SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
Commission File No. 000-28520
n-VISION, INC.
(Name of Registrant as specified in its Charter)
Delaware 54-1741313
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
7680 Old Springhouse Road, Madison Bldg., First Floor, McLean, Virginia 22102
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(Address of principal executive office) (Zip Code)
Registrant's Telephone Number: (703) 506-8808
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:
Common Stock, par value $0.01 per share
Class A Warrants
(Title of Class)
Check whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the Issuer was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes ( X ) No ( )
<PAGE>
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B in this Form 10-KSB, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. (X)
The Registrant's revenues for its most recent fiscal year (1997) were
$2,399,579.
As of March 9, 1998, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was $4,303,581.
As of February 28, 1998, the Registrant had outstanding 5,298,411
shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the fiscal year ended
December 31, 1997 (the "1997 Annual Report") are incorporated by reference into
Part II and Part III of this Form 10-KSB. Portions of the Proxy Statement for
the 1998 Annual Meeting of Stockholders (the "1998 Proxy Statement") are
incorporated by reference into Part III of this Form 10-KSB.
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PART I
ITEM 1. BUSINESS
(a) General.
(1) n-Vision, Inc. (the "Company") was incorporated under the
laws of the State of Delaware on September 16, 1994. The Company designs,
develops, manufactures and markets state-of-the-art, proprietary 3D immersive
displays for use in advanced visualization applications.
(2) No material changes have occurred in the Company's mode of
conducting business in the last four fiscal years.
(b) Description of Business.
The Company was established in 1988 as an operating division of
Advanced Technology Systems, Inc. (ATS), a McLean, Virginia information
technology company. The Company was incorporated on September 16, 1994, and
acquired all rights, title and interest in the Virtual Reality (VR) products and
systems from ATS. The Company is a premier manufacturer of 3D Immersion Displays
for use in advanced visualization applications. The Company registered the sale
of its common stock and warrants to the public and became subject to the filing
requirements of the Securities and Exchange Commission on May 28, 1996. Its
corporate headquarters is located at 7680 Old Springhouse Road, First Floor,
McLean, Virginia 22102, and its telephone number is 703-506-8808.
The Company's products are marketed worldwide, but principally to
customers in North America, Europe, and the Pacific Rim. At the beginning of the
1997 fiscal year, the Company was focused on manufacturing and marketing the
seven high performance display devices developed in prior years. These included
the Datavisor HiRes and VGA products, the Datavisor 80, HiRes (high resolution)
and VGA Virtual Binoculars, which garnered publicity when they were used by the
Jet Propulsion Laboratory to view the Mars terrain in stereo. Also, a monoscopic
device available in either HiRes or VGA was delivered for use in a U.S. Army
Artillery training device. Orders are expected for the next several years in
response to the Company's marketing program. The program has generated interest
from a similar training program in Europe. In the first quarter of the 1997
fiscal year, the Company concluded an engineering contract with a subsidiary of
The Walt Disney Company to deliver prototype devices. This $476,000 effort led
to a $1.25 million order in the fourth quarter of 1997 as well as the
possibility of producing a commercial product, pending final agreement with The
Walt Disney Company subsidiary and determination of satisfactory market
acceptance.
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PART II
The Company has 15 employees, one of whom is part time. The Company is
not unionized, and 3 persons left the Company last year. The Company feels its
relations with its employees are good.
The Company has developed its marketing in three areas. First, the
products have been marketed through its reseller program in the international
market. At the beginning of the 1997 fiscal year, Division Ltd., Virtual
Presence Ltd., both in England, and Virtual Reality Technologies Gmbh of
Germany, were engaged as resellers. In Japan, Solidray Co. Ltd. was the
Company's representative and reseller. In 1997, Nihon Binary of Japan, Immersion
SA of France, and the first worldwide reseller, Deneb Robotics, Inc., became
resellers. The Company has sought representation overseas to reduce
demonstration expenses and other marketing costs which would otherwise be
incurred internally. Demonstrations are critical to sales success, and
maintaining relationships with organizations in Europe and Japan have been
important in reaching these markets with timely responses. Each distributor is
trained in the use of the Company's products.
Second, the United States market has been characterized by direct
selling and sales of the Company's products to integrators that are using the
products as a component of or in support of various programs. While corporate
and educational sales have tended to be direct sales after demonstration,
integrators often must have the products demonstrated or integrated for the
final customer, which has often been the U.S. Government.
To execute the third marketing approach the Company entered into an
agreement with Virtuality Ltd. in late 1996 to resell Virtuality Ltd.'s low end
LCD product. Because of the financial collapse of Virtuality Ltd., the Company
is no longer reselling their products and the Company has undertaken its own
program to offer LCD based products in 1998. The Company is continuing the
development of low end LCD products in order to broaden its line.
The major suppliers for the Company's products are: Rank Brimar Ltd. of
England and Thomas Electronics Inc. for high resolution miniature cathode ray
tubes. Supply became critically low in late 1997 due to a tube delivery
requiring correction and slowed delivery of products at year end. Even with
corrected tubes the Company has expanded its sources of supply and has received
its first satisfactory tube from another supplier. Other important suppliers are
Vivitek Ltd., a Taiwan based manufacturer of the VGA electronics components, and
Apex Precision, Inc., a local company that supplies machined parts as required.
The Company has excellent relationships with these suppliers, and expects no
change in the relationships.
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PART II
The Company extends sales terms of net 30 days. Overseas sales are
quoted in U.S. Dollars to reduce currency risk. The Company grants distributors
a right to return products within limits. During the past fiscal year no
products sold to distributors have been returned. U.S. Government sales often
take longer to collect due to the bureaucratic nature of the U.S. Government and
the extra approval channels usually encountered. All receivables due from the
U.S. Government to date have been collected.
The Company's customers are diverse and none by itself is material to
the Company except for the size of The Walt Disney Company subsidiary order for
$1.25 million which is significant. The U.S. Government is internally diverse
with sales to the U.S. Army, U.S. Navy, NASA, and the U.S. Air Force. The
Company has no contracts subject to renegotiation with the U.S. Government.
The Company is not required to obtain government approval for any of
its products, and there are no restricting regulations concerning the products.
The Company is completing certifications evidencing compliance with European EMC
Directive 89/33EEC (CE Mark) which is required for the sale of products to
non-technical users in the European market.
The Company has entered the high-value immersive display market, which
is dominated by emerging commercial uses of head-mounted displays in large
corporations such as the automotive and aerospace industries and the U.S.
Government. The use of the products has moved swiftly in the automotive
industry, as highly sophisticated ergonomic design models can be exercised using
virtual driving and viewing. The aerospace market is divided into the military
and civilian training applications for pilots and the design application market
developing now as the automotive market developed in 1995 and 1996. The military
services of Europe and the United States are experimenting with mission
rehearsal systems, sighting systems, and other training applications. The
medical market is a high-value developing market, but developing slowly.
Inquiries are now being received as virtual reality booths at medical
conventions are stimulating awareness of potential applications. This market has
potential as high resolution and quality are essential to the success of that
type of business. Geographically, the markets in Europe and Japan are developing
and evolving, with the European market ahead of the rest of the world. The
Company has five distributors in Europe and two in Japan.
The Company's major competitor for high-end federal systems and
military applications is Kaiser Electro-Optics, Inc. ("Kaiser"). Commercial
competitors include Fakespace, Inc. and Virtual Research Systems Inc.
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PART II
In the U.S. Government market, the Company can underprice Kaiser when
it competes head-to-head or when it has the opportunity to compete. The size,
history, and presence of Kaiser in the U.S. Government market, and the military
market in particular, make it a major competitor as it uses superior marketing
resources to obtain long-term development and supply contracts. Kaiser also has
developed many specialized products for the military market, which places the
Company at a disadvantage in this market, especially for custom products. The
Company can and does compete well head-to-head for HMD business and can
dramatically undersell Kaiser for comparable quality.
Federal employee awareness of the Company and its products is limited,
and needs continuing sales and marketing emphasis.
The Company competes in the commercial market but has limited resources
to cover the market, as direct sales through demonstration are usually needed
due to the complexity and nature of the products. The Company has found that it
can compete head-to-head successfully, offering superior quality at a
competitive price. On the lower end, price may cause some purchasers to select a
dramatically less expensive product at half the price, but with some degradation
in viewing quality. The Company is pursuing offerings using LCD technology to
reduce costs. This segment of the market is perceived by Management as being
inadequately addressed and having potentially higher than average future growth.
The Company's product warranty terms include a full one-year warranty against
all defects and failure under normal usage.
ITEM 2. DESCRIPTION OF PROPERTY
(a) The Company leases approximately 15,000 square feet for its
headquarters and operations in facilities located at 7680 Old Springhouse Road,
Madison Bldg., First Floor, McLean, Virginia 22102. The lease term is three (3)
years and will expire on February 29, 2000. The lease requires the Company to
pay certain customary property taxes and operating expenses. The Company pays
$9.00 per square foot for the leased space with a 3% rent increase per year.
The Company subleases approximately 43.4% (approximately 6,515 square
feet) of the space to three subtenants. The Company believes that its current
and anticipated facilities needs are suitably met with this space and that the
space is adequate for current operations and future growth.
(b) The Company has made no real estate investments during the 1997
fiscal year.
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PART II
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings and, to the best of
its information, knowledge and belief, none is contemplated or has been
threatened.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders during the
fourth quarter of the 1997 fiscal year.
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) Market Information.
The Company's Common Stock and Class A Warrants have traded on the
NASDAQ Stock Market Small Cap Market since May 29, 1996 under the symbols "NVSN"
and "NVSNW" respectively. Prior to an initial public offering of Common Stock
and Class A Warrants in May 1996, there had been no market for the Company's
Common Stock or Class A Warrants. On December 31, 1997 the Common Stock closed
at $1.031 per share and the Warrants closed at $.125 per share. The table below
shows the high and low trading prices by quarter for the Common Stock and
Warrants during the 1997 fiscal year. On December 6, 1996, the Company's
investment banker and underwriter of the Company's public offering was barred
from the national securities exchanges and has since ceased making a market in
the Company's securities. This event has had, and may have, an adverse effect on
the Company's securities, however, the number of market makers in the Company's
securities has risen to between 8 and 11 companies executing monthly trading.
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1997
Common Common
Stock Stock Warrants Warrants
HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter 0.75 0.41 0.16 0.06
Second Quarter 0.66 0.41 0.09 0.06
Third Quarter 2.94 0.41 0.34 0.03
Fourth Quarter 2.66 1.00 0.41 0.13
These quotations reflect inter-dealer prices, without retail mark-up, markdown
or commission and may not necessarily represent actual transactions. Under the
new securities rules, the closing bid price must equal at least $1.00. Failure
to maintain that price for an extended period of time could result in the
Company being de-listed.
(b) Holders.
As of March 13, 1998, there are approximately 23 holders of record of
the Common Stock and 4 holders of record of the Warrants. Included in the number
of holders of record are approximately 1,118 beneficial securities holders.
(c) Dividends.
There was no dividend paid during the past three years. Holders of the
Company's Common Stock are entitled to dividends when, as and if declared by the
Board of Directors out of funds legally available therefor. The Company does not
anticipate the declaration or payment of any dividends in the foreseeable
future. The Company intends to retain earnings, if any, to finance the
development and expansion of its business. Future dividend policy will be
subject to the discretion of the Board of Directors and will be contingent upon
future earnings, if any, the Company's financial condition, capital
requirements, general business conditions, and other factors. Therefore, there
can be no assurance that any dividends of any kind will ever be paid by the
Company.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
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The information required by this Item is incorporated by reference to
the section captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Company's 1997 Annual Report.
ITEM 7. FINANCIAL STATEMENTS
The information required by this Item is incorporated by reference to
pages 10 through 21 of the Company's 1997 Annual Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this Item is incorporated by reference to
the section captioned "Voting Securities and Principal Holders Thereof" and the
section captioned "Proposal I - Election of Directors" in the Company's 1998
Proxy Statement.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the section captioned "Executive Compensation" in the Company's 1998 Proxy
Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the section captioned "Voting Securities and Principal Holders Thereof" in the
Company's 1998 Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the section captioned "Proposal I - Election of Directors" in the Company's 1998
Proxy Statement.
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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
List of Exhibits.
3(i) Certificate of Incorporation of the Company
3(ii) Bylaws of the Company
10 Material Contracts (listed in Exhibit Index)
11* Computation of per Share Earnings
13* Portions of 1997 Annual Report Incorporated By Reference
27* Financial Data Schedule
* Filed herewith.
(a) Exhibits.
All exhibits are listed in the Exhibit Index, which is incorporated
herein by reference.
(b) Reports on Form 8-K.
The Company has filed no Forms 8-K during the quarter ended December
31, 1997.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to the signed on
its behalf by the undersigned, thereunto duly authorized.
n-VISION, INC.
(Registrant)
By: /s/_____________________________
Delmar J. Lewis
Chairman of the Board and
Chief Executive Officer
Dated: March 25, 1998
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 date indicated.
n-VISION, INC.
(Registrant)
By: /s/_________________________________ Dated: March 25, 1998
Claude H. Rumsey, Jr.
Director
By: /s/______________________________ Dated: March 25, 1998
Rear Admiral Ronald C. Wilgenbusch, USN
(Retired)
Director
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By: /s/______________________________ Dated: March 25, 1998
Robert B. Hamilton, C.P.A.
Executive Vice President,
Chief Financial Officer, Secretary and
Director
By: /s/______________________________ Dated: March 25, 1998
Christopher J. Lewis
President, Chief Operating Officer and
Director
By: /s/______________________________ Dated: March 25, 1998
Delmar J. Lewis
Chairman of the Board and
Chief Executive Officer
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EXHIBIT INDEX
n-VISION, INC.
EXHIBITS TO FORM 10-KSB
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Identification Numbered Page
------- -------------- -------------
<S><C>
3(i) Certificate of Incorporation of the Company (incorporated by N.A.
N.A. reference to Exhibit 3.0 to the Registration Statement of
the Company on Form SB-2 filed on April 2, 1996, Registration
No. 333-3098)
3(ii) By-Laws of the Company N.A.
10(1) Employment Agreement, Delmar J. Lewis (incorporated by N.A.
reference to Exhibit 10.0 to Amendment No. 1 of the
Registration Statement of the Company on Form SB-2 filed on
April 19, 1996, Registration No. 333-3098)
10(2) Employment Agreement, Christopher J. Lewis (incorporated by N.A.
reference to Exhibit 10.1 to Amendment No. 1 of the
Registration Statement of the Company on Form SB-2 filed on
April 19, 1996, Registration No. 333-3098)
10(3) Employment Agreement, Robert B. Hamilton, C.P.A. (incorporated N.A.
by reference to Exhibit 10.2 to Amendment No. 1 of the
Registration Statement of the Company on Form SB-2 filed on
April 19, 1996, Registration No. 333-3098)
10(4) Asset Purchase Agreement, dated November 1, 1994 (incorporated N.A.
by reference to Exhibit 10.3 of the Registration Statement of
the Company on Form SB-2 filed on April 2, 1996, Registration
No. 333-3098)
11.00 Statement re: Computation of earnings per share
13.00 Portions of 1997 Annual Report Incorporated By Reference
27 Financial Data Schedule
</TABLE>
13
EXHIBIT 11
Computation of per share earnings (loss)
Income (loss) per share of common stock is computed using weighted
average shares outstanding for each period, adjusted retroactively for stock
splits. Warrants and stock options have not been reflected in the computation of
weighted average shares because they are anti-dilutive.
Financial Review
n-vision 1997
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Some statements in this Management's Discussion and Analysis contain
forward-looking information that involve a number of risks and uncertainties,
the possible realization of which could have material adverse effects on the
Company's operating results. Factors that may cause actual results to differ
materially include: development of new products and rapid change in technology
that may displace products sold by the Company; the highly competitive market in
which the Company operates; the Company's dependence upon a limited number of
suppliers for the availability of components used in products and the timing of
their deliveries; fluctuations in the Company's quarterly results of operations
and in the timing of orders from customers; and other risk factors listed from
time to time in the Company's SEC filings, including, but not limited to, the
Form SB-2 Registration Statement dated April 2, 1996, and any amendments
thereto.
General
n-Vision, Inc. ("Company"), a Delaware Corporation, designs, develops,
manufactures, and markets state-of-the-art 3D immersive displays for use in
advanced visualization applications, products, and systems for a variety of
commercial, industrial, and military applications. The Company's products and
systems are marketed worldwide, but principally to customers in North America,
Europe, and the Pacific Rim. The Company's customers include Boeing, Daimler
Benz, Horizon Entertainment, HT Medical, Hughes Training, Iowa State University,
KPMG Peat Marwick, Lockheed Martin, NASA, Raytheon, Silicon Graphics, The Walt
Disney Company, Thompson CSF, University of Illinois, U.S. Air Force, U.S. Navy,
Volkswagen, and Volvo among others.
Results of Operations and Financial Condition
Year Ended December 31, 1997, Compared to December 31, 1996
For the year ended December 31, 1997, the Company reported revenue of
$2,399,579, a 119% increase from the prior year in which the Company reported
revenue of $1,095,894. The increase is attributed primarily to increased sales
of its immersive display systems as well as engineering services which
contributed approximately $550,000 to revenue in 1997. Revenue derived from
engineering services was not significant in 1996. During 1997, the Company
delivered 64 systems compared to delivery of 24 systems in 1996. New products
such as the Datavisor VGA, the Datavisor 80, the Virtual Binoculars, and a
monoscopic viewing system (all of which the Company introduced in 1996)
contributed significantly to the increase in revenue during 1997. With the
exception of the Datavisor 80, the new products typically offer customers a
mid-range price/performance option compared to the Datavisor HiRes, which has
historically been the Company's core product. Although there can be no
assurances, management believes the products should allow the Company to
penetrate new markets and broaden its customer base accordingly. During 1997,
the Company continued aggressively promoting its products in international
markets by enlisting resellers such as Nihon Binary, Virtual Reality
Technologies, Virtual Presence, and Deneb Robotics. During 1997, revenue from
international operations represented approximately 35% of product sales compared
to 26% in 1996.
Sales in the fourth quarter of 1997 were 98% higher than in the same quarter in
1996, but were negatively impacted by supplier issues, primarily stemming from
components received from a major supplier which had to be returned to correct
quality defects. The Company has also received its first sample display tube
from another manufacturer in order to reduce the risk associated with reliance
upon a limited number of manufacturers. The quarter also reflects the shifting
of production to meet the $1.25 million order from a subsidiary of The Walt
Disney Company to be delivered in the first half of 1998. Although there can be
no assurances, the Company expects to substantially reduce backlog during the
first quarter of 1998. Backlog and sales as of March 6, 1998 totaled
approximately $1,800,000.
The Company's gross margin on sales for the year ended December 31, 1997 was
43%, unchanged from 1996. Quarterly fluctuations in gross margins in 1997 ranged
from a high of 51% in the third quarter to a low of 33% in the fourth quarter.
The gross margins in 1996 range from a high of 62% in the first quarter to a low
of 12 % in the fourth quarter. The Company may continue to report fluctuating
gross margins in the future, but it appears that the volatility of the
fluctuations is diminishing. At the current level of sales and production,
annual gross margins appear to be stabilizing at approximately 43%.
For the year ended December 31, 1997, operating expenses increased 38% to
$2,254,178 from $1,633,693 in 1996. General and administrative expenses and
marketing expenses increased significantly during the year while product
development costs decreased marginally. The increase in general and
administrative costs can be attributed to the growing infrastructure needs and
other requirements of a publicly listed company during a period of expansion.
For the year ended December 31, 1997, marketing and sales expenses increased 94%
to $556,632 from $287,694 in the same period in 1996. The increase is attributed
to a number of factors including additional advertising in industry trade
journals, additional sales staff needed to increase the sales of products in new
markets and an increased presence at national and international trade shows. The
increased marketing budget was needed in order to launch new products in markets
not previously penetrated by the Company's products. The Company expects a very
modest increase in marketing and sales expenses in the coming year.
For the year ended December 31, 1997, the Company reported product development
costs of $400,977, compared to $592,799 for the same period ended December 31,
1996. The decrease is
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Financial Review
n-vision 1997
attributed to the development of fewer new products in 1997 as compared to 1996.
Products under development in 1997 included continued development of the
Datavisor 80 as well as the Virtual Binoculars. Another product developed during
the year was the ViewPort product. However, the costs for developing this
product were funded by revenue from a prototyping contract awarded to the
Company by a subsidiary of The Walt Disney Company. The Company expects to
integrate existing liquid crystal display (LCD) technology in its new products
in 1998 to achieve a lower priced line of products.
Net non-operating income was $109,299 in 1997 versus a loss of $3,462,925 in
1996, but is not fully comparable from period to period because of a one time
financing charge incurred during 1996. In March 1996, the Company borrowed
$250,000 from three nonaffiliated persons under three separate 8% convertible
promissory notes, convertible into 750,000 shares of the Company's common stock
at the option of the noteholders. In April 1996, the three shareholders elected
to convert their notes. Because the conversion feature of the notes was granted
at a price substantially below the initial public offering price, a financing
expense of $3,500,000 was accrued during the period with a corresponding credit
to paid-in-capital.
Adjusting for the one-time expenses in 1996, the Company had a positive net
interest margin in 1997 of $109,299 compared to a positive net interest margin
of $37,075 in 1996. Interest was earned on the proceeds of the public offering
in 1996 for approximately seven months. The Company expects to have a positive
net interest margin in 1998 (See note F to the Financial Statements for further
information).
Liquidity and Capital Resources
Working capital totaled $2,683,434 as of December 31, 1997 compared to a working
capital balance of $4,232,653 as of December 31, 1996. The decrease in working
capital is due primarily to the operating loss sustained during the year. The
Company believes the current level of working capital should provide sufficient
liquidity to fund operations through the current year, including planned product
development.
Longer-term cash requirements, other than normal operating expenses, are
anticipated for the development of new products, financing of growth, and the
possibility of acquisitions of related businesses or technologies. The Company
believes the current level of capital is sufficient to satisfy the anticipated
cash requirements through the end of 1998. The Company has agreed to terms on a
$1,500,000 credit line with George Mason Bank of Fairfax, Virginia, to finance
receivables associated with the known and anticipated growth in sales.
Additionally, the Company has 1,380,000 class A warrants for $5.50 per share
outstanding which may be exercised during a four-year period expiring May 29,
2001. The warrants are also subject to redemption at the Company's election if
the Company's common stock price equals or exceeds $9.00 per share for 20
consecutive trading days within a period of 30 days. The Company, however, can
make no assurances that investors will elect to exercise the warrants or that
the required conversion price or redemption price can be reached since the
current trading price has been approximately in the $1.00-$2.50 range. Until
operations improve, and the Company obtains additional underwriting support to
replace its prior underwriter, which is no longer in business, the Company's
ability to generate proceeds from the conversion of the warrants may be
adversely affected. As of December 31, 1997, the Company had approximately eight
active market makers.
Income Taxes
The Company is organized as a C Corporation and pays income taxes based upon
accrual based taxable income adjusted for differences in the timing of reporting
certain expenses for tax and financial statement purposes. The Company's income
taxes payable if any, that may arise in the future may be offset by credits
available for certain research and development expenditures incurred.
As of December 31, 1997, the Company had a net operating loss carryforward
available to offset future taxable income generated through 2010 of
approximately $2,638,000. The deferred tax asset associated with these tax
benefits has been fully reserved in the Company's financial statements because
of the uncertainty surrounding future profitability. In the event of a change in
control of the Company, use of such a carryforward could be reduced.
Impact of Inflation and the Asian Financial Crisis
The Company believes that inflation has not had a material adverse effect on
sales or costs. Additionally, the Company believes that the financial crisis in
Asia will not have adverse affects on the operating results during 1998. During
1997, less than 10% of the Company's revenue was derived from products sold to
customers in Asia.
Year 2000 Issues
The Company's information systems are based on operating systems and
client/server applications that are fully Year 2000 compliant. As a result,
management believes the Company does not face significant Year 2000 issues.
Seasonality
Based on its limited experience to date, the Company believes that its future
operating results will not be subject to seasonal changes. Such effects, should
they occur, might become apparent in the Company's operating results during a
period of expansion. However, the Company can make no assurances that its
business can be significantly expanded.
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Financial Review
n-vision 1997
<TABLE>
<CAPTION>
Balance Sheets
December 31, 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Current Assets
Cash $ 876,805 $ 2,422,839
Investments 1,246,875 1,250,000
Accounts receivable
Trade 252,270 194,910
Other 15,335 19,332
Inventories 843,868 716,590
Prepaid expenses 83,227 48,731
- ---------------------------------------------------------------------------------------------------------------------------
Total Current Assets 3,318,380 4,652,402
Property and Equipment, net 604,617 302,745
Other Assets 27,193 40,585
- ---------------------------------------------------------------------------------------------------------------------------
$ 3,950,190 $ 4,995,732
Liabilities and Stockholders' Equity
- ---------------------------------------------------------------------------------------------------------------------------
Current Liabilities
Current maturities of note payable to Advanced Technology Systems, Inc. $ 120,000 $ 120,000
Current portion of capital lease obligation 24,599 21,554
Accounts payable 302,484 52,131
Accrued salaries and vacation 115,198 81,950
Deferred revenue and accrued warranty costs 72,665 144,114
- ---------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 634,946 419,749
Long-Term Liabilities
Note payable-Advanced Technology Systems, Inc. 360,000 480,000
Capital lease obligation (net of current portion) 2,497 27,334
Stockholders' Equity
Common stock, $.01 par value; 25,000,000 shares authorized;
5,293,673 and 5,312,625 shares issued and outstanding at
December 31, 1997 and 1996, respectively 52,937 53,126
Common stock subscriptions and notes receivable -- (91,722)
Paid-in capital 10,442,007 10,529,492
Unrealized loss on available-for-sale investment (3,125) --
Accumulated deficit (7,539,072) (6,422,247)
- ---------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 2,952,747 4,068,649
- ---------------------------------------------------------------------------------------------------------------------------
$ 3,950,190 $ 4,995,732
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
Financial Review
n-vision 1997
<TABLE>
<CAPTION>
Statements of Operations
Year ended December 31, 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Sales $ 2,399,579 $ 1,095,894
Cost of Sales 1,371,525 621,142
- ---------------------------------------------------------------------------------------------------------------------------
Gross Margin 1,028,054 474,752
Operating Expenses
General and administrative 1,296,569 753,200
Marketing and sales 556,632 287,694
Product development 400,977 592,799
- ---------------------------------------------------------------------------------------------------------------------------
Loss from Operations (1,226,124) (1,158,941)
Non-operating Income (Expense)
Interest income 160,099 156,244
Interest expense - bridge financing -- (3,500,000)
Interest expense - note and lease obligations (50,800) (119,169)
- ---------------------------------------------------------------------------------------------------------------------------
Loss Before Income Taxes (1,116,825) (4,621,866)
Provision for Income Taxes -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net Loss $(1,116,825) $(4,621,866)
- ---------------------------------------------------------------------------------------------------------------------------
Loss Per Common Share-basic and diluted $ (0.21) $ (0.98)
- ---------------------------------------------------------------------------------------------------------------------------
Shares Used in Calculation of Loss Per Common Share-basic and diluted 5,298,411 4,698,856
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
Financial Review
n-vision 1997
<TABLE>
<CAPTION>
Statements of Stockholders' Equity
Years ended December 31, 1997 and 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Common Common Stock Paid-in Accumulated Unrealized Total
Stock Subscriptions Capital Deficit Loss on
and Notes Available-for-Sale
Receivable Investment
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Balance, January 1, 1996 $ 30,000 $(700,364) $ 440,761 $(1,800,381) $ -- $(2,029,984)
Cancellation of Shareholder Notes
Receivable in Exchange for Common Stock (1,324) 612,413 (611,089) -- -- --
Interest on Shareholder Notes Receivable -- (29,722) -- -- -- (29,722)
Conversion of Note Payable to
Advanced Technology Systems, Inc.,
to Common Stock 2,000 -- 998,000 -- -- 1,000,000
Conversion of Bridge Loans Payable to
Shares and Associated Financing Expense 7,500 -- 3,742,500 -- -- 3,750,000
Issuance of Common Stock and Warrants 14,950 -- 5,930,185 -- -- 5,945,135
Proceeds on Common Stock
Subscriptions Receivable -- 25,951 6,180 -- -- 32,131
Provision for Contributed
Stockholder/Officer Services -- -- 22,955 -- -- 22,955
Net Loss -- -- -- (4,621,866) -- (4,621,866)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 53,126 (91,722) 10,529,492 (6,422,247) -- 4,068,649
Proceeds on Common Stock
Subscriptions Receivable -- -- 4,048 -- -- 4,048
Cancellation of Shareholder Notes
Receivable in Exchange for Common Stock (189) 91,722 (91,533) -- -- --
Unrealized Loss on Available-for-Sale
Investment -- -- -- -- (3,125) (3,125)
Net Loss -- -- -- (1,116,825) -- (1,116,825)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ 52,937 $ -- $10,442,007 $(7,539,072) $(3,125) $ 2,952,747
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
Financial Review
n-vision 1997
<TABLE>
<CAPTION>
Statements of Cash Flows
Year ended December 31, 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Increase (Decrease) in Cash
Cash Flows from Operating Activities
Net loss $ (1,116,825) $ (4,621,866)
- ---------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss to net cash used in operating activities
Interest expense associated with convertible notes payable -- 3,500,000
Provision for contributed stockholder/officer services -- 22,955
Accrued interest on shareholders' notes payable -- (29,722)
Depreciation and amortization 194,530 63,735
Loss on disposal of fixed assets 33,626 1,636
Changes in assets and liabilities
(Increase) decrease in accounts receivable (53,363) 22,982
Increase in inventories (90,956) (219,502)
Increase in prepaid expenses (34,496) (43,436)
Decrease in accounts payable (3,672) (257,132)
Increase in accrued salaries and vacation 33,248 40,897
(Decrease) increase in deferred revenue and accrued warranty costs (71,449) 32,830
Decrease in accrued interest on stockholder notes -- (253,445)
- ---------------------------------------------------------------------------------------------------------------------------
Total Adjustments 7,468 2,881,798
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Operating Activities (1,109,357) (1,740,068)
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchase of property and equipment (308,176) (243,262)
Proceeds from sale of fixed assets 9,243 --
Purchase of investments -- (1,250,000)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (298,933) (1,493,262)
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net proceeds from issuance of common stock and warrants 4,048 5,945,135
Payments to Advanced Technology Systems, Inc. (120,000) (491,613)
Payments on bank line of credit -- (67,237)
Proceeds from convertible note payable -- 250,000
Payments on capital lease obligations (21,792) (18,335)
Proceeds from shareholder notes receivable -- 32,131
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities (137,744) 5,650,081
- ---------------------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash (1,546,034) 2,416,751
Cash at Beginning of Year 2,422,839 6,088
- ---------------------------------------------------------------------------------------------------------------------------
Cash at End of Year $ 876,805 $ 2,422,839
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
Financial Review
n-vision 1997
Notes to Financial Statements
December 31, 1997 and 1996
Note A - Summary of Significant Accounting Policies
Nature of Operations
n-Vision, Inc. (the Company), a Delaware corporation, was incorporated in 1994.
The Company designs, develops, manufactures and markets state-of-the-art,
proprietary immersive display products and systems for a variety of commercial,
industrial and military applications.
Revenue Recognition
Revenue from the sale of products is recognized upon shipment. Related warranty
costs are provided for at the time of sale.
Currently, the Company has non-exclusive distribution agreements with companies
in the United Kingdom, Europe and Japan. The Company performs ongoing credit
evaluations of its customers' financial condition and usually requires no
collateral. The Company's typical sales terms with distributors permit certain
distributors the right to return products for credit against future purchases in
certain circumstances. As of December 31, 1997 and 1996, no reserve was recorded
because distributors have sold substantially all products to end users who have
no right of return.
Inventories
Inventories are stated at lower of cost or market. Cost is determined by the
first-in, first-out (FIFO) basis.
Property and Equipment
Property and equipment are stated at cost less depreciation computed using the
straight-line method over estimated useful lives of five to seven years for
furniture, three years for computer equipment and software, and two years for
demonstration equipment.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under the
liability method, a deferred tax asset, net of a valuation allowance, or
liability is recorded on the tax effects of temporary differences between the
tax basis and financial amounts of assets and liabilities, or for differences in
timing such as net operating losses. Temporary differences arise from accrued
warranty costs, receivable and inventory reserves and the liability for paid
leave.
Research and Development Costs
Research and development costs are expensed in the period in which they are
incurred.
Use of Estimates in Preparing Financial Statements
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Fair Value of Financial Instruments
The estimated fair value information as of December 31, 1997, presented herein
is required by Statement of Financial Accounting Standards (SFAS) No. 107,
"Disclosures About Fair Value of Financial Instruments." Such information which
pertains to the Company's financial instruments (primarily cash, investments and
borrowings) is based on the requirements set forth in SFAS No. 107 and does not
purport to represent the aggregate fair value of the Company. Further, the fair
value estimates are based on various assumptions, methodologies and subjective
considerations, which vary widely among different entities and are subject to
change. Financial instruments in the accompanying balance sheet consist of cash
deposits stated at cost which equals fair value and investments in debt
securities stated at the related security's quoted trading value. Notes payable
are presented in the accompanying balance sheets at the face value of the
obligation outstanding. Management is unable to determine the fair value of the
notes, as they are between related parties and no comparable market value data
for such instruments are available.
Loss Per Share
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share," effective for periods
ending after December 15, 1997. The Statement establishes standards for
computing and presenting earnings (or loss) per share and applies to entities
with publicly held common stock or potential common stock. The Statement
simplifies the standards for computing earnings per share previously found in
Accounting Principles Board Opinion No. 15, "Earnings Per Share," and makes the
standards comparable to international EPS standards. The Company has adopted the
provisions of SFAS No. 128 as required.
SFAS No. 128 replaces the presentation of primary EPS with a presentation of
basic EPS. It also requires a dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the diluted
EPS computation. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Diluted EPS is computed using the
weighted-average number of common shares and dilutive potential common shares
outstanding during the period. Basic and diluted loss per share for the Company
is the same amount because the effect of including warrants and stock options in
the diluted calculation is anti-dilutive. All loss per share amounts for all
periods have been presented, and where necessary, restated to conform to SFAS
No. 128 requirements.
16
<PAGE>
Financial Review
n-vision 1997
The following sets forth the computation of basic and diluted earnings per share
for the years ended December 31:
1997 1996
- ----------------------------------------------------------------------
Numerator
Net loss $(1,116,825) $(4,621,866)
- ----------------------------------------------------------------------
Denominator
Denominator for basic loss per
share - weighted-average
shares outstanding 5,298,411 4,698,856
- ----------------------------------------------------------------------
Effect of dilutive securities -
warrants and options -- --
Denominator for diluted loss per
share - adjusted weighted-average
shares and assumed conversions 5,298,411 4,698,856
- ----------------------------------------------------------------------
Basic and diluted loss
per share $ (.21) $ (.98)
- ----------------------------------------------------------------------
Note B - Investments
Investments consist of debt securities with a coupon rate of 5.75% and a
maturity date of November 15, 1998. Investments are carried at market value and
are classified as available for sale. The unrealized depreciation in the value
of the investments at December 31, 1997, of $3,125 has been presented as a
component of stockholders' equity. Market value approximated cost at December
31, 1996.
Note C - Inventories
Inventories consist of the following at December 31:
1997 1996
- ---------------------------------------------------------------------
Raw materials $ 625,423 $ 298,529
Work in process 186,570 113,709
Finished goods 67,370 381,217
Reserve for inventory obsolescence (35,495) (76,865)
- ---------------------------------------------------------------------
$ 843,868 $ 716,590
- ---------------------------------------------------------------------
Note D - Property and Equipment
Property and equipment consist of the following at December 31:
1997 1996
- ---------------------------------------------------------------------
Furniture $ 38,552 $ 18,757
Computers and equipment 499,322 298,143
Demonstration equipment 214,504 43,517
Computer software 126,336 81,736
Leasehold improvements 5,649 --
- ---------------------------------------------------------------------
884,363 442,153
Less accumulated depreciation (279,746) (139,408)
- ---------------------------------------------------------------------
$ 604,617 $ 302,745
- ---------------------------------------------------------------------
The net book value of property under capitalized leases at December 31, 1997 and
1996, was approximately $24,000 and $48,000, respectively.
Note E - Income Taxes
The provision for income taxes consists of the following for the year ended
December 31:
1997 1996
- ---------------------------------------------------------------------
Current (benefit) $ -- $ --
Deferred (benefit) (434,000) (426,000)
Valuation allowance 434,000 426,000
- ---------------------------------------------------------------------
$ -- $ --
- ---------------------------------------------------------------------
Following is a reconciliation of the statutory federal income tax rate to
effective rates reflected in the statements of operations for the years ended
December 31:
1997 1996
- ---------------------------------------------------------------------
Pretax loss $ (1,116,825) $(4,621,866)
- ---------------------------------------------------------------------
Tax (benefit) at statutory rate (379,721) $(1,571,434)
State income tax benefit,
net of federal expense (44,673) (184,875)
Permanent differences (9,606) 309
Non-deductible bridge
financing cost -- 1,330,000
Change in valuation allowance 434,000 426,000
- ---------------------------------------------------------------------
Income tax benefit $ -- $ --
- ---------------------------------------------------------------------
Deferred tax assets are composed of the following at December 31:
1997 1996
- ---------------------------------------------------------------------
Inventory and receivable reserves $ 22,988 $ 65,648
Other differences (4,788) (6,384)
Accrued vacation and
warranty expenses 35,880 21,113
Depreciation (6,178) (2,107)
Deferred warranty revenue 15,595 --
Net operating loss carryforward 1,002,522 554,504
- ---------------------------------------------------------------------
1,066,019 632,774
Valuation allowance (1,066,019) (632,774)
- ---------------------------------------------------------------------
$ -- $ --
- ---------------------------------------------------------------------
The Company has a net operating loss carryforward as of December 31, 1997, of
approximately $2,638,000 available to offset future tax income generated through
2012. In the event of a change in control of the Company, the use of all or a
portion of the net operating loss may be limited.
17
<PAGE>
Financial Review
n-vision 1997
Note F - Long-Term Obligations
Convertible Promissory Notes
In March 1996, the Company borrowed $250,000 from three nonaffiliated persons
under three separate 8% convertible promissory notes, convertible into 750,000
shares of the Company's common stock at the option of the shareholders. In April
1996, the three noteholders elected to convert their notes to a total of 750,000
shares of the Company's common stock.
Because the conversion feature of the notes was granted at a price substantially
below the initial public offering price, financing expense of $3,500,000 was
accrued during the period from the date of the notes payable and the date of the
public offering with a corresponding credit to paid-in capital.
Notes Payable - Advanced Technology Systems
The Company is obligated under a promissory note in the amount of $480,000 at
December 31, 1997. The note payable is unsecured and is due to Advanced
Technology Systems, Inc. (ATS), a Company principally owned and controlled by a
stockholder and officer of the Company. The principal balance on this note arose
from a line-of-credit arrangement with ATS, the borrowings on which amounted to
$1,127,328 at December 31, 1995. The balance due on the line of credit was
partially curtailed in June 1996, using the proceeds of the Company's initial
public offering. Interest is due on principal outstanding at 8% per annum.
Principal payments of $60,000 are payable twice each year in June and December
and commenced on June 30, 1997. Annual maturities of this note for each of the
next four years are $120,000 after which the note will be paid in full.
In connection with the acquisition of the Company's business from ATS in 1994,
the Company became obligated under a promissory note payable to ATS of
$1,020,590. In May 1996, this note was retired for cash of $20,590 and the
issuance of 200,000 shares of the Company's common stock.
Capital Lease Obligation
The Company leases certain equipment under a capitalized lease. The lease
commitment is for three years and expires in January 1999. Following is a
schedule of minimum lease payments under the capital lease together with the
present value of future minimum rentals as of December 31, 1997:
Year ending December 31,
- ---------------------------------------------------------------------
1998 $ 26,993
1999 2,249
- ---------------------------------------------------------------------
Total minimum lease payments 29,242
Amount representing interest (2,146)
Current portion of capital lease obligation (24,599)
- ---------------------------------------------------------------------
Present value of long-term capital lease obligation $ 2,497
- ---------------------------------------------------------------------
Note G - Commitments
Employment Agreements
The Company has employment agreements originating in 1996 with three officers.
Two of the agreements extend for a period of two years and the third agreement
extends for a period of three years. The Company's commitment under the
agreements is as follows:
Year ending December 31,
- --------------------------------------
1998 $ 350,000
1999 52,000
- --------------------------------------
$ 402,000
- --------------------------------------
In 1996, the Company recorded a provision for compensation expense of $22,955
and a corresponding credit to stockholders' equity for the value of services
rendered by the officers (who are also stockholders) based upon the difference
between the amount paid and the compensation called for in the above agreements.
Operating Leases
The Company is obligated under certain noncancelable operating leases for office
and manufacturing space and equipment. The Company subleases a portion of its
leased office space to ATS (see Note I) on a month-to-month basis, and to an
unrelated party under a sublease which is co-terminus with the Company's lease.
The following is a schedule of the approximate future minimum rental payments
required under operating leases, and future minimum sublease rental income under
subleases with terms of one year or more as of December 31, 1997.
Year ending December 31, Lease Sublease
Commitment Income
- ---------------------------------------------------------------------
1998 $ 146,485 $ (21,096)
1999 149,235 (21,096)
2000 26,885 (3,516)
- ---------------------------------------------------------------------
$ 322.595 $ (45,708)
- ---------------------------------------------------------------------
Total rent expense for the years ended December 31, 1997 and 1996, net of
sublease rental income, was approximately $72,000 and $18,000, respectively.
Note H - Stockholders' Equity
Initial Public Offering of Securities
In June 1996, the Company received proceeds, net of expenses, of $5,945,135 from
an initial public offering of securities. The offering included the sale of
1,495,000 shares of common stock at an offering price of $5.00 per share and
1,380,000 Class A warrants at $.15 per Class A warrant. The Class A warrants
shall be exercisable commencing one year after the date of the prospectus,
entitling the holder to purchase one share of common stock at $5.50 per share
during the four-year period commencing one year from the effective date of the
offering. The warrants are also redeemable upon certain conditions. The offering
also included the sale of 750,000 shares of
18
<PAGE>
Financial Review
n-vision 1997
common stock acquired by certain stockholders upon the conversion of certain
promissory notes into common stock in April 1996 as described in Note F.
Stock Option Plan
In 1996, the Company issued non-qualified stock options accounted for under
Accounting Principles Board Opinion No. 25. These options have variable terms
and become exercisable starting in 1998. The exercise price is equal to the fair
market value of the underlying shares at the date of grant.
Accordingly, no compensation cost has been recognized for the plan. Had
compensation cost for the plan been determined based on the fair value of the
options at the grant dates consistent with the method of SFAS No. 123, the
Company's net loss and loss per share would have been as follows:
1997 1996
- --------------------------------------------------------------------------------
As Reported Pro forma As Reported Pro forma
- --------------------------------------------------------------------------------
Net loss $(1,116,825) $(1,172,252) $(4,621,666) $(4,996,562)
Loss per share (.21) (.22) (.98) (1.06)
- --------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants in 1997 and 1996: expected volatility of 105.10% and
86.78%, respectively, calculated by averaging the Company's volatility with the
mean volatility of an appropriate peer group; risk-free interest rates ranging
from 5.78% to 6.69% in 1997 and 5.86% in 1996; and expected lives of three to
four years. The weighted-average fair value of options granted during 1997 and
1996 were $.92 and $2.98.
In 1997, the Company repriced certain options granted in prior years to
employees. In accordance with SFAS No. 123, the Company computed pro forma
compensation expense for the incremental value of the newly priced options over
the value of the old options at the repricing date.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
A summary of the status of the Company's incentive stock option plan as of
December 31, 1997 and 1996, and changes for the year then ended on those dates
is presented at the bottom of this page.
The following information applies to options outstanding at December 31:
1997 1996
- ---------------------------------------------------------------------------
Number outstanding 233,373 144,906
Range of exercise prices $.50 to $1.81 $1.75 to $3.84
Weighted-avg. exercise price .93 3.62
Weighted-avg. remaining contractual life 7.41 8.41
- ---------------------------------------------------------------------------
Note I - Related Party Transactions
During the year ended December 31, 1996, the Company paid $146,250 to a company
owned by one of its directors for research and development and inventory. No
such amounts were paid for the year ended December 31, 1997.
During the year ended December 31, 1996, the Company had sales of approximately
$217,000 to a U.S. government customer via a contract held by Advanced
Technology Systems, Inc. (ATS). No such sales were made for the year ended
December 31, 1997. In
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------------------------------------------
Weighted-Avg. Weighted-Avg.
Shares Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
Outstanding at beginning of year 149,906 $ 3.62 -- $ --
Granted 83,467 1.37 149,906 3.62
Cancellation of options to be repriced (133,976) 3.62 -- --
Grant of repriced options 133,976 .56 -- --
Exercised -- -- -- --
Forfeited -- -- -- --
- ----------------------------------------------------------------------------------------------------------------
Outstanding at year-end 233,373 $ .93 149,906 $ 3.62
- ----------------------------------------------------------------------------------------------------------------
Options exercisable at year-end -- $ -- -- $ --
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
Financial Review
n-vision 1997
addition, the Company was reimbursed $63,500 and $28,088 by ATS in 1997 and
1996, respectively, for administrative consulting services rendered by employees
of the Company on behalf of ATS.
Note J - Employee Benefit Plan
The Company sponsors a 401(k) retirement plan (the Plan) that originated January
1, 1993, and which is a defined contribution plan covering all full-time
employees of the Company who are at least 21 years of age and have three months
of continuous, full-time employment with the Company. The Plan is subject to the
provisions of the Employee Retirement Income Security Act of 1974. The Company
made no contributions to the Plan during fiscal years 1997 and 1996.
Note K - Concentrations
Deposit Credit Risk
Financial instruments which subject the Company to concentrations of credit risk
consist of demand-deposits placed with financial institutions. Funds in excess
of the federal insurance limit for the years ended December 31, 1997 and 1996,
totaled $776,805 and $2,322,839, respectively.
Suppliers
The Company currently buys 1" tubes, an important component of its products,
from two suppliers. Although both suppliers have provided tubes to meet
production requirements in the past, the Company had difficulty obtaining
sufficient quantities in the fourth quarter, resulting in a delay in
manufacturing and shipping products. Management believes no loss of sales
attributable to the delay will be realized. The Company has subsequently found a
third supplier to help alleviate such a risk in the future.
Customers
For the years ended December 31, 1997 and 1996, aggregate revenue derived from
one and two customers amounted to approximately 25% and 31%, respectively, of
the Company's total revenue. The Company had sales to customers outside the
United States (primarily Europe) constituting $583,690 and $288,503 for the
years ended December 31, 1997 and 1996, respectively.
Note L - Supplemental Cash Flows Information
Supplemental Cash Flow Information
The Company paid the following amounts for interest and income taxes during the
year ended December 31:
1997 1996
- ----------------------------------------------------------
Interest $ 50,800 $ 372,614
- ----------------------------------------------------------
Income taxes $ -- $ --
- ----------------------------------------------------------
An income tax refund of $101,000 was received in 1996.
Supplemental Non-Cash Financing and Investing Activities
In 1997, $217,703 of inventory used for demonstration purposes was reclassified
to property and equipment.
In 1996, a capital lease obligation of $65,000 was incurred by the Company for
equipment.
Note M - New Accounting Standards
SFAS No. 130
The Financial Accounting Standards Board recently released SFAS No. 130,
"Reporting Comprehensive Income," effective for fiscal years beginning after
December 15, 1997. The Statement establishes standards for reporting and display
of comprehensive income and its components (revenue, expenses, gains and losses)
in a complete set of general-purpose financial statements. The Statement
requires all items that are required to be recognized under accounting standards
as components of comprehensive income, be reported in a financial statement
which is displayed with the same prominence as other financial statements. SFAS
No. 130 requires no specific format for the financial statement, but requires an
enterprise to display an amount representing total comprehensive income for the
period in the financial statement. The Statement requires that an enterprise
classify items of other comprehensive income by their nature in a financial
statement, and display the accumulated balance of other comprehensive income
separately from the retained earnings and additional paid-in capital in the
equity section of a statement of financial position. Reclassification of
financial statements for earlier periods provided for comparative purposes is
required. The Company will comply with disclosure requirements of SFAS No. 130
in fiscal year 1998.
SFAS No. 131
The Financial Accounting Standards Board recently issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," effective
for periods beginning after December 15, 1997. The Statement establishes
standards for the methods by which public business enterprises report
information about operating segments in annual financial statements, and
requires those enterprises to report information about operating segments in
interim financial reports issued to shareholders. The Statement also establishes
standards for related disclosures about products and services, geographic areas
and major customers, and requires that a public business enterprise report
financial and descriptive information about its reportable operating segments.
Operating segments are composed of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decisionmaker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments. The Statement requires that a public
business enterprise report a measure of segment profit or loss, certain specific
revenue and expense items, and segment assets. Since the Company's management
has no identified segments, no significant impact to its financial statements is
expected in fiscal year 1998.
20
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
n-Vision, Inc.
We have audited the accompanying balance sheets of n-Vision, Inc., as of
December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity and cash flows for each of the two years in the period then
ended. These financial statements 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 financial statements referred to above present fairly, in
all material respects, the financial position of n-Vision, Inc., as of December
31, 1997 and 1996, and the results of its operations and its cash flows for each
of the two years in the period then ended, in conformity with generally accepted
accounting principles.
/s/ Grant Thornton, LLP
_______________________
Grant Thornton, LLP
Vienna, Virginia
February 24, 1998
EXECUTIVE OFFICERS:
Delmar J. Lewis
Chairman, Chief Executive Officer
Christopher J. Lewis
President, Chief Operating Officer, Director
Robert B. Hamilton
Executive Vice President, Chief Financial Officer, Secretary, Director
OTHER DIRECTORS:
Claude H. Rumsey, Jr.
Rear Admiral Ronald C. Wilgenbusch, USN (Retired)
GENERAL COUNSEL:
Patton Boggs, L.L.P.
2550 M Street N.W.
Washington, D.C. 20037-1350
INDEPENDENT AUDITORS:
Grant Thornton L.L.P.
2070 Chain Bridge Road
Suite 375
Vienna, VA 22182-2536
REGISTRAR AND TRANSFER AGENT:
American Stock Transfor & Trust
40 Wall Street
New York, NY 10005
COMMON STOCK & WARRANTS:
NASDAQ Small Cap Market System
Stock Symbol: NVSN
Warrant Symbol: NVSNW
CORPORATE HEADQUARTERS:
n-Vision, Inc.
7680 Old Springhouse Road
Madison Building, First Floor
McLean, VA 22102
703.506.8808 voice
703.903.0455 fax
http://wwww.nvis.com
salesenvis.com
NOTICE OF ANNUAL MEETING
The annual meeting of stockholders will be held on May 8, 1998,
at 10:00 am at The Ritz Carlton, 1700 Tysons, Boulevard, McLean,
Virginia 22102.
n-Vision and Datavisor are registered trademarks of n-Vision, Inc.
Graphic design: Beveridge Seay, Inc.
21
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<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
form 10-KSB for the period ended December 31, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US$
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1.00
<CASH> 876,805
<SECURITIES> 1,246,875
<RECEIVABLES> 292,605
<ALLOWANCES> (25,000)
<INVENTORY> 843,868
<CURRENT-ASSETS> 3,318,380
<PP&E> 884,363
<DEPRECIATION> (279,746)
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0
0
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<CGS> 1,371,525
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<OTHER-EXPENSES> 2,254,178
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<INTEREST-EXPENSE> (50,800)
<INCOME-PRETAX> (1,116,825)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,116,825)
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