INTEGRAL VISION INC, 10-K405/A, 2000-04-18

INTEGRAL VISION INC
10-K405/A, 2000-04-18
INDUSTRIAL INSTRUMENTS FOR MEASUREMENT, DISPLAY, AND CONTROL

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United States Securities And Exchange Commission
Washington, D.C. 20549

FORM 10-K/A

[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.

[ ] 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 0-12728

INTEGRAL VISION, INC.
(Exact name of registrant as specified in its charter)


Michigan (State or other jurisdiction of incorporation or organization)		38-2191935 (I.R.S. Employer Identification Number)




38700 Grand River Avenue, Farmington Hills, Michigan (Address of principal executive offices)		48335 (Zip Code)

Registrant’s telephone number, including area code: (248) 471-2660

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, No Par Value, Stated Value $.20 Per Share
(Title of Class)

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 and (2) has been subject to the filing requirements for at least the past 90 days. YES X NO___

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the 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. [ X]

The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 29, 2000:

Common Stock, No Par Value, Stated Value $.20 Per Share — $30,447,505

The number of shares outstanding on each of the issuer’s classes of common stock, as of February 29, 2000:

Common Stock, No Par Value, Stated Value $.20 Per Share – 9,024,901

Documents Incorporated By Reference: Portions of the proxy statement for the annual shareholders meeting to be held May 24, 2000 are incorporated by reference into Part III.

The Company has filed this amendment to its 10-K, filed on March 29, 2000, to include an audit opinion issued by its former auditors, Ernst & Young LLP, covering the years ended December 31, 1998 and 1997. In addition, due to the inclusion of the second audit opinion, our current auditors reissued their opinion letter, which is also included in this amendment. The list of financial statements, Item 14(a)(1), was adjusted to reflect the inclusion of the additional opinion. Because there were no changes to any of the exhibits, the exhibits were not included with this filing. Due to the fact that they are included in the listing of exhibits, Item 14(a)(3), there was an annotation added to note that these exhibits were included in our originally filed 10-K. Other than the previously discussed changes, there were no other changes to the original filing.

PART IV

ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)(1) and (2) The response to this portion of ITEM 14 is submitted as a separate section of this report.

(3) Listing of exhibits.


Exhibit
Number		Description of Document

3.1		Articles of Incorporation, as amended (filed as Exhibit 3.1 to the registrant’s Form 10-K for the year ended December 31, 1995, SEC file 0-12728, and incorporated herein by reference).




3.2		Bylaws of the Registrant, as amended (filed as Exhibit 3.2 to the registrant’s Form 10-K for the year ended December 31, 1994, SEC file 0-12728, and incorporated herein by reference).




4.1		Note and Warrant Purchase Agreement (filed as Exhibit 4.1 to the registrants Form 8-K dated July 15, 1997, SEC file 0-12728, and incorporated herein by reference).




4.3		Form of Integral Vision, Inc. Common Stock Purchase Warrant Certificate (filed as Exhibit 4.3 to registrants Form 8-K dated July 15, 1997, SEC file 0-12728, and incorporated herein by reference).




10.1		Amendment to Integral Vision, Inc. Incentive Stock Option Plan dated May 10, 1993 (filed as Exhibit 10.3 to the registrant’s Form 10-K for the year ended December 31, 1993, SEC File 0-12728, and incorporated herein by reference).




10.2		Non-qualified Stock Option Plan (filed as Exhibit 10.3 to the registrant’s Form 10-K for the year ended December 31, 1992, SEC File 0-12728, and incorporated herein by reference).




10.3		Integral Vision, Inc. Employee Stock Option Plan (filed as Exhibit 10.5 to the registrant’s Form 10-Q for the quarter ended September 30, 1995, SEC file 0-12728, and incorporated herein by reference).




10.4		Form of Confidentiality and Non-Compete Agreement Between the Registrant and its Employees (filed as Exhibit 10.4 to the registrant’s Form 10-K for the year ended December 31, 1992, SEC File 0-12728, and incorporated herein by reference).




10.5		Integral Vision, Inc. 1999 Employee Stock Option Plan (filed as exhibit 10.5 to the registrant’s Form 10-Q for the quarter ended June 30, 1999 and incorporated herein by reference).




10.16*		Patent License Agreement dated October 4, 1995 by and between Integral Vision, Inc. and Square D Company (filed as Exhibit 10.24 to the registrant’s Form 10-Q for the quarter ended September 30, 1995, SEC File 0-12728, and incorporated herein by reference).




10.32		Asset Purchase Agreement between the Registrant and Weltronic (filed as exhibit to the registrant’s Preliminary Schedule 14A – Rule 14A-101 dated May 6, 1999 and incorporated herein by reference).




10.33**		Post Closing Adjustment and Settlement Agreement between Integral Vision, Inc. and Weltronic/Technitron, Inc. dated December 29, 1999.




21**		Subsidiary of the registrant.




23.1**		Consent of Ernst & Young, LLP, independent auditors.




23.2**		Consent of Moore Stephens Doeren Mayhew, independent auditors.




(b)		The Company filed a report with the commission on December 20, 1999 on Form 8-K reporting a change in our certifying accountant under ITEM 9.




(c)**		Exhibits – The response to this portion of ITEM 14 is submitted as a separate section of this report.




(d)		Financial statement schedules – The response to this portion of ITEM 14 is submitted as a separate section of this report.

* The Company has been granted confidential treatment with respect to certain portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.

** The Company filed these exhibits previously on Form 10-K which was filed with the commission on March 29, 2000.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: April 17, 2000 INTEGRAL VISION, INC.

By: /S/ CHARLES J. DRAKE
_________________________________
Charles J. Drake, Chairman of the Board
(Principal Executive Officer)

By: /S/ VINCENT SHUNSKY
_________________________________
Vincent Shunsky, Treasurer and Director
(Acting Chief Financial 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 and in the capacities and on the dates indicated.


/S/ CHARLES J. DRAKE _________________________________ Charles J. Drake		Chairman of the Board (Principal Executive Officer) and Director

/S/ MAX A. COON _________________________________ Max A. Coon		Vice Chairman, Secretary and Director

/S/ VINCENT SHUNSKY _________________________________ Vincent Shunsky		Treasurer and Director (Acting Chief Financial Officer)

/S/ WILLIAM B. WALLACE _________________________________ William B. Wallace		Director

/S/ STEPHAN SHARF _________________________________ Stephan Sharf		Director

Annual Report on Form 10K

ITEM 14(a)(1) and (2), (c) and (d)

List of Financial Statements and Financial Statement Schedules

Certain Exhibits

Financial Statement Schedules

Year Ended December 31, 1999

INTEGRAL VISION, INC.

Farmington Hills, MI

Form 10-K — ITEM 14(a)(1) and (2)
Integral Vision, Inc. and Subsidiary

List of Financial Statements and Financial Statement Schedules

(a)(1) The following consolidated financial statements of Integral Vision, Inc. and subsidiary are included in ITEM 8:

Report of Moore Stephens Doeren Mayhew, Independent Auditors

Report of Ernst & Young LLP, Independent Auditors

Consolidated Balance Sheets-December 31, 1999 and 1998

Consolidated Statements of Operations-Years ended December 31, 1999, 1998 and 1997

Consolidated Statements of Stockholders’ Equity-Years ended December 31, 1999, 1998, and 1997

Consolidated Statements of Cash Flows-Years ended December 31, 1999, 1998 and 1997

Notes to Consolidated Financial Statements-December 31, 1999

(2) The following Consolidated Financial Statement schedule of Integral Vision, Inc. and subsidiary is submitted herewith:

Schedule II Valuation and qualifying accounts

All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.

Report of Independent Auditors

To the Board of Directors and Stockholders
Integral Vision, Inc.
Farmington Hills, MI

We have audited the accompanying consolidated balance sheet of Integral Vision, Inc. and subsidiary as of December 31, 1999, and the related consolidated statements of operations, stockholders’ equity and cash flows for the year then ended. In connection with our audit of the consolidated financial statements, we also have audited the financial statement schedule for 1999 as listed in the accompanying index at ITEM 14(a). These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audit.

We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 1999 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Integral Vision, Inc. and subsidiary as of December 31, 1999 and the consolidated results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule for 1999, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ Moore Stephens Doeren Mayhew

Troy, Michigan
February 23, 2000

Report of Independent Auditors

Board of Directors and Stockholders
Integral Vision, Inc. (Formerly Medar, Inc.)

We have audited the consolidated balance sheets of Integral Vision, Inc. (formerly Medar, Inc.) and subsidiaries as of December 31, 1998, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 1998. Our audits included the amounts in the financial statement schedule listed in the index at ITEM 14(a) for each of the two years in the period ended December 31, 1998. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Integral Vision, Inc. (formerly Medar, Inc.) and subsidiaries at December 31, 1998 and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the amounts in the related financial statement schedule for each of the two years in the period ended December 31, 1998, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information contained therein.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note D to the 1998 financial statements, as a result of recurring operating losses the Company has violated the provisions of certain of its loan agreements with regard to levels of tangible net worth. Consequently the revolver and term notes with the Bank, all mature in June 1999. The Company is currently exploring alternatives for financing its operations should the Bank elect not to extend the agreement. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are more fully described in Note D. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

/s/ Ernst & Young LLP

Detroit, Michigan
February 23, 1999, except for Note D
as to which the date is March 31, 1999

Consolidated Balance Sheets
Integral Vision, Inc. and Subsidiary


			December 31

			1999			1998
						(restated)

			(in thousands)
Assets




Current Assets




	Cash		$	391		$	566




	Accounts receivable, less allowance of $820,000 ($400,000 in 1998)			3,883			2,838




	Inventories — Note A			1,995			4,176




	Costs and estimated earnings in excess of billings on incomplete contracts - Note D			284			199




	Current maturities of notes from sale of Welding division — Note C			1,716




	Other current assets			309			533




	Current assets of discontinued operations — Note C						10,843

Total current assets				8,578			19,155









Property and equipment




	Land and improvements			363			363




	Building and building improvements			3,740			3,732




	Production and engineering equipment			2,669			2,605




	Furniture and fixtures			872			847




	Vehicles			145			254




	Computer equipment			2,762			2,845

				10,551			10,646




	Less accumulated depreciation			6,289			6,086

				4,262			4,560




Other assets




	Capitalized computer software development costs, less accumulated amortization — Note A			4,327			4,353




	Patents, less accumulated amortization			259			351




	Note from sale of Welding division, less unamortized




		discount and current maturities — Note C		1,563




	Other			69			467




	Noncurrent assets of discontinued operations — Note C						5,434

				6,218			10,605

			$	19,058		$	34,320

Liabilities and Stockholders’ Equity




Current liabilities




	Accounts payable		$	1,546		$	1,801




	Employee compensation			300			489




	Accrued and other liabilities			887			1,046




	Current maturities of long-term debt			35			13,178

Total current liabilities				2,768			16,514









Long-term debt, less current maturities — Note E				1,965			6,945




Stockholders’ equity — Notes G and I




	Common stock, without par value, stated value $.20 per share; 15,000,000, shares authorized; 9,024,901 shares issued and outstanding			1,805			1,805




	Additional paid-in capital			31,187			31,187




	Retained-earnings deficit			(18,103	)		(21,628	)




	Notes receivable from officers			(602	)		(580	)




	Accumulated translation adjustment — Note A			38			77

Total stockholders’ equity				14,325			10,861

			$	19,058		$	34,320

See accompanying notes

Consolidated Statements of Operations
Integral Vision, Inc. and Subsidiary


				Year ended December 31

				1999			1998			1997
							(restated)			(restated)

				(in thousands, except per share data)
Net revenues				$	10,743		$	9,434		$	15,955




Direct costs of sales					10,848			8,169			11,642

Gross margin — Note A					(105	)		1,265			4,313




Other costs and expenses:




	Marketing				2,464			2,419			2,788




	General and administrative				1,306			1,410			1,319




	Engineering and development:




			Expenditures		4,190			4,868			8,325




			Allocated to capitalized software and direct cost of sales — Note A		(1,109	)		(1,375	)		(7,041	)

			Net Expense		3,081			3,493			1,284




	Product restructuring and




		other charges — Note B						4,231

					6,851			11,553			5,391

Loss from operations					(6,956	)		(10,288	)		(1,078	)




Other income — Note C					1,450




Interest income — Note C					374




Interest expense — Note E					(539	)		(915	)		(1,054	)

Loss from continuing operations before income taxes					(5,671	)		(11,203	)		(2,132	)




Provision (credit) for income taxes — Note F											(469	)

Loss from continuing operations					(5,671	)		(11,203	)		(1,663	)









Income from discontinued welding operations, less applicable income taxes of $-0- and $-0-, and $507 for the years ended December 31, 1999, 1998 and 1997 respectively — Notes C and F					1,030			19			1,519




Gain on disposal of Welding division, less applicable income taxes of $300 - Note C					8,749




Extraordinary charge for early retirement of debt less applicable income tax credit of $200 — Note E					(583	)

Net income (loss)				$	3,525		$	(11,184	)	$	(144	)

Basic and diluted earnings per share:




	Continuing operations			$	(.63	)	$	(1.24	)	$	(.19	)




	Discontinued Welding operations				.11						.17




	Disposal of Welding division				.97




	Extraordinary charge				(.06	)

	Net income (loss)			$	.39		$	(1.24	)	$	(.02	)

Weighted average number of shares of common stock and common stock equivalents outstanding					9,025			9,025			8,897

See accompanying notes

Consolidated Statements of Stockholders’ Equity
Integral Vision, Inc. and Subsidiary


						Additional		Retained						Accumulated
				Common		Paid-In		Earnings			Officer			Translation
				Stock		Capital		(Deficit)			Notes			Adjustment			Total

				(in thousands)
Balances at January 1, 1997				$	1,771	$	29,767	$	(10,300	)	$	(483	)	$	64		$	20,819




	Net loss for the year								(144	)								(144	)




	Translation adjustments														(57	)		(57	)

			Comprehensive loss															(201	)

	Issuance of 150,000 shares				30		720											750




	Exercise of options to				4		98											102




			purchase 22,500 shares




	Issuance of stock warrants						602											602




	Loans to Officers											(69	)					(69	)

Balances at December 31, 1997					1,805		31,187		(10,444	)		(552	)		7			22,003




	Net loss for the year								(11,184	)								(11,184	)




	Translation adjustments														70			70

			Comprehensive loss															(11,114	)

	Loans to Officers											(28	)					(28	)

Balances at December 31, 1998					1,805		31,187		(21,628	)		(580	)		77			10,861




	Net income for the year								3,525									3,525




	Translation adjustments														(39	)		(39	)

		Comprehensive income																3,486

	Loans to Officers											(22	)					(22	)

Balance at December 31, 1999				$	1,805	$	31,187	$	(18,103	)	$	(602	)	$	38		$	14,325

See accompanying notes.

Consolidated Statements of Cash Flows
Integral Vision, Inc. and Subsidiary


			Year Ended December 31

			1999			1998			1997
						(restated)			(restated)

			(in thousands)
Operating Activities Net income (loss)			$	3,525		$	(11,184	)	$	(144	)




Income from discontinued operations				(1,030	)		(19	)		(1,519	)




Gain on sale of welding division				(8,749	)




Extraordinary charge for early retirement of debt				583

Loss from continuing operations				(5,671	)		(11,203	)		(1,663	)




Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:




	Depreciation and amortization			2,374			2,374			3,276




	Restructuring charges						4,231




	Changes in operating assets and liabilities of continuing operations:




		Accounts receivable		(1,045	)		1,444			(508	)




		Inventories		2,181			2,104			779




		Prepaid and other		117			313			(929	)




		Accounts payable and other current liabilities		(603	)		(590	)		(234	)

Net cash provided by (used in) operating activities				(2,647	)		(1,327	)		721









Investing Activities Proceeds from sale of Welding division				22,394




Increase in property and equipment				(290	)		(251	)		(128	)




Investment in capitalized software				(1,410	)		(1,283	)		(4,644	)




Other				265			124			(45	)

Net cash provided by (used in) investing activities				20,959			(1,410	)		(4,817	)









Financing Activities Repayments of revolving line of credit and other obligations				(20,448	)		(19,664	)		(34,085	)




Proceeds from draws on revolving line of credit							22,066			37,400




Proceeds from mortgage note payable				2,000




Proceeds from exercise of stock options										102




Proceeds from sale of common stock										750




Proceeds from issuance of stock warrants										602

Net cash provided by (used in) financing activities				(18,448	)		2,402			4,769

Effect of exchange rate changes				(39	)		70			(57	)

Increase (decrease) in cash				(175	)		(265	)		616




Cash at beginning of year				566			831			215

Cash at end of year			$	391		$	566		$	831

See accompanying notes.

Notes to Consolidated Financial Statements
Integral Vision, Inc. and Subsidiary

Note A — Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its 100% owned subsidiary: Integral Vision LTD, United Kingdom. Upon consolidation, all significant intercompany accounts and transactions are eliminated.

Use of Estimates

The preparation of 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 and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Translation of Foreign Currencies

The financial statements of Integral Vision LTD are translated into United States dollar equivalents at exchange rates as follows: balance sheet accounts at year-end rates; income statement accounts at average exchange rates for the year. Transaction gains and losses are reflected in net earnings and are not significant.

Accounts Receivable

Trade accounts receivable primarily represent amounts due from equipment manufacturers and end-users in North America, Asia and Europe.

Inventories

Inventories are stated at the lower of first-in, first-out cost or market, and at December 31 consisted of the following (net of obsolescence reserve of $2,100,000 in 1999 and $300,000 in 1998):


	1999		1998

	(in thousands)
Raw materials	$	1,502	$	3,587




Work in process		218		260




Finished goods		275		329

	$	1,995	$	4,176

In 1999, $1.5 million was charged to direct costs of sales to set up an additional obsolescence reserve as a result of the review of the marketability of remaining inventory related to a previously discontinued product line. In 1998, management decided to no longer sell inspection systems for the audio CD market, as a result $1.4 million was charged to direct costs of sales to write-off the inventory related to the discontinued product line. A reconciliation of gross margin as reported to gross margin from operations is presented in the table below.


	1999			1998		1997

	(in thousands)
Net revenues	$	10,734		$	9,434	$	15,955




Gross margin as reported		(105	)		1,265		4,313




Adjustments to reconcile gross margin from operations:




Specific inventory adjustments		1,525			1,402

Gross margin from operations	$	1,420		$	2,667	$	4,313

Property and Equipment

Property and equipment is stated on the basis of cost. Equipment capitalized under lease agreements and the related accumulated amortization is included in property and equipment. Expenditures for normal repairs and maintenance are charged to operations as incurred.

Depreciation, including amortization of assets recorded under capital lease obligations, is computed by the straight-line method based on the estimated useful lives of the assets (buildings-40 years, other property and equipment-3 to 10 years).

Capitalized Computer Software Development Costs

Computer software development costs are capitalized after the establishment of technological feasibility of the related technology. These costs are amortized following general release of products based on current and estimated future revenue for each product with an annual minimum equal to the straight-line amortization over the remaining estimated economic life of the product (not to exceed 5 years). Management continually reviews the net realizable value of capitalized software costs. At the time that a determination is made that capitalized software amounts exceed the estimated net realizable value of amounts capitalized, any amounts in excess of the estimated realizable amounts are written off. (See Note B.)

Amortization of the capitalized costs amounted to $1,182,000, $1,420,000, and $2,678,000 in 1999, 1998 and 1997, respectively. Total accumulated amortization at December 31, 1999 and 1998, was $3,886,000 and $2,704,000, respectively.

Patents

Patents are stated at cost less accumulated amortization of $515,000 and $369,000 at December 31, 1999 and 1998, respectively. Amortization of the patents amounted to $146,000, $120,000 and $100,000 in 1999, 1998, and 1997, respectively. These costs are amortized on a straight-line basis over the estimated useful lives of the assets.

Revenue Recognition

Revenues are recorded at the time services are performed or when products are shipped, except for long-term contracts. Revenues on long-term contracts are recognized using the percentage of completion method. The effects of changes to estimated total contract costs are recognized in the year determined and losses, if any, are fully recognized when identified. Costs and estimated earnings recognized in excess of amounts billed are classified under current assets as costs and estimated earnings in excess of billings on incomplete contracts. Long-term contracts include a relatively high percentage of engineering costs and are generally less than one year in duration.

Income Taxes

Deferred income taxes are provided when necessary to recognize the effect of temporary differences between financial and income tax accounting related principally to contract revenues, depreciation and capitalized computer software development costs.

Fair Value Disclosure

The carrying amounts of certain financial instruments such as cash, accounts receivable, notes receivable, accounts payable and long-term debt approximate their fair values. The fair value of the long-term financial instruments is estimated using discounted cash flow analysis and the Company’s current incremental borrowing rates for similar types of arrangements.

Reclassifications

Certain amounts have been reclassified in prior periods’ presentations to conform to the current year’s presentation.

Note B — Restructuring of Operations

Early in the second quarter of 1998, Management completed an evaluation of competitive conditions and product offerings in vision. A charge of $5,633,000 was recorded as of March 31, 1998 to give effect to the impairment of assets identified in this review. The charge consisted of $4,231,000 related to capitalized software development costs and $1,402,000 related to inventory (included in direct costs of sales).

Note C — Discontinued Operations

On June 30, 1999, the Company completed an agreement to sell substantially all the assets of its Welding Controls division for $25.7 million, net of costs of the sale, for cash, the assumption of certain liabilities, and a subordinated note. The interest bearing portion of the note, approximately $1.9 million, carries an interest rate approximating prime plus 1% and requires quarterly payments beginning on February 15, 2000, with a February 15, 2001 maturity date. The non-interest bearing portion of the note, $1.5 million, was discounted using an imputed interest rate of 9% and matures on February 15, 2001. Additionally, in connection with the sale, Integral Vision entered into an agreement to provide certain services to the purchaser for a fee totaling $1.5 million, all of which was paid in cash. These services included use of the Company’s personnel, facilities and software.

During the quarter ended December 31, 1999, the Company resolved certain post closing adjustments with the purchaser of the former Welding Controls division which produced the additional gain of $2.1 million recognized in the quarter. Part of the resolution with the purchaser included an agreement to pay amounts that previously had been contingent on shipments to a certain customer. This accounted for approximately $1.5 million of this additional gain recorded.

The results of operations for this segment have been reported separately as discontinued operations in the Consolidated Statements of Operations for the current and prior periods presented.


	1999		1998		1997

	(in thousands)
Net revenues	$	12,403	$	25,379	$	24,569




Costs and expenses		11,373		25,360		22,543

Income before income taxes		1,030		19		2,026




Income tax expense		—		—		507

Net income




from discontinued operations	$	1,030	$	19	$	1,519

Net assets of the discontinued operations at December 31, 1998 were as follows:


		1998

		(in thousands)
Current assets		$	15,082




Current liabilities			(4,239	)

	Net current assets		10,843





Property and equipment			3,928




Intangibles and other			2,760




Non-current liabilities			(1,254	)

Net non-current assets of discontinued operations			5,434

Total net assets of discontinued operations		$	16,277

Note D — Costs and Estimated Earnings in Excess of Billings on Incomplete Contracts

Costs and estimated earnings in excess of billings on incomplete contracts at December 31 are summarized as follows:


	1999		1998

	(in thousands)
Contract costs to date	$	500	$	263




Estimated contract earnings		863		491

		1,363		754




Less billings to date		1,079		555

Costs and estimated earnings in excess of billings on incomplete contracts	$	284	$	199

The Company anticipates that substantially all of the costs incurred on long-term contracts at December 31, 1999, will be billed and collected in 2000.

Note E — Long-Term Debt and Other Financing Arrangements

Long-term debt at December 31 consists of the following:


		1999		1998

		(in thousands)
Mortgage note payable, 8.9%		$	2,000	$	—




Revolving note payable to bank					10,000




Term notes payable to bank					3,214




Subordinated debentures, 12.95%




	(Net of $417,000 ($510,000 in 1997) unaccreted value assigned to related warrants)				6,583




Other					326

			2,000		20,123




Less current maturities			35		13,178

		$	1,965	$	6,945

The Company used cash received as a result of the sale of the Welding Controls division to retire substantially all outstanding debt at June 30, 1999 (see Note C). An extraordinary charge of $583,000, net of tax credit, resulted from this early retirement of debt. These charges included unaccreted value assigned to warrants and unamortized discounts.

Maturities of long-term debt are $41,000 in 2001; $45,000 in 2002; $49,000 in 2003; $54,000 in 2004; $1,776,000 thereafter.

Interest paid approximates interest expensed for the years presented.

Note F — Income Taxes

The Company establishes valuation allowances in accordance with the provisions of FASB Statement No. 109, “Accounting for Income Taxes.” The Company continually reviews realizability of deferred tax assets and recognizes these benefits only as reassessment indicates that it is more likely than not that the benefits will be realized.

As of December 31, 1999, the Company has cumulative net operating loss carryforwards approximating $23,100,000 (expiring: $7,457,000 in 2010, $3,889,000 in 2011, $6,404,000 in 2012, and $5,350,000 in 2018) for tax purposes available to reduce taxable income of future periods and unused investment, alternative minimum tax, and research and development tax credits approximating $1,197,000 which expire through 2013. For financial reporting purposes, the net operating losses and credits have been offset against net deferred tax liabilities based upon their expected amortization during the loss carryforward period. The remaining valuation allowance is necessary due to the uncertainty of future income estimates. The valuation allowance decreased $1,143,000 in 1999 and increased $3,883,000 in 1998 and decreased $55,000 in 1997.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax liabilities and assets as of December 31 are as follows:


		1999		1998

		(in thousands)
Deferred tax liabilities:




	Deductible software development costs, net of amortization	$	1,471	$	1,808




	Tax over book depreciation		664		498




	Percentage of completion		293		508

Total deferred tax liabilities			2,428		2,814




Deferred tax assets:




	Net operating loss carryforwards		7,854		9,489




	Credit carry forwards		1,197		1,097




	Reserve for warranty		27		61




	Bad debt reserve		279		136




	Other		100		203

Total deferred tax assets			9,457		10,986




Valuation allowance for deferred tax assets			7,029		8,172

Net deferred tax assets			2,428		2,814

Net deferred tax		$	0	$	0

The reconciliation of income taxes computed at the U.S. federal statutory tax rates to income tax expense (credit) is as follows:


	1999			1998			1997

	(in thousands)
Tax provision (credit) at U.S. statutory rates	$	1,199		$	(3,802	)	$	(56	)




Tax provision included in income from discontinued welding operations								(507	)




Change in valuation allowance		(1,143	)		3,883			(55	)




Nondeductible expenses		30			38			43




Other		(86	)		(119	)		86

	$	0		$	0		$	(469	)

There were no income tax payments in 1999, 1998 or 1997.

Note G — Earnings per Share

The following table sets forth the computation of basic and diluted earnings per share:


		1999			1998			1997

		(in thousands, except per share data)
Numerator for basic and diluted earnings per share -




Income(loss) available to common stockholders




	Loss from continuing operations	$	(5,671	)	$	(11,203	)	$	(1,663	)




	Income from discontinued Welding operations		1,030			19			1,519




	Gain on disposal of Welding division		8,749




	Extraordinary charge		(583	)

	Net Income (loss)	$	3,525		$	(11,184	)	$	(144	)




*there was no effect of dilutive securities see below




Denominator for basic and diluted earnings per share -




weighted average shares			9,025			9,025			8,897

*there was no effect of dilutive securities see below




Basic and diluted earnings per share:




	Continuing operations	$	(0.63	)	$	(1.24	)	$	(0.19	)




	Discontinued Welding operations		0.11						0.17




	Disposal of Welding division		0.97




	Extraordinary charge		(0.06	)

	Net income (loss)	$	0.39		$	(1.24	)	$	(0.02	)

Warrants and options outstanding were not included in the computation of diluted earnings per share because the inclusion of these options would have an antidilutive effect. For additional disclosures regarding stock options and warrants see Note I.

Note H — Employee Savings Plan

The Company has an Employee Savings Plan covering substantially all United States’ employees. The Company contributes $.20 to the Plan for every dollar contributed by the employees up to 6% of their compensation. The Plan also provides for discretionary contributions by the Company as determined annually by the Board of Directors. Company contributions charged to operations under the Plan were $30,000, $30,000, and $37,000 for the years ended December 31, 1999, 1998 and 1997, respectively.

Note I — Stock Options and Warrants

A summary of the status of the Option Plans at December 31, 1999 is as follows:


				Non-Qualified
		Qualified ISO		Stock Option
		Plan		Plan		1999 Plan		1995 Plan

		(in thousands)
Options outstanding			171		14		400		492




Options exercisable			171		14		0		286




Options granted during:




	1999		0		0		400		206




	1998		0		0		0		0




	1997		0		0		0		267




	1996		0		0		0		132




	1995						0		211




Options available							0




	For Grant		0		0		100		8

Option grants are approved by the Compensation Committee of the Board of Directors. The option price is the market price on the date of the grant, and vesting generally occurs after one year and the expiration occurs ten years from the date of the grant.

A summary of option activity under all plans follows:


		1999							1998					1997

						Weighted						Weighted					Weighted
						Average						Average					Average
		Shares			Exercise Price				Shares			Exercise Price		Shares			Exercise Price

		(number of shares in thousands)
Outstanding at beginning of year			597				$	5.48		662		$	5.64		589		$	5.87




Granted			606					1.07		0			0		267			5.20




Exercised			0					0		0			0		(23	)		4.57




Canceled			(126	)				6.10		(65	)		5.74		(171	)		5.88

Outstanding at end of year			1,077					3.02		597			5.48		662			5.64




	($1.07 to $9.25 per share)

Exercisable ($1.07 to $9.25 per share)			471				$	5.54		597		$	5.48		396		$	5.93

Additional information regarding the range of exercise prices and weighted average remaining life of options outstanding at December 31, 1999 follows:


			Weighted
Range of	Number		Average		Number
Exercise Prices	Outstanding		Remaining Life		Exercisable


	(number of shares in thousands)
$1.07 to 1.75		611		9.7		5




4.00 to 4.88		190		4.3		190




5.00 to 5.63		110		7.6		110




6.00 to 6.25		118		4.6		118




8.25 to 9.25		48		5.3		48

$1.07 to 9.25		1,077		7.8		471

The Company has elected to follow APB No. 25 “Accounting for Stock Issued to Employees” and related interpretations in accounting for its employee stock options because, in management’s opinion, the models required to be used by FASB Statement No. 123, “Accounting for Stock-Based Compensation,” were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.

For purposes of proforma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. After adjusting for the proforma effect of stock compensation, the net income in 1999 is estimated to be $2,998,000 ($.33 per share), and the net loss in 1998 and 1997 was estimated to be $11,532,000 ($1.28 per share), and $470,000 ($.05 per share), respectively. In 1999 the assumptions used in determining the proforma disclosure was a risk free interest rate of 6.00%, no dividend yields, .85 market price volatility, and 7.8-year weighted average life of options. These proforma results reflect only stock options granted in 1995 through 1999 (no options were issued during 1998) and may not be comparable with the results of applying the fair market value methodology to all stock options granted prior to the initial adoption of this statement.

In connection with the private placement of $7.0 million of debentures in 1997, which were retired in 1999, the company issued warrants for the purchase of 1,400,000 Integral Vision common shares at $6.86 per share all of which were outstanding at December 31, 1999.

Note J — Lease Commitments and Contingencies

The Company and its subsidiary use equipment and office space under long-term operating lease agreements requiring rental payments approximating $78,000 in 2000, $83,000 in 2001 and $80,000 in 2002 and $74,000 in 2003. Rent expense charged to operations approximated $65,000, $60,000, and $57,000 in 1999, 1998 and 1997, respectively.

Note K — Operations by Geographic Area

The Company adopted Statement of Financial Accounting Standards (“SAFS”) No. 131, Disclosures about Segments of an Enterprise and Related Information, for the year ended December 31, 1998. SFAS No. 131 established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. It also established standards for related disclosures about products and services, and geographic areas. Operating segments are defined as components of the enterprise about which separate

financial information is available that is evaluated regularly by management in deciding how to allocate resources and in assessing performance.

The Company is engaged in one line of business, vision-based inspection products. The following presents information by geographic area.


			Year Ended December 31

			1999			1998			1997

			(in thousands)
Net revenues from unaffiliated customers:




		United States	$	7,589		$	6,773		$	14,995




		United Kingdom		3,154			2,661			960

			$	10,743		$	9,434		$	15,955

Earnings (loss) from continuing operations before income taxes:




	United States		$	(4,686	)	$	(5,740	)	$	100




	United Kingdom			(985	)		(1,232	)		(2,232	)




	Restructuring charges						(4,231	)

			$	(5,671	)	$	(11,203	)	$	(2,132	)

Identifiable assets:




	United States		$	21,556		$	20,270		$	27,722




	United Kingdom			1,337			1,608			4,471




	Eliminations			(3,835	)		(3,835	)		(3,835	)




	Net assets of discontinued operations						16,277			20,163

			$	19,058		$	34,320		$	48,521

Capital expenditures:




	United States		$	245		$	212		$	104




	United Kingdom			45			39			24

			$	290		$	251		$	128

Depreciation and amortization expense:




	United States		$	1,997		$	2,004		$	2,794




	United Kingdom			377			370			482

			$	2,374		$	2,374		$	3,276

Net revenues by geographic area:




	North America*		$	4,912		$	2,815		$	11,300




	Europe			3,154			3,361			4,030




	Asia			2,677			3,258			625

			$	10,743		$	9,434		$	15,955

* Countries that are considered individually material (more than 10% of net revenues) all others are included in North America and in total are considered immaterial

Schedule II — Valuation And Qualifying Accounts

Integral Vision, Inc. And Subsidiary

(in thousands)


Column A		Column B		Column C			Column D			Column E

				Additions

				Charged To		Charged To
		Balance At		Costs		Other				Balance At
		Beginning Of		And		Accounts-	Deductions			End
Description		Period		Expenses		Describe	Describe			Of Period

Year ended December 31, 1999:




	Accounts receivable allowance	$	400	$	516	$	$	96	(3)	$	820




	Inventory obsolescence reserve		300		1,800						2,100




	Deferred tax valuation allowance		8,172					1,143	(2)		7,029

		$	8,872	$	2,316	$	$	1,239		$	9,949

Year ended December 31, 1998:




	Accounts receivable allowance	$	400	$	162		$	162	(3)	$	400




	Inventory obsolescence reserve		210		1,530			1,440	(1)		300




	Deferred tax valuation allowance		4,289		3,883						8,172

		$	4,899	$	5,575		$	1,602		$	8,872

Year ended December 31, 1997:




	Accounts receivable allowance	$	400	$	120		$	120	(3)	$	400




	Inventory obsolescence reserve		156		622			568	(1)		210




	Deferred tax valuation allowance		4,344					55	(2)		4,289

		$	4,900	$	742		$	743		$	4,899

1) Write-off obsolete inventory
2) Net change in deferred tax valuation allowance
3) Net accounts receivable write-offs

		[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.

		[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________ to _____________.