UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the Quarterly period ended September 30, 2002.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from to .
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Commission File Number 0-12728
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INTEGRAL VISION, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-2191935
(State or other jurisdiction of (I.R.S. Employee
incorporation or organization) Identification Number)
38700 Grand River Avenue, 48335
Farmington Hills, Michigan
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 471-2660
---------------
Former name, former address and former fiscal year, if changed since last
report:
Not Applicable
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days.
YES X NO
------ -------
The number of shares outstanding of the registrant's Common Stock, no par value,
stated value $.20 per share, as of October 31, 2002 was 9,429,901.
1
PART I
FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
INTEGRAL VISION, INC. AND SUBSIDIARY
September 30, December 31,
2002 2001
(Unaudited)
----------------------------------
(in thousands)
ASSETS
CURRENT ASSETS
Cash $ 25 $ 125
Accounts receivable, less allowance of $240,000
($179,000 in 2001) 420 332
Inventories 242 208
Prepaid rent - Note J -- 91
Note receivable - Note M 83 --
Other current assets 48 71
------- -------
TOTAL CURRENT ASSETS 818 827
PROPERTY, PLANT AND EQUIPMENT
Production and engineering equipment 661 704
Furniture and fixtures 458 457
Vehicles 47 47
Computer equipment 1,169 1,153
------- -------
2,335 2,361
Less accumulated depreciation (2,302) (2,202)
------- -------
33 159
OTHER ASSETS
Capitalized computer software development costs, less
accumulated amortization of $8,038,000 ($7,837,000 in 2001) 565 710
Patents, less accumulated amortization of $366,000 ($485,000 in 2001) 106 268
------- -------
671 978
------- -------
$ 1,522 $ 1,964
======= =======
See notes to consolidated financial statements.
2
CONSOLIDATED BALANCE SHEETS -- CONTINUED
INTEGRAL VISION, INC. AND SUBSIDIARY
September 30, December 31,
2002 2001
(Unaudited)
-----------------------------------
(in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT)
CURRENT LIABILITIES
Notes payable - Notes F & M $ 941 $ 358
Accounts payable 833 993
Accrued compensation and related costs - Note M 329 427
Accrued state income taxes - Note B 202 195
Accrued interest - Notes F & M 126 30
Other accrued liabilities 63 206
Customer deposits 96 --
Current maturities of long term debt - Note F 357 90
-------- --------
TOTAL CURRENT LIABILITIES 2,947 2,299
LONG-TERM DEBT, less current maturities and
O.I.D. - Note F 596 337
STOCKHOLDERS' EQUITY(DEFICIT)
Common stock, without par value, stated value $.20
per share; 20,000,000 shares authorized; 9,429,901
shares issued and outstanding 1,886 1,886
Additional paid-in capital 31,362 31,265
Retained earnings deficit (35,200) (33,362)
Notes receivable from officers - Note M (69) (250)
Accumulated translation adjustment - Note P -- (211)
-------- --------
Total Stockholders' Equity(Deficit) (2,021) (672)
-------- --------
$ 1,522 $ 1,964
======== ========
See notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF OPERATIONS
INTEGRAL VISION, INC. AND SUBSIDIARY
Three Months Ended September 30,
2002 2001
------------------------------
(Unaudited)
(In thousands, except per share data)
Net revenues $ 556 $ 506
Costs of sales:
Direct costs of sales - Note L 284 820
Depreciation and amortization - Notes J, K & L 156 895
------- -------
Total costs of sales 440 1,715
------- -------
Gross margin 116 (1,209)
Other costs and expenses:
Marketing 141 350
General and administrative - Note M 202 683
Engineering and development:
Expenditures 217 421
Allocated to capitalized software and direct
cost of sales -- (92)
------- -------
Net engineering and development expenses 217 329
------- -------
Total costs and expenses 560 1,362
------- -------
Operating loss (444) (2,571)
Gain on sales of assets - Notes J & K 111 77
Interest income and other - Notes B & M 30 --
Interest expense - Notes F & J (59) (13)
Foreign currency translation gain (loss) - Note P 9 --
------- -------
Loss from operations before income taxes (353) (2,507)
Provision (credit) for income taxes -- --
------- -------
Net loss $ (353) $(2,507)
======= =======
Basic and diluted earnings (loss) per share $ (0.04) $ (0.27)
Weighted average number of shares of common stock and
common stock equivalents, where applicable 9,430 9,295
======= =======
See notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF OPERATIONS
INTEGRAL VISION, INC. AND SUBSIDIARY
Nine Months Ended September 30,
2002 2001
-------------------------------
(Unaudited)
(In thousands, except per share data)
Net revenues $ 1,382 $ 2,157
Costs of sales:
Direct costs of sales - Note L 756 1,875
Depreciation and amortization - Notes J, K & L 339 1,856
------- -------
Total costs of sales 1,095 3,731
------- -------
Gross margin 287 (1,574)
Other costs and expenses:
Marketing 487 1,297
General and administrative - Note M 911 1,461
Engineering and development:
Expenditures 612 1,663
Allocated to capitalized software and direct
cost of sales - (334)
------- -------
Net engineering and development expenses 612 1,329
------- -------
Total costs and expenses 2,010 4,087
------- -------
Operating loss (1,723) (5,661)
Gain on sales of assets - Notes J & K 129 80
Interest income and other - Notes B & M 37 89
Interest expense - Notes F & J (172) (141)
Foreign currency translation loss - Note P (199) -
------- -------
Loss from operations before income taxes (1,928) (5,633)
Provision (credit) for income taxes - Note N (90) -
------- -------
Loss from operations (1,838) (5,633)
Loss on sale of note receivable - Note B - (441)
------- -------
Net loss $(1,838) $(6,074)
======= =======
Basic and diluted earnings (loss) per share:
Loss from operations $ (0.19) $ (0.62)
Loss on sale of note receivable - Note B - (0.05)
------- -------
Net loss $ (0.19) $ (0.67)
======= =======
Weighted average number of shares of common stock and
common stock equivalents, where applicable 9,430 9,119
======= =======
See notes to consolidated financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INTEGRAL VISION, INC. AND SUBSIDIARY
Nine Months Ended September 30,
2002 2001
-------------------------
(Unaudited, in thousands)
OPERATING ACTIVITIES
Net loss $(1,838) $(6,074)
Loss on sale of note receivable -- 441
------- -------
Loss from operations (1,838) (5,633)
Adjustments to reconcile loss from operations to
net cash used in operating activities:
Depreciation 122 481
Amortization 340 1,667
Gain on sales of assets (129) (80)
Deemed compensation 256
Changes in operating assets and liabilities:
Accounts receivable (88) 451
Inventories (34) 642
Prepaid and other 212 (106)
Accounts payable and other current liabilities (147) 369
------- -------
NET CASH USED IN OPERATING ACTIVITIES (1,562) (1,953)
INVESTING ACTIVITIES
Payments received on note receivable -- 1,189
Proceeds from the sale of a portion of note receivable -- 300
Repurchase of portion of note receivable -- (221)
Sale (Purchase) of property and equipment 40 2,340
Investment in capitalized software -- (334)
Proceeds from sale of packaging technology -- 500
Proceeds from sale of disc technology 100 --
Other (7) (7)
------- -------
NET CASH PROVIDED BY INVESTING ACTIVITIES 133 3,767
FINANCING ACTIVITIES
Repayments of mortgage note payable -- (1,962)
Repayments on revolving line of credit -- (270)
Proceeds from sale of Class 2 Notes, net of repayments 528
Proceeds from sale of debentures, net of discount 493 324
Proceeds from sale of warrants 97 71
------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,118 (1,837)
------- -------
EFFECT OF EXCHANGE RATE CHANGES 211 (51)
------- -------
DECREASE IN CASH (100) (74)
CASH AT BEGINNING OF PERIOD 125 78
------- -------
CASH AT END OF PERIOD $ 25 $ 4
======= =======
See notes to consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTEGRAL VISION, INC. AND SUBSIDIARY
SEPTEMBER 30, 2002
(Unaudited)
Note A -- Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three-month and nine-month periods ended September 30, 2002 are not
necessarily indicative of the results that may be expected for the year
ended December 31, 2002. For further information, refer to the consolidated
financial statements and notes thereto included in Integral Vision's Annual
Report on Form 10-K for the year ended December 31, 2001.
Note B -- Sale of Welding Controls Division
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 (WTC note). The interest bearing portion of the note,
approximately $1.9 million, carried an interest rate approximating prime
plus 1% and required 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 matured on February 15, 2001.
In January 2001, the Company sold 19.9% of the $1.7 million then
outstanding under the note agreement to third party investors in exchange
for consideration of $300,000. In May 2001, the Company completed a
transaction whereby it repurchased the portion of the note previously sold
to the investors and then sold the entire note receivable, which had an
outstanding balance of $1.1 million at April 30, 2001, to a third party for
$750,000. The Company recognized a loss on sale of the note receivable of
$441,000 in the quarter ended March 31, 2001.
The Company incurred both Federal and State income tax liabilities as a
result of the sale of the assets of it Welding Controls division. The
Company paid approximately $90,000 for its 1999 alternative minimum tax
liability, which resulted primarily from the gain on the sale of the
Welding Controls Division. This amount was refunded to the Company in 2002
(see Note N to consolidated financial statements). Additionally, the
Company incurred a Michigan Single Business Tax (SBT) liability of
approximately $120,000 for the 1999 tax year as a result of the
transaction. At September 30, 2002, this liability was not yet paid and was
included in accrued state income taxes in the consolidated balance sheet.
Approximately $82,000 for interest and penalties on this obligation have
also been accrued and included in accrued state income taxes in the
consolidated balance sheet.
7
Note C -- Comprehensive Income
The components of comprehensive income(loss) for the three and nine-month
periods ended September 30, 2002 and 2001 are as follows (see Note P to
consolidated financial statements):
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------------------------- --------------------------
(unaudited, in thousands)
Net loss $ (353) $ (2,507) $ (1,838) $ (6,074)
Translation adjustments - 17 211 (51)
------ -------- -------- --------
$ (353) $ (2,490) $ (1,627) $ (6,125)
====== ======== ======== ========
The components of accumulated comprehensive income(loss) at September 30, 2002
and December 31, 2001 are as follows:
September 30, December 31,
2002 2001
(unaudited)
----------------------- ------------------------
(in thousands)
Accumulated translation adjustments $ - $ (211)
Note D -- Inventories
Inventories are stated at the lower of first-in, first-out cost or market,
and the major classes of inventories at the dates indicated were as
follows:
September 30, December 31,
2002 2001
(Unaudited)
---------------------- -----------------------
(in thousands)
Raw materials $ 1 $ 43
Work-in-process 228 81
Finished goods 13 84
---------------------- -----------------------
$ 242 $ $ 208
====================== =======================
Note E -- Costs and Estimated Earnings in Excess of Billings on Incomplete
Contracts
Contracts whose duration overlap an accounting quarter reporting period,
are non-repetitive and exceed $100,000 are accounted for under the
percentage-of-completion accounting method.
The Company had no long-term contracts at September 30, 2002 or at December
31, 2001.
8
Note F -- Long-Term Debt and Other Financing Arrangements
In March 2001, the Company's board of directors approved the issuance of up
to $1.5 million of senior debentures (increased to $2.0 million in May
2002). At June 30, 2001, $120,000 of the debentures had been placed of
which $24,000 was deemed a discount on the note based on a $.10 per share
value assigned to the warrants received by the purchaser. The debentures
had maturities of up to four years and an interest rate of 15%. The holders
of the debentures received warrants for the purchase of two Integral Vision
shares for each $1 in principal value of the debentures purchased. The
warrants have a conversion rate of $.50 per share. In July 2001, the
Company's board of directors and the holder of the previously outstanding
debentures approved an amendment to the terms of its debentures. As a
result of the amendment, the debentures, including the $120,000 placed
prior to the amendment, have an interest rate of 10% and continue to have
maturities of up to four years. Additionally, the directors will determine
the conversion rate at the date of issuance, subject to change in the event
additional shares are issued in the future. In the nine months ended
September 30, 2002, an additional $590,000 of the debentures were placed,
$350,000 of which were purchased by the Company's chairman Charles J Drake.
Additionally, $40,000 of these debentures were purchased by Max A. Coon,
the Company's vice chairman and secretary, pursuant to an agreement between
Mr. Coon and the Company on March 5, 2002. When given proper notice that
the Company required cash to meet its obligations, the agreement obligated
Mr. Coon to provide cash to the Company in exchange for debentures and
warrants, the terms of which were established on the date of the agreement.
As part of the purchase, Mr. Coon received warrants for the purchase of
120,000 shares of Integral Vision common stock at a conversion price of
$0.35 per share. At September 30, 2002, a total of $1,100,000 of the
debentures had been placed. The purchasers of these debentures received
warrants for the purchase of 240,000 shares of the Company's common stock
at a conversion price of $.50 per share, 2,790,000 shares at a conversion
price of $.35 per share and 50,000 shares at a conversion price of $.80 per
share. At September 30, 2002, there was approximately $145,000 in principal
and interest due to the debenture holders under the terms of the agreement.
Although these payments are past due, the debenture holders have not given
the Company a written notice of default and, subsequent to September 30,
2002, four of the prior note purchasers invested in an additional $200,000
in Class 2 Notes. The Company is negotiating with the debenture holders to
extend the payment dates of the Notes and expects to reach an agreement
before the end of the year.
Effective May 1, 2002, the Note and Warrant Purchase Agreement was amended
to provide for "Class 2 Notes" and "Class 2 Warrants" which are
subordinated to the prior purchasers. Class 2 Notes are working capital
notes which are secured by accounts receivable of the Company. The number
of Class 2 Warrants to be obtained is based on the length of time the
related Class 2 Note is outstanding. In the nine months ended September 30,
2002, $550,000 of the Class 2 Notes were purchased by the prior note
purchasers. The outstanding principal balance on the Class 2 Notes was
$528,000 at September 30, 2002. Subsequent to September 30, 2002, $200,000
of additional Class 2 Notes were purchased by the prior note purchasers.
In May 2002, the Company's board of directors approved an increase to the
amount of debentures that can be issued under the 2001 debenture plan from
$1.5 million to $2.0 million. The increase gives the Company added
flexibility in its efforts to meet its working capital needs.
9
At September 30, 2002, the Company had short-term notes payable to related
parties of approximately $413,000. The Company's notes to related parties
included the following: a $139,000 obligation to Maxco, Inc. (a 25% owner
of the Company); a $158,000 obligation to Warren, Cameron, Faust &
Asciutto, P.C. (the Company's corporate counsel); a $79,000 obligation to
2161 Limited Partnership (a partnership in which J. Michael Warren of
Warren, Cameron, Faust & Asciutto, P.C. is a partner); an $18,000
obligation to Mark R. Doede (an officer of the Company); and a $19,000
obligation to Charles J. Drake (an officer of the Company). These notes
have interest rates ranging from 5.5% to 8.0% and are due on demand.
Note G -- Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------- ------- ------- -------
(unaudited)
(in thousands, except per share data)
NUMERATOR FOR BASIC AND DILUTED EARNINGS PER
SHARE - INCOME (LOSS) AVAILABLE TO COMMON
STOCKHOLDERS
Loss from operations $ (353) $(2,507) $(1,838) $(5,633)
Loss on sale of note receivable -- -- -- (441)
------- ------- ------- -------
Net loss $ (353) $(2,507) $(1,838) $(6,074)
*there was no effect of dilutive securities see below
DENOMINATOR FOR BASIC AND DILUTED EARNINGS (LOSS) PER
SHARE - WEIGHTED AVERAGE SHARES 9,430 9,295 9,430 9,119
*there was no effect of dilutive securities see below
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
Loss from operations $ (0.04) $ (0.27) $ (0.19) $ (0.62)
Loss on sale of note receivable -- -- -- (0.05)
------- ------- ------- -------
Net loss $ (0.04) $ (0.27) $ (0.19) $ (0.67)
------- ------- ------- -------
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 H.
10
Note H -- Stock Options and Warrants
In March 2001, the Company's board of directors approved the issuance of up
to $1.5 million of senior debentures (increased to $2.0 million in May
2002). At June 30, 2001, $120,000 of the debentures had been placed of
which $24,000 was deemed a discount on the note based on a $.10 per share
value assigned to the warrants received by the purchaser. The debentures
had maturities of up to four years and an interest rate of 15%. The holders
of the debentures received warrants for the purchase of two Integral Vision
shares for each $1 in principal value of the debentures purchased. The
warrants have a conversion rate of $.50 per share. In July 2001, the
Company's board of directors and the holder of the previously outstanding
debentures approved an amendment to the terms of its debentures. As a
result of the amendment, the debentures, including the $120,000 placed
prior to the amendment, have an interest rate of 10% and continue to have
maturities of up to four years. Additionally, the directors will determine
the conversion rate at the date of issuance, subject to change in the event
additional shares are issued in the future. In the nine months ended
September 30, 2002, an additional $590,000 of the debentures were placed,
$350,000 of which were purchased by the Company's chairman Charles J Drake.
Additionally, $40,000 of these debentures were purchased by Max A. Coon,
the Company's vice chairman and secretary, pursuant to an agreement between
Mr. Coon and the Company on March 5, 2002. When given proper notice that
the Company required cash to meet its obligations, the agreement obligated
Mr. Coon to provide cash to the Company in exchange for debentures and
warrants, the terms of which were established on the date of the agreement.
As part of the purchase, Mr. Coon received warrants for the purchase of
120,000 shares of Integral Vision common stock at a conversion price of
$0.35 per share. At September 30, 2002, a total of $1,100,000 of the
debentures had been placed. The purchasers of these debentures received
warrants for the purchase of 240,000 shares of the Company's common stock
at a conversion price of $.50 per share, 2,790,000 shares at a conversion
price of $.35 per share and 50,000 shares at a conversion price of $.80 per
share. At September 30, 2002, there was approximately $145,000 in principal
and interest due to the debenture holders under the terms of the agreement.
Although these payments are past due, the debenture holders have not given
the Company a written notice of default and, subsequent to September 30,
2002, four of the prior note purchasers invested in an additional $200,000
in Class 2 Notes. The Company is negotiating with the debenture holders to
extend the payment dates of the Notes and expects to reach an agreement
before the end of the year.
Effective May 1, 2002, the Note and Warrant Purchase Agreement was amended
to provide for "Class 2 Notes" and "Class 2 Warrants" which are
subordinated to the prior purchasers. Class 2 Notes are working capital
notes which are secured by accounts receivable of the Company. The number
of Class 2 Warrants to be obtained is based on the length of time the
related Class 2 Note is outstanding. In the nine months ended September 30,
2002, $550,000 of the Class 2 Notes were purchased by the prior note
purchasers. The outstanding principal balance on the Class 2 Notes was
$528,000 at September 30, 2002. Subsequent to September 30, 2002, $200,000
of additional Class 2 Notes were purchased by the prior note purchasers.
In May 2002, the Company's board of directors approved an increase to the
amount of debentures that can be issued under the 2001 debenture plan from
$1.5 million to $2.0 million. The increase gives the Company added
flexibility in its efforts to meet its working capital needs.
11
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
through June 30, 2004, all of which were outstanding at September 30, 2002.
Pursuant to the Company's 1997 Note and Warrant Purchase Agreement, the
conversion price has been adjusted to take into consideration warrants
issued subsequent to the 1997 placement. At September 30, 2002, the
adjusted conversion price was $5.26 per share, which would allow holders of
these warrants to increase the number of shares they are entitled to
purchase from 1,400,000 shares to 1,825,203 shares.
In January 2002, the Compensation Committee of the Company's Board of
Directors resolved to grant 225,000 qualified stock options for the
purchase of common shares with an exercise price equal to the market price
at the close of trading on the grant date, $.10 per share. In order to
facilitate this grant, Mr. Charles Drake, the Company's Chairman, agreed to
forfeit options on 144,000 shares so that they could be distributed to
other key people. Additionally, in March 2002, the Compensation Committee
resolved to grant 55,000 qualified and 20,000 non-qualified stock options
for the purchase of common shares with an exercise price equal to the
market price at the close of trading on the grant date, $.24 per share.
At September 30, 2002, there were options outstanding to purchase 1,065,000
shares of common stock at prices ranging from $.10 to $9.25 per share.
A summary of the outstanding warrants and options is as follows:
Weighted Weighted
Average Number Average Number
Exercise Price Outstanding (1) Remaining Life Exercisable (1)
-------------------------------------------------------------------------
(number of shares in thousands)
1997 Note and Warrant Purchase Agreement $ 5.26 1,825 4.8 1,825
2001 Note and Warrant Purchase Agreement $ 0.37 3,080 3.1 3,080
Qualified ISO Plan $ 6.55 58 0.9 58
Non-Qualified Stock Option Plan $ 5.92 9 2.0 9
1995 Employee Stock Option Plan $ 1.15 498 7.8 400
1999 Employee Stock Option Plan $ 0.51 500 8.3 242
------------------------------------------------------------------------
$ 2.01 5,970 4.4 5,614
========================================================================
(1)Excludes warrants exercisable under Class 2 Notes. The number of
warrants available to holders of Class 2 Notes is dependent on the
length of time the principal balance is outstanding and the agreed
upon base exercise price. In the nine months ended September 30,
2002, $550,000 of the Class 2 Notes had been placed.
12
Note I -- Operations by Geographic Area
The following presents information by geographic area:
September 30, December 31,
2002 2001
(unaudited)
---------------------------------
(in thousands)
Identifiable assets:
United States $ 5,137 $ 5,466
United Kingdom 220 333
Eliminations (3,835) (3,835)
------- -------
$ 1,522 $ 1,964
======= =======
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------- ------- ------- -------
(unaudited)
(in thousands)
Net revenues from unaffiliated customers:
United States $ 363 $ 239 $ 762 $ 1,193
Untied Kingdom 193 267 620 964
------- ------- ------- -------
$ 556 $ 506 $ 1,382 $ 2,157
======= ======= ======= =======
Earnings (loss) from operations before income taxes:
United States $ (407) $(1,765) $(4,584) $(4,133)
United Kingdom 54 (742) 2,656 (1,500)
------- ------- ------- -------
$ (353) $(2,507) $(1,928) $(5,633)
======= ======= ======= =======
Depreciation and amortization expense:
United States $ 187 $ 710 $ 442 $ 1,740
United Kingdom - 266 20 408
------- ------- ------- -------
$ 187 $ 976 $ 462 $ 2,148
======= ======= ======= =======
Capital expenditures:
United States $ - $ - $ - $ -
United Kingdom - - - -
------- ------- ------- -------
$ - $ - $ - $ -
======= ======= ======= =======
Net revenues by geographic area:
North America* $ 420 $ 283 $ 587 $ 1,197
Europe 104 214 492 846
Asia 32 9 303 114
------- ------- ------- -------
$ 556 $ 506 $ 1,382 $ 2,157
======= ======= ======= =======
* Geographic areas that are considered individually material are listed (more
than 10% of net revenues), all others are included in North America and in
total are considered immaterial.
13
Note J -- Sale of Building
On July 27, 2001, the Company completed a transaction to sell the building
it currently occupies in Farmington Hills, MI for $2.45 million, at which
time the existing mortgages were retired. The Company continues to occupy a
portion of the building under a five-year lease agreement with the new
owner. Net proceeds from the sale was approximately $200,000 of which
$186,000 was used to prepay nine months of rent, a requirement of the lease
agreement. The Company recognized a loss on the transaction of
approximately $22,000 in the third quarter of 2001, which is included in
gain on sales of assets.
Note K -- Sale of Technology
Packaging Inspection Technology
On August 24, 2001, the Company completed the sale of certain of its
packaging applications software and most of the fixed assets of its
subsidiary, Integral Vision Ltd., to n.v. DIMACO, s.a. for $500,000 in cash
and future royalties. Included in the transaction was the sale of the
worldwide exclusive rights to Integral Vision's "Full Bottle Inspection
System" (FBIS), a product that performs certain inspections on bottles at
the end of a filling line. Integral Vision will receive a royalty on each
FBIS sold for the next three years. The proceeds from the transaction were
used primarily to fund current operations and to pay down existing trade
payables.
Also included with the transaction was a manufacturing agreement whereby
DIMACO will manufacture products for Integral Vision's Optical Disc and
Display Inspection customers in Europe.
Under the terms of the sale, most of Integral Vision Ltd.'s personnel and
costs will transfer to DIMACO. However, Integral Vision Ltd. will maintain
sales and service staff to support its Optical Disc and Display Inspection
customers in Europe.
The approximate net book values of the assets sold were $13,000 for
inventory, $97,000 for fixed assets, and $276,000 for capitalized software
development costs. The Company recognized a gain on the transaction of
approximately $114,000, which is included in gain on sales of assets in the
third quarter of 2001, primarily attributable to the software included in
the sale.
The packaging applications included in the sale accounted for approximately
$34,000 and $516,000 of the Company's net revenue for the three and nine
month periods ended September 30, 2001, respectively.
Optical Disc Inspection Technology
On September 9, 2002, DaTARIUS Technologies Inc., a subsidiary of global
test equipment manufacturer DaTARIUS Technologies GmbH, purchased Integral
Vision's assets related to inspection systems for the optical disc
industry, including the names "Automatic Inspection Systems" and "AID." The
sale included Integral Visions optical disc scanner products as well as its
range of print and identification code products used to inspect the
printing stage of disc manufacture. The consideration the Company received
for the technology consisted of a $100,000 advanced minimum royalty payment
in addition to future royalties. Additionally, the Company received $25,000
from the sale of equipment to DaTARIUS. The Company recognized a gain on
the transaction of approximately $112,000, which is included in gain on
sale of assets in the third quarter of 2002, primarily attributable to the
advanced minimum royalty payment received. The proceeds from the
transaction were used primarily to fund current operations.
14
Included with the transaction was a Transition Services Agreement whereby
Integral Vision provides assembly and agreed upon technical support
services for the product line for up to twelve months after the closing
date at an agreed upon rate.
The optical disc inspection technology included in the sale accounted for
approximately $312,000 of the Company's net revenue for the three months
ended September 30, 2002 compared to $292,000 for the three months ended
September 30, 2001. For the nine months ended September 30, 2002, sales of
the optical disc inspection technology accounted for approximately $743,000
of the Company's net revenue compared to $946,000 in the 2001 comparable
period.
Note L -- Change in Estimate
Management has focused its development, sales and marketing efforts on the
Company's inspection systems for the small flat panel display (SFPD)
industry. Industry sources indicate that this market will be substantial
once fully developed. The Company has developed inspection solutions for
the leading technologies used in the SFPD industry including liquid crystal
on silicon (LCOS), organic light emitting diodes (OLED), liquid crystal
display (LCD), and microelectromechanical systems (MEMS).
Management periodically performs an analysis of the net realizable value of
capitalized software costs. In 2001, based on market conditions and the
direction of the Company, Management determined that capitalized software
development costs exceeded the estimated net realizable value of amounts
capitalized and a write-down was necessary. For the quarter ended September
30, 2001, $480,000 of additional amortization was included in costs of
sales as a result of these analyses. Additionally, as a result of the
analyses, direct costs of sales for the quarter ended September 30, 2001
included a $350,000 charge for the write-down of inventory.
In the third quarter of 2002, Management determined that capitalized patent
costs exceeded the estimated net realizable value of amounts capitalized
and a write-down was necessary. In the quarter ended September 30, 2002,
$74,000 of additional amortization was included in costs of sales as a
result of this determination.
Note M -- Officers' Advances
In 2001, Messrs. Charles Drake and Mark Doede each had loans from the
Company, the outstanding balances of which were included in the
stockholders' equity section of the consolidated balance sheet. In August
2001, the Compensation Committee of the Company's Board of Directors
resolved to forgive $100,000 of the outstanding balance on each of their
loans from the Company. The $200,000 charge for the write-down of the notes
was included in general and administrative expenses in the consolidated
statement of operations in the quarter ended September 30, 2001. Mr. Drake
also made approximately $250,000 in principal payments on his note in 2001.
Mr. Drake paid off the remaining principal balance of this note in 2002.
At June 30, 2002, Mr. Drake had received other short-term advances from the
company of approximately $83,000. This amount is evidenced by a demand note
and carries interest at 5.5% per annum. This amount is included in note
receivable in the consolidated balance sheet. Mr. Drake received no new
advances from the Company subsequent to June 30, 2002. Additionally, Mr.
Drake has advanced approximately $19,000 to the Company, which the Company
used to meet certain working capital requirements. This advance is included
in short-term notes payable in the consolidated balance sheet.
15
In 2002, Mr. Doede made principal payments on his note of approximately
$119,000. At September 30, 2002, Mr. Doede's outstanding note balance was
$69,000. Mr. Doede received no new advances from the Company subsequent to
June 30, 2002. Additionally, Mr. Doede has advanced approximately $18,000
to the Company, which the Company used to meet certain working capital
requirements. This advance is included in short-term notes payable in the
consolidated balance sheet. Mr. Doede has also voluntarily deferred
approximately $40,000 of his wages. This amount is included in accrued
compensation and related costs in the consolidated balance sheet.
At September 30, 2002, Mr. Arthur Harmala, the Company's Vice President of
Marketing, had voluntarily deferred approximately $19,000 of his wages.
This amount is included in accrued compensation and related costs in the
consolidated balance sheet.
Note N -- Income Taxes
In March 2002, Congress enacted what is known as the "Job Creation and
Worker Assistance Act of 2002" to provide tax incentives for economic
recovery. One of the provisions of the Act was to extend the carryback
period for net operating losses incurred in tax years ending in 2001 or
2002 to five years versus the three years previously allowed. Additionally,
any net operating losses as computed for alternative minimum tax purposes
for tax years ending in 2001 or 2002 can also be carried back five years
and can be used to offset up to 100% of alternative minimum taxable income.
Previously, alternative minimum tax net operating losses could only be used
to offset up to 90% of alternative minimum taxable income. As a result of
this Act, the Company was able to carryback its 2001 net operating loss as
computed for alternative minimum tax purposes to 1999, which reduced its
tax liability in that year to zero. In the quarter ended September 30,
2002, the Company received a refund of taxes previously paid of
approximately $90,000.
Note O -- Going Concern Matters
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, the Company has incurred losses from operations in the current
and prior year nine month periods of $1.8 million and $5.6 million,
respectively. Further, during the years ended December 31, 2001, 2000, 1999
and 1998, the Company incurred losses from continuing operations of $7.7
million, $7.1 million, $5.7 million and $11.2 million, respectively. The
continuing losses, in addition to working capital deficiencies, recurring
reductions in product sales, and cash flow deficiencies, among other
factors, may indicate that the Company will be unable to continue as a
going concern for a reasonable period of time.
The financial statements do not include any adjustments that might be
necessary should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
obtain additional financing as may be required, and ultimately to attain
profitability. The Company's anticipated cash provided by operating
activities will not be sufficient to support the Company's cash flow needs
over the next twelve months. The projected cash shortfall over the next
twelve months is estimated to be approximately $550,000, which is primarily
attributable to amounts due to the Company's current debenture holders over
the next twelve months. In order to address this shortfall, the Company is
negotiating with the debenture holders to extend the payment dates of the
Notes and expects to reach an agreement before the end of the year. At
September 30, 2002, there was approximately $145,000 in principal and
interest due to the debenture holders under the terms of the agreement.
Although these payments are past due, the debenture holders have not given
the Company a written
16
notice of default and, subsequent to September 30, 2002, four of the prior
note purchasers invested in an additional $200,000 in Class 2 Notes. In
March 2001, the Company's board of directors approved the issuance of up to
$1.5 million of senior debentures (increased to $2.0 million in May 2002),
which could provide additional financing to the Company. Additionally,
effective May 1, 2002, the Company's Note and Warrant Purchase Agreement
was amended to provide for "Class 2 Notes" and "Class 2 Warrants" which are
subordinated to the prior purchasers. Class 2 Notes are working capital
notes which are secured by accounts receivable of the Company. Management
could also fund the projected shortfall through the sales of its debentures
and Class 2 Notes. Additionally, if necessary, Management would attempt to
obtain any additional cash needed to enable the Company to continue as a
going concern through possible joint ventures and other strategic
alliances. Additional financing may or may not be available through banks.
There can be no assurance that Management will be able to successfully
execute these plans before the Company has exhausted all of its resources.
These uncertainties raise substantial doubt about the Company's ability to
continue as a going concern.
Note P -- Foreign Currency Translation Adjustment
In June 2002, Integral Vision, Inc. wrote-off an inter-company receivable
due from Integral Vision Ltd., its subsidiary in the United Kingdom. As the
consolidated financial statements include the accounts of both entities,
upon consolidation, the charge recorded by Integral Vision, Inc.,
approximately $3.1 million, was eliminated against the gain recorded by
Integral Vision Ltd. However, previously unrecognized losses that resulted
from foreign currency translation adjustments were recognized in the
quarter ended June 30, 2002 and totaled approximately $208,000.
Note Q -- Off Balance Sheet Risk
A claim has been made against the Company citing unpaid royalties totaling
$107,000. Management is still researching the claim but does not believe
that the Company will ultimately be found to be liable to the claimant.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTEGRAL VISION, INC. AND SUBSIDIARY
SEPTEMBER 30, 2002
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO SEPTEMBER 30, 2001
Net revenues from continuing operations increased 9.9%, or $50,000, to $556,000
in the third quarter of 2002 from $506,000 in the third quarter of 2001. The
increase was primarily attributable to increased sales of the Company's small
flat panel display inspection systems over the prior year. Additionally, in
spite of the fact that the Company sold its disc identification/print inspection
technology in early September 2002 (see Note K to consolidated financial
statements), sales of those products for the 2002 quarter were higher than in
the comparable 2001 quarter. These increases were partially offset by decreased
revenue from the Company's service activities in the 2002 quarter. The sale of
the Company's packaging applications software in 2001 also impacted the increase
in sales as sales of that product line accounted for $34,000 of the net revenue
in the third quarter of 2001 (see Note K to consolidated financial statements).
Direct costs of sales decreased to $440,000 (approximately 79.1% of sales) in
the third quarter of 2002 compared to $1.7 million (approximately 339% of sales)
in the third quarter of 2001. Depreciation and amortization expense was lower in
2002 primarily due to the 2001 sale of the Company's building (see Note J to
consolidated financial statements) and the write-off of capitalized software
costs in 2001. Management periodically performs an analysis of the net
realizable value of capitalized software costs. In 2001, based on market
conditions and the direction of the Company, Management determined that
capitalized software development costs exceeded the estimated net realizable
value of amounts capitalized and a write-down was necessary. For the quarter
ended September 30, 2001, $480,000 of additional amortization was included in
costs of sales as a result of these analyses. Additionally, as a result of the
analyses, direct costs of sales for the quarter ended September 30, 2001
included a $350,000 charge for the write-down of inventory. In the third quarter
of 2002, Management determined that capitalized patent costs exceeded the
estimated net realizable value of amounts capitalized and a write-down was
necessary. In the quarter ended September 30, 2002, $74,000 of additional
amortization was included in costs of sales as a result of this determination.
The gross margin in the 2001 quarter was negative due to the fact that the sales
volume was not sufficient to cover the fixed charges, depreciation and
amortization, included in direct cost of sales.
Marketing costs decreased 59.7%, or $209,000, to $141,000 in the third quarter
of 2002 from $350,000 in the third quarter of 2001. This decrease is primarily
attributable to workforce reductions resulting from the implementation of a cost
reduction plan by Management in late 2000 and throughout 2001. The plan also
called for workforce reductions in both the general and administrative
department and the engineering department, as evidenced by the figures below.
General and administrative costs decreased 70.4%, or $481,000, to $202,000 in
the third quarter of 2002 from $683,000 in the third quarter of 2001. In 2001,
Messrs. Charles Drake and Mark Doede each had loans from the Company. In August
2001, the Compensation Committee of the Company's Board of Directors resolved to
forgive $100,000 of the outstanding balance on each of their loans from the
Company, which resulted in a $200,000
18
charge to compensation expense. Additionally, Mr. Charles Drake was provided
with 400,000 shares of unregistered stock of the Company, subject to certain
sale restrictions. An additional $56,000 of compensation expense was charged to
general and administrative expense in the 2001 quarter as a result of the
issuance of these shares. General and administrative costs for the 2001 quarter
also included a $62,000 charge for bad debts as certain of the Company's
debtors' financial conditions worsened. Exclusive of these non-recurring
charges, general and administrative costs decreased 44.7% or $163,000 in the
2002 quarter.
Engineering and development expenditures decreased 48.5%, or $204,000, to
$217,000 in the third quarter of 2002 from $421,000 in the third quarter of
2001.
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 (WTC note). The interest bearing portion of the note, approximately $1.9
million, carried an interest rate approximating prime plus 1% and required
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 matured on February 15,
2001.
In January 2001, the Company sold 19.9% of the $1.7 million then outstanding
under the note agreement to third party investors in exchange for consideration
of $300,000. In May 2001, the Company completed a transaction whereby it
repurchased the portion of the note previously sold to the investors and then
sold the entire note receivable, which had an outstanding balance of $1.1
million at April 30, 2001, to a third party for $750,000. The Company recognized
a loss on sale of the note receivable of $441,000 in the quarter ended March 31,
2001.
Gain on sales of assets in the 2002 quarter included a $112,000 gain on the sale
of assets to DaTARIUS Technologies, Inc. in September 2002 (see Note K to
consolidated financial statements). The 2001 quarter included a $114,000 gain on
the sale of assets to n.v. DIMACO, s.a. in August 2001 (see Note K to
consolidated financial statements). This gain was partially offset by a $22,000
loss on the sale of the Company's building in Farmington Hills, MI in July 2001.
Interest income and other increased $30,000 in the third quarter of 2002
compared to the 2001 quarter. The income in the 2002 quarter is primarily
attributable to $18,000 of royalty income from the Company's VisionBlox software
and $3,000 of interest charged on the officers' notes receivable. The 2001
quarter included $15,000 of interest charged on the officers' notes receivable
which was offset by miscellaneous expenses. The decrease in interest income from
the prior year period is primarily attributable to reductions to the officers'
notes receivable in 2001 (see Note M to consolidated financial statements).
Interest expense increased $46,000 to $59,000 in the third quarter of 2002 from
$13,000 in the third quarter of 2001. The increase is primarily attributable to
the debentures and Class 2 notes that were sold under the 2001 Note and Warrant
Purchase Agreement (see Note F to consolidated financial statements). The
increase was partially offset by a reduction in mortgage interest as the
Company's mortgages were paid in full when the sale of its building closed on
July 27, 2001 (see Note J to consolidated financial statements).
19
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO SEPTEMBER 30, 2001
Net revenues from continuing operations decreased 35.9%, or $775,000, to $1.4
million compared to $2.2 million in last year's comparable nine-month period.
The decrease was partially attributable to the fact that the Company sold its
packaging applications software in 2001 (see Note K to consolidated financial
statements). Sales of that product line accounted for $516,000 of the net
revenue in the 2001 period. Additionally, sales of the Company's disc
identification/print inspection (CDiD/CDiP) products were lower in the 2002
period. The Company sold its disc identification/print inspection technology in
early September 2002 (see Note K to consolidated financial statements). The
Company's revenue from service activities and from sales of the Company's
software were also lower in the 2002 period. These decreases were partially
offset by increased sales of the Company's small flat panel display inspection
product.
Direct costs of sales decreased to $1.1 million (approximately 79.2% of sales)
in 2002 compared to $3.7 million (approximately 173% of sales) in last year's
comparable period. This was primarily attributable to the lower sales volume and
the lower depreciation and amortization expense in the 2002 period. Depreciation
and amortization expense was lower in 2002 primarily due to the 2001 sale of the
Company's building (see Note J to consolidated financial statements) and the
write-off of capitalized software costs in 2001. Management periodically
performs an analysis of the net realizable value of capitalized software costs.
In 2001, based on market conditions and the direction of the Company, Management
determined that capitalized software development costs exceeded the estimated
net realizable value of amounts capitalized and a write-down was necessary. For
the period ended September 30, 2001, $480,000 of additional amortization was
included in costs of sales as a result of these analyses. Additionally, as a
result of the analyses, direct costs of sales for the period ended September 30,
2001 included a $350,000 charge for the write-down of inventory. In the 2002
period, Management determined that capitalized patent costs exceeded the
estimated net realizable value of amounts capitalized and a write-down was
necessary. In the period ended September 30, 2002, $74,000 of additional
amortization was included in costs of sales as a result of this determination.
The gross margin in the 2001 period was negative due to the fact that the sales
volume was not sufficient to cover the fixed charges, depreciation and
amortization, included in direct cost of sales.
Marketing costs decreased 62.5%, or $810,000, to $487,000 compared to $1.3
million in last year's comparable nine-month period. This decrease is primarily
attributable to workforce reductions resulting from the implementation of a cost
reduction plan by Management in late 2000 and throughout 2001. The plan also
called for workforce reductions in both the general and administrative
department and the engineering department, as evidenced by the figures below.
General and administrative costs decreased 37.6%, or $550,000, to $911,000
compared to $1.5 million in last year's comparable nine-month period. In 2001,
Messrs. Charles Drake and Mark Doede each had loans from the Company. In August
2001, the Compensation Committee of the Company's Board of Directors resolved to
forgive $100,000 of the outstanding balance on each of their loans from the
Company, which resulted in a $200,000 charge to compensation expense.
Additionally, Mr. Charles Drake was provided with 400,000 shares of unregistered
stock of the Company, subject to certain sale restrictions. An additional
$56,000 of compensation expense was charged to general and administrative
expense in the 2001 period as a result of the issuance of these shares. General
and administrative costs for the 2001 period also included a $62,000 charge for
bad debts as
20
certain of the Company's debtors' financial conditions worsened. Exclusive of
these non-recurring charges, general and administrative costs decreased 20.3% or
$232,000 in 2002.
Engineering and development expenditures decreased 63.2%, or $1.1 million, to
$612,000 compared to $1.7 million in last year's comparable nine-month period.
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 (WTC note). The interest bearing portion of the note, approximately $1.9
million, carried an interest rate approximating prime plus 1% and required
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 matured on February 15,
2001.
In January 2001, the Company sold 19.9% of the $1.7 million then outstanding
under the note agreement to third party investors in exchange for consideration
of $300,000. In May 2001, the Company completed a transaction whereby it
repurchased the portion of the note previously sold to the investors and then
sold the entire note receivable, which had an outstanding balance of $1.1
million at April 30, 2001, to a third party for $750,000. The Company recognized
a loss on sale of the note receivable of $441,000 in the quarter ended March 31,
2001.
Gain on sales of assets in the 2002 period included a $112,000 gain on the sale
of assets to DaTARIUS Technologies, Inc. in September 2002 (see Note K to
consolidated financial statements). The 2001 period included a $114,000 gain on
the sale of assets to n.v. DIMACO, s.a. in August 2001 (see Note K to
consolidated financial statements). This gain was partially offset by a $22,000
loss on the sale of the Company's building in Farmington Hills, MI in July 2001.
Interest income and other decreased $52,000 to $37,000 compared to $89,000 in
last year's comparable nine-month period. The income in the 2002 period is
primarily attributable to $18,000 of royalty income from the Company's
VisionBlox software and $9,000 of interest charged on the officers' notes
receivable. The income in the 2001 period is primarily attributable to $55,000
of interest charged on the officers' notes receivable and $34,000 of interest
charged on the note receivable that resulted from the sale of the Company's
Welding Controls division (see Note B to consolidated financial statements). The
decrease in interest income from the prior year period is primarily attributable
to the sale of the Company's note receivable in May 2001 and the receipt of
principal payments on the outstanding balance of the note throughout the year.
Reductions to the officers' notes receivable throughout 2001 also contributed to
the decrease in interest income in the 2002 period (see Note M to consolidated
financial statements).
Interest expense increased $31,000 to $172,000 compared to $141,000 in last
year's comparable nine-month period. The increase is primarily attributable to
the debentures and Class 2 notes that were sold under the 2001 Note and Warrant
Purchase Agreement (see Note F to consolidated financial statements). The
increase was partially offset by a reduction in mortgage interest as the
Company's mortgages were paid in full when the sale of its building closed on
July 27, 2001 (see Note J to consolidated financial statements). Additionally,
the Company used proceeds from the sale of its note receivable in May 2001 (see
Note B to consolidated financial statements) to pay in full its revolving line
of credit at which time that agreement was terminated.
21
In June 2002, Integral Vision, Inc. wrote-off an inter-company receivable due
from Integral Vision Ltd., its subsidiary in the United Kingdom. As the
consolidated financial statements include the accounts of both entities, upon
consolidation, the charge recorded by Integral Vision, Inc., approximately $3.1
million, was eliminated against the gain recorded by Integral Vision Ltd.
However, previously unrecognized losses that resulted from foreign currency
translation adjustments were recognized in the June 30, 2002 quarter and totaled
approximately $208,000.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities used $1.6 million in cash for the nine months primarily due
to the Company's loss from operations of $1.8 million.
On September 9, 2002, DaTARIUS Technologies Inc., a subsidiary of global test
equipment manufacturer DaTARIUS Technologies GmbH, purchased Integral Vision's
assets related to inspection systems for the optical disc industry, including
the names "Automatic Inspection Systems" and "AID." The sale included Integral
Visions optical disc scanner products as well as its range of print and
identification code products used to inspect the printing stage of disc
manufacture. The consideration the Company received for the technology consisted
of a $100,000 advanced minimum royalty payment in addition to future royalties.
Additionally, the Company received $25,000 from the sale of equipment to
DaTARIUS. The Company recognized a gain on the transaction of approximately
$112,000, which was included in gain on sale of assets in the third quarter of
2002, primarily attributable to the advanced minimum royalty payment received.
The proceeds from the transaction were used primarily to fund current
operations.
Included with the transaction was a Transition Services Agreement whereby
Integral Vision provides assembly and agreed upon technical support services for
the product line for up to twelve months after the closing date at an agreed
upon rate.
The Company's financing activities included the receipt of $590,000 from the
sale of the Company's senior debentures and the receipt of $550,000 from the
sale of the Company's Class 2 Notes. The Company made principal payments of
approximately $22,000 on its Class 2 Notes in the period.
The Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
obtain additional financing as may be required, and ultimately to attain
profitability. The Company's anticipated cash provided by operating activities
will not be sufficient to support the Company's cash flow needs over the next
twelve months. The projected cash shortfall over the next twelve months is
estimated to be approximately $550,000, which is primarily attributable to
amounts due to the Company's current debenture holders over the next twelve
months. In order to address this shortfall, the Company is negotiating with the
debenture holders to extend the payment dates of the Notes and expects to reach
an agreement before the end of the year. At September 30, 2002, there was
approximately $145,000 in principal and interest due to the debenture holders
under the terms of the agreement. Although these payments are past due, the
debenture holders have not given the Company a written notice of default and,
subsequent to September 30, 2002, four of the prior note purchasers invested in
an additional $200,000 in Class 2 Notes. In March 2001, the Company's board of
directors approved the issuance of up to $1.5 million of senior debentures
(increased to $2.0 million in May 2002), which could provide additional
financing to the Company. Additionally, effective May 1, 2002, the Company's
Note and Warrant Purchase Agreement was amended to provide for "Class 2 Notes"
and "Class 2 Warrants" which are subordinated to the prior purchasers. Class 2
Notes are working capital notes which are secured by accounts
22
receivable of the Company. Management could also fund the projected shortfall
through the sales of its debentures and Class 2 Notes. Additionally, if
necessary, Management would attempt to obtain any additional cash needed to
enable the Company to continue as a going concern through possible joint
ventures and other strategic alliances. Additional financing may or may not be
available through banks. There can be no assurance that Management will be able
to successfully execute these plans before the Company has exhausted all of its
resources. These uncertainties raise substantial doubt about the Company's
ability to continue as a going concern.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to market risk stemming from changes in foreign exchange
rates, interest rates and prices of inventory purchased for assembly into
finished products. Changes in these factors could cause fluctuations in earnings
and cash flows. In the normal course of business, exposure to interest rates is
managed by fixing the interest rates on the Company's long term debt whenever
possible. The Company does not generally enter into long-term purchase contracts
but instead purchases inventory to fill specific sales contracts thereby
minimizing risks with respect to inventory price fluctuations.
Foreign Exchange Rates -- The Company's location outside the US is in the United
Kingdom. This is a sales office with net non-current assets that are not
significant. On a consolidated basis the Company denominates sales in the
following currencies:
- Japanese Yen
- Pound Sterling
- French Francs
- Euros
In Management's opinion, as the currencies of Western Europe and the UK are
generally stable; there is no significant exposure to losses due to currency
fluctuations. However, because the Yen has not been stable over the past several
years, the Company does enter into forward sales contracts equal to the future
amount of the Yen to be received at the time the order is accepted. These
hedging transactions are on an order by order basis and at no time are they
speculative in nature. At September 30, 2002, the Company had no open positions.
CONTROLS AND PROCEDURES
a) Evaluation of disclosure controls and procedures
The Company's Chief Executive Officer and Chief Financial Officer
believe Integral Vision's disclosure controls and procedures, as
defined in Securities Exchange Act Rules 13a-14 and 15d-14, are
effective. This conclusion was reached after an evaluation of these
controls and procedures as of September 30, 2002.
b) Changes in internal controls
We are not aware of any significant changes in the Company's internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses, or in other factors that could
significantly affect these controls after September 30, 2002.
23
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) On March 29, 2001 the Company sold $120,000 of its 15% Senior
Subordinated Secured Notes. As part of the sale, the purchaser also
received 240,000 warrants for the purchase of Integral Vision, Inc.
common stock for $0.50 per share (see Note F to the accompanying
financial statements for further information regarding the terms of the
note and warrant, as they have been subsequently amended). The Company
received cash in the amount of $120,000 in exchange for the note and
warrants.
The terms of the notes were subsequently amended (see Note F to the
accompanying consolidated financial statements) to eliminate the
subordination provisions, change the interest rate to 10%, and to
provide that the price for the warrants would be set by the Company's
board of directors at the time the related note was purchased, based on
the then current market price for the Company's common stock.
From July 18, 2001 through October 31, 2002, the Company sold notes and
warrants totaling an additional $980,000. The purchasers in these
transactions received warrants to purchase 2,790,000 shares of the
Company's common stock at a conversion price of $.35 per share and
50,000 shares at a conversion price of $.80 per share.
The notes and warrants were sold in private transactions exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
There have been twelve purchasers, some of whom have purchased on more
than one occasion. Of these, four of the purchasers are related
entities or insiders of the Company. Each of the remaining purchasers
is a client, or relative of the principal, of one State of California
registered investment advisor. All of the purchasers are either
"accredited investors" as that term is defined in Regulation D under
the Securities Act of 1933 or, either alone or with their purchaser
representative, have such knowledge and experience in financial and
business matters that they are capable of evaluating the merits and
risks of the investment.
Effective May 1, 2002, the Note and Warrant Purchase Agreement was
amended to provide for "Class 2 Notes" and "Class 2 Warrants" which
will be subordinated to the prior purchasers. Class 2 Notes are working
capital notes which will be secured by accounts receivable of the
Company. The number of Class 2 Warrants to be obtained will be based on
the length of time the related Class 2 Note is outstanding. As of
November 14, 2002, $750,000 of the Class 2 Notes were purchased by five
of the prior note purchasers.
The Company is authorized to sell up to $2 million of its debentures.
Any additional sales of debentures will be sold only in private
transactions to investors meeting the above criteria.
24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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
registrant's 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 registrant's Form 8-K dated
July 15, 1997, SEC file 0-12728, and incorporated herein by
reference).
4.4 Note and Warrant Purchase Agreement dated March 29, 2001
including Form of Integral Vision, Inc. 15% Senior Subordinated
Secured Note and Integral Vision, Inc. Common Stock Purchase
Warrant Certificate (filed as Exhibit 4.4 to registrant's Form
10-K for the year ended December 31, 2000, SEC file 0-12728, and
incorporated herein by reference).
4.5 Form of amended Note and Warrant Purchase Agreement including
Form of Integral Vision, Inc. 10% Secured Note and Integral
Vision, Inc. Common Stock Purchase Warrant Certificate (filed as
Exhibit 4.5 to registrant's Form 10-Q for the quarter ended June
30, 2001, SEC file 0-12728, and incorporated herein by
reference).
25
4.6 Form of Second Amended Note and Warrant Purchase Agreement
including Form of Integral Vision, Inc. Class 2 Note and Integral
Vision, Inc. Class 2 Common Stock Purchase Warrant Certificate
(filed as Exhibit 4.6 to registrant's Form 10-Q for the quarter
ended March 31, 2002, SEC file 0-12728, and incorporated herein
by reference).
10.1 Incentive Stock Option Plan of the Registrant as amended (filed
as Exhibit 10.4 to the registrant's Form S-1 Registration
Statement effective July 2, 1985, SEC File 2-98085, and
incorporated herein by reference).
10.2 Second Incentive Stock Option Plan (filed as Exhibit 10.2 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 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).
10.4 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).
10.5 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).
10.6 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).
10.7 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).
10.8* 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).
10.9 Asset Sale 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).
10.10 Post Closing Adjustment and Settlement Agreement between Integral
Vision, Inc. and Weltronic/Technitron, Inc. (filed as exhibit
10.33 to the registrant's Form 10-K for the year ended December
31, 1999, SEC file 0-12728, and incorporated herein by
reference).
10.11 Loan agreement between National City Bank and Integral Vision,
Inc. (filed as exhibit 10.9 to the registrant's Form 10-Q for the
quarter ended June 30, 2000, SEC File 0-12728, and incorporated
herein by reference).
26
10.12 Asset Sale Purchase Agreement between the registrant and n.v.
DIMACO, s.a. (filed as exhibit 10.12 to the registrant's Form
10-Q for the quarter ended September 30, 2001 and incorporated
herein by reference).
10.13 Asset Sale Purchase Agreement between the registrant and DaTARIUS
Technologies, Inc.
99.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350, as adopted).
(b) Reports on Form 8-K. On September 11, 2002, a Form 8-K was filed
to report an event under Item 5. No financial statements were
included in the 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.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEGRAL VISION, INC.
Date: November 14, 2002 /S/ CHARLES J. DRAKE
------------------------ --------------------------
Charles J. Drake,
Chairman of the Board and
Chief Executive Officer
Date: November 14, 2002 /S/ MARK R. DOEDE
------------------------ --------------------------
Mark R. Doede,
President, Chief Operating Officer, and
Chief Financial Officer,
28
CERTIFICATION
I, Charles J. Drake, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Integral Vision,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
------------------
/S/ Charles J. Drake
-----------------------
Charles J. Drake
Chief Executive Officer
29
CERTIFICATION
I, Mark R. Doede, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Integral Vision,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
---------------------- /S/ Mark R. Doede
-----------------------
Mark R. Doede
Chief Financial Officer
30
EXHIBIT INDEX
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
registrant's 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 registrant's Form 8-K dated
July 15, 1997, SEC file 0-12728, and incorporated herein by
reference).
4.4 Note and Warrant Purchase Agreement dated March 29, 2001
including Form of Integral Vision, Inc. 15% Senior Subordinated
Secured Note and Integral Vision, Inc. Common Stock Purchase
Warrant Certificate (filed as Exhibit 4.4 to registrant's Form
10-K for the year ended December 31, 2000, SEC file 0-12728, and
incorporated herein by reference).
4.5 Form of amended Note and Warrant Purchase Agreement including
Form of Integral Vision, Inc. 10% Secured Note and Integral
Vision, Inc. Common Stock Purchase Warrant Certificate (filed as
Exhibit 4.5 to registrant's Form 10-Q for the quarter ended June
30, 2001, SEC file 0-12728, and incorporated herein by
reference).
4.6 Form of Second Amended Note and Warrant Purchase Agreement
including Form of Integral Vision, Inc. Class 2 Note and Integral
Vision, Inc. Class 2 Common Stock Purchase Warrant Certificate
(filed as Exhibit 4.6 to registrant's Form 10-Q for the quarter
ended March 31, 2002, SEC file 0-12728, and incorporated herein
by reference).
10.1 Incentive Stock Option Plan of the Registrant as amended (filed
as Exhibit 10.4 to the registrant's Form S-1 Registration
Statement effective July 2, 1985, SEC File 2-98085, and
incorporated herein by reference).
10.2 Second Incentive Stock Option Plan (filed as Exhibit 10.2 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 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).
10.4 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).
31
10.5 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).
10.6 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).
10.7 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).
10.8* 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).
10.9 Asset Sale 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).
10.10 Post Closing Adjustment and Settlement Agreement between Integral
Vision, Inc. and Weltronic/Technitron, Inc. (filed as exhibit
10.33 to the registrant's Form 10-K for the year ended December
31, 1999, SEC file 0-12728, and incorporated herein by
reference).
10.11 Loan agreement between National City Bank and Integral Vision,
Inc. (filed as exhibit 10.9 to the registrant's Form 10-Q for the
quarter ended June 30, 2000, SEC File 0-12728, and incorporated
herein by reference).
10.12 Asset Sale Purchase Agreement between the registrant and n.v.
DIMACO, s.a. (filed as exhibit 10.12 to the registrant's Form
10-Q for the quarter ended September 30, 2001 and incorporated
herein by reference).
10.13 Asset Sale Purchase Agreement between the registrant and DaTARIUS
Technologies, Inc.
99.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350, as adopted).
(b) Reports on Form 8-K. On September 11, 2002, a Form 8-K was filed
to report an event under Item 5. No financial statements were
included in the 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.
32