailed by certified or registered mail with postage
prepaid:
(A) If to Agent, at the address indicated on the signature page hereof.
(B) If to the Corporation, to:
INVISION TECHNOLOGIES, INC.
7151 Gateway Blvd.
Newark, CA 94560
<PAGE>
or to such other address as may have been furnished to Agent by the Corporation.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
and as of the day and year first above written.
INVISION TECHNOLOGIES, INC,
By:
--------------------------------
Name:
Title:
AGENT
--------------------------------
Name:
<PAGE>
1998 Executive Bonus Program Exhibit 10.37
In December 1997, the Board of Directors authorized the establishment
of an executive bonus pool for 1998, the size of which would be determined at
year end based on the Company's net earnings for that year (including the
bonus):
- - 0% of net earnings from $0-3 million
- - 5% of net earnings from $3-6 million
- - 25% of net earnings over $6 million
The Board subsequently changed the payment date from February to April
1999 and added two additional conditions:
- - One quarter of backlog before the end of Q1/99
- - Q1/99 earnings of at least $.12 per share
Following the determination of the amount in the bonus pool, the Board
of Directors allocated the funds among the participants based on its executive
compensation policy (excerpt follows):
"Under the Company's executive bonus plan, executive officers may
receive a certain percentage of their base salary in bonus payments, based on a
combination of the Committee's subjective evaluation of the individual's
performance and advice from the Committee's compensation consultant regarding
competitive rates. Further, the Committee seeks to balance the desire for
immediate earnings and the longer term goal of enhancing stockholder value.
"The CEO's bonus is dependent upon the Company achieving the
performance goals established by the Committee and the Committee's subjective
evaluation of the CEO's performance."
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-08559, 333-35237 and 333-41137) and on Form
S-3 (Nos. 333-05517 and 333-41487) of InVision Technologies, Inc. of our
report dated February 9, 2000 appearing in the 1999 Annual Report to
Stockholders which is incorporated in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
San Jose, California
March 30, 2000
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<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ANNUAL REPORT AND FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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