item 14 exhibits financial statement schedules reports form 8k a1 list financial statements consolidated financial statements required item submitted separate section beginning page report a2 list financial statement schedules omitted applicable required information shown financial statements notes thereto a3 exhibits b reports form 8k registrant filed report form 8k dated october 7 1997 regarding closing quantum acquisition c see exhibits listed item 14a3 financial statement schedules required item listed item 14a2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 30th day march 1998 invision technologies inc sergio magistri sergio magistri president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent accountants board directors stockholders invision technologies inc opinion accompanying consolidated balance sheets related consolidated statements operations cash flows changes stockholders equity deficit present fairly material respects financial position invision technologies inc subsidiaries december 31 1996 1997 results operations cash flows three years period ended december 31 1997 conformity generally accepted accounting principles financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed price waterhouse llp san jose california february 16 1998 invision technologies inc consolidated balance sheets thousands except per share amounts accompanying notes integral part consolidated financial statements invision technologies inc consolidated statements operations thousands except per share amounts accompanying notes integral part consolidated financial statements invision technologies inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements invision technologies inc consolidated statements stockholders equity deficit thousands accompanying notes integral part consolidated financial statements invision technologies inc notes consolidated financials statements note 1the company invision technologies inc invision company worldwide leader explosive detection technology company develops manufactures markets supports explosive detection system eds civil aviation security based advanced computed tomography ct technology formed 1990 invision exited development stage 1995 upon first commercial sales product ctx 5000 explosive detection system ctx 5000 series includes upgraded ctx 5000 sold airport regulatory authorities airlines throughout world acquisition quantum magnetics inc quantum 1997 invision added quantums portfolio complementary detection technologies quantum founded 1987 develop commercialize patented proprietary technology inspection detection analysis explosives materials based quadrupole resonance qr technology form magnetic resonance products prototype stage include devices inspect checked carryon luggage cargo airports customs facilities small scanner detect explosives illegal drugs mail small packages advanced security system detection liquid explosives flammables sealed glass plastic containers note 2summary significant accounting policies basis presentation consolidated financial statements include financial statements company wholly owned subsidiaries imatron federal systems inc acquired december 1996 quantum acquired september 1997 invision international inc invision foreign sales inc significant intercompany transactions accounts eliminated preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates stock split share information periods presented retroactively adjusted reflect 1for11 reverse stock split common stock preferred stock effected march 15 1996 2for1 common stock dividend effected february 7 1997 cash equivalents company considers liquid investments purchased original maturity three months less cash equivalents shortterm investments shortterm investments consist primarily commercial paper original maturities date purchase beyond three months less 12 months shortterm investments carried cost approximates fair market value due short period time maturity revenue recognition revenue product sales recognized upon shipment unless extended acceptance criteria exist case revenue recognized upon completion acceptance criteria provision estimated installation training warranty costs recorded time revenue recognized deferred revenue arises advance payments received customers systems delivered within next year service yet performed invision technologies inc notes consolidated financials statements continued inventories stated lower cost firstin firstout market property equipment property equipment recorded cost depreciation computed using straightline method based upon estimated useful lives assets range one five years leasehold improvements amortized using straightline method shorter useful lives terms leases 1996 company adopted statement financial accounting standards 121 accounting impairment longlived assets longlived assets disposed accordingly company evaluates recoverability assets events changes circumstances indicate amounts may recoverable company determines recoverability carrying amount intangible asset reviewing following factors undiscounted value expected operating cash flows relation net capital investment estimated useful contractual life intangible asset contract product supporting intangible asset case purchased technology company periodically reviews recoverability asset value evaluating products respect technological advances competitive products longlived asset impairment losses income taxes company accounts income taxes using asset liability approach requires recognition deferred tax assets liabilities expected future tax consequences events recognized companys financial statements tax returns research development costs research development costs charged operations incurred contractually reimbursable costs certain research development activities reflected reduction research development expense period related costs incurred note 5 software development costs date period achieving technological feasibility general availability software included companys product short software development costs qualifying capitalization insignificant accordingly company capitalized software development costs stock compensation company accounts employee stockbased compensation accordance accounting principles board opinion 25 accounting stock issued employees january 1996 company adopted disclosure requirements statement financial accounting standards 123 fas 123 accounting stockbased compensation see note 8 dependence suppliers companys ability timely deliver products dependent upon availability quality components subsystems used products company depends part upon subcontractors manufacture assemble deliver certain items timely satisfactory manner company obtains certain components subsystems single limited number sources significant interruption delivery items could material adverse effect companys financial condition results operations recent accounting pronouncements june 1997 financial accounting standards board issued statement 130 reporting comprehensive income statement establishes standards reporting displaying comprehensive income components revenues expenses gains losses full set generalpurpose financial statements items may include foreign currency translation adjustments unrealized gainslosses investing hedging activities transactions statement requires items required recognized accounting standards components comprehensive income reported financial statement displayed prominence financial statements statement required adopted fiscal years beginning december 15 1997 invision technologies inc notes consolidated financials statements continued june 1997 financial accounting standards board issued statement 131 disclosures segments enterprise related information statement establishes standards way public business enterprises report information operating segments annual financial statements requires enterprises report selected information operating segments interim financial reports issued stockholders also establishes standards related disclosures products services geographic areas major customers statement required adopted fiscal years beginning december 15 1997 export sales concentration credit risk company markets systems internationally domestically product sales geographic region follows thousands financial instruments potentially subject company significant concentrations credit risk consist primarily cash accounts receivable company limits amount credit exposure cash balances maintaining accounts high credit quality financial institutions date company experienced material credit losses accordingly recorded allowance doubtful accounts december 31 1996 1997 companys revenues denominated us dollars december 31 1997 two customers accounted 558 167 total accounts receivable significant customers represented 10 revenues respective periods follows net income loss per share december 1997 company adopted statement financial accounting standards 128 fas 128 earnings per share historical earnings per share information restated required fas 128 basic earnings per share computed dividing income available common shareholders weightedaverage common shares outstanding period diluted earnings per share reflects weightedaverage common shares outstanding plus potential effect dilutive securities contracts convertible common shares options warrants convertible debt preferred stock invision technologies inc notes consolidated financials statements continued following reconciliation components basic diluted net income loss per share calculations periods presented thousands except per share amounts note 3acquisition quantum magnetics inc september 30 1997 company acquired quantum developer explosive systems based upon quadrupole resonance technology transaction accounted pooling interests effective september 30 1997 therefore prior periods restated prior acquisition quantum used september 30 fiscal year end financial statements company restated combine results quantum used december 31 year end nonrecurring expenses associated acquisition comprised primarily outside accounting legal fees amounted 685000 included acquisition costs income statement revenues net income loss separate companies date acquisition included companys consolidated statements operations followsin thousands note 4federal aviation administration faa contract december 1996 company entered contract federal aviation administration faa contract deliver fiftyfour 54 ctx 5000 systems various airports united states minimum amount due faa contract including related products associated installation support services 522 million december 31 1997 company delivered 32 systems 22 remain shipped 1998 invision technologies inc notes consolidated financials statements continued note 5research development contracts company awarded various research development contracts grants faa governmental private enterprises share costs developing enhancing companys products 1995 1996 1997 company entitled reimbursements 31 million 49 million 85 million respectively contracts grants reimbursements reflected reduction research development expense period presented billings contracts grants rendered monthly basis actual costs incurred december 1996 1997 related receivable balances development contracts 13 million 15 million respectively note 6shortterm debt line credit 1997 company entered two oneyear revolving line credit agreements silicon valley bank agreements extended april 1998 company intends renew agreements prior expiration extensions first agreement provides maximum borrowings amount lower 80 eligible domestic accounts receivable 45 million borrowings agreement bear interest banks prime rate plus 050 per annum 875 december 31 1997 second agreement partially guaranteed exportimport bank united states provides maximum borrowings amount lower sum 90 eligible export accounts receivable plus 70 eligible raw materials workinprocess inventory designated export customers 45 million borrowings agreement bear interest banks prime rate plus 025 per annum 850 december 31 1997 borrowings agreements secured companys assets agreements require company maintain certain financial ratios levels tangible net worth profitability also prohibit company paying cash dividends proceeds loans lines credit may used general corporate purposes subordinated promissory note company note payable outstanding third party remaining balance 168000 december 31 1997 outstanding balance accrued interest rate 10 paid full january 1998 bridge loan december 1995 invision entered 2000000 bridge loan agreement bridge loan lender agreement invision borrowed 1000000 december 1995 additional 1000000 february 1996 principal outstanding agreement secured assets invision bridge loan repaid full may 1 1996 accordance terms connection bridge loan lender received warrants aggregate fair value bridge loan warrants determined respective dates issuance 1330000 value represents discount amortized financing cost period bridge loan outstanding note 7stockholders equity common stock terms acquisition quantum 777000 shares common stock either issued quantum shareholders exchange quantum capital stock outstanding reserved issuance connection quantum common stock options outstanding prior acquisition converted options invision common stock may 1997 company sold 1875000 shares common stock underwritten public offering 1200 per share generating net proceeds company approximately 212 million including proceeds underwriters overallotment option exercised june 1997 invision technologies inc notes consolidated financials statements continued november 1996 company issued 183750 shares unregistered common stock egg international ltd 1088 per share reflecting 10 discount market price companys common stock connection signing research development license agreement note 12 net proceeds totaled 1974000 april 1996 company issued 1800000 shares common stock 550 per share conjunction companys initial public offering ipo proceeds company net discounts commissions offering expenses totaled 8211000 may 1996 underwriters exercised overallotment option purchase 270000 additional shares common stock total net proceeds company 1321000 proceeds ipo used primarily repay short term debt reduce outstanding accounts payable provide working capital company connection companys ipo donald co securities inc underwriter received terms underwriting agreement fouryear warrants purchase 180000 shares companys common stock price 660 per share commencing april 23 1997 preferred stock conjunction companys ipo outstanding convertible preferred stock converted common stock december 31 1997 5000000 shares preferred stock authorized shares issued outstanding board directors authorized issue preferred stock one series fix rights preferences privileges restrictions thereof including dividend rights dividend rates conversion rights voting rights terms redemption prices liquidation preferences number shares constituting series designation series without action vote companys stockholders note 8employee stock benefit plans equity incentive plan march 1996 board directors approved amended restated 1991 stock option plan renamed equity incentive plan equity incentive plan provides granting incentive stock options non qualified stock options purchase aggregate 2221818 shares companys common stock officers employees consultants directors company board directors responsible administration equity incentive plan board directors determines term option exercise price number shares option granted rate option exercisable options granted equity incentive plan generally vest four year period incentive non qualified stock options may granted exercise price per share less 85 fair value per common share date grant less 110 fair value case holders 10 companys voting stock options granted equity incentive plan generally expire ten years date grant five years incentive stock options granted holders 10 companys voting stock december 1994 company repriced outstanding options order reconstitute option pool result dilutive effect common stock issuance series preferred stock year outstanding options cancelled new options issued exercise price 055 per share represented fair value common stock determined board directors cumulative vesting percentages applicable cancelled options given regranted options connection grants stock options employees directors 1995 1996 1997 company recorded 1095000 152000 240000 respectively deferred compensation representing difference deemed fair value companys common stock exercise price date grant amounts 362000 494000 425000 expensed 1995 1996 1997 respectively invision technologies inc notes consolidated financials statements continued remaining 199000 amortized remaining vesting period related options transactions equity incentive plan summarized follows thousands except per share amounts following table summarizes information employee director stock options outstanding december 31 1997 thousands except per share amounts 1996 employee stock purchase plan companys 1996 employee stock purchase plan purchase plan adopted march 1996 total 300000 shares common stock reserved issuance purchase plan december 31 1997 23000 shares issued purchase plan invision technologies inc notes consolidated financials statements continued fair value disclosures compensation cost options granted 1995 1996 1997 companys 1996 equity incentive plan determined based fair value grant dates prescribed fas 123 companys net income loss pro forma net income loss per share would follows thousands except per share amounts fair value option grant estimated date grant using minimum value method following assumptions used grants applicable period dividend yield 00 periods 1997 employee 401k plan company adopted plan know invision technologies inc 401k plan provide retirement incidental benefits employees allowed section 401k internal revenue code plan provides taxdeferred salary deductions eligible employees may contribute 20 annual compensation plan limited maximum amount set periodically internal revenue service beginning july 1997 company began matching employee contributions rate 050 dollar maximum lesser 6 gross compensation 5000 per year per person matching contributions vest immediately company matching contributions plan totaled 170000 1997 invision technologies inc notes consolidated financial statements continued note 9commitments company leases facilities equipment noncancelable leases expiring various times 2007 future minimum lease payments leases december 31 1997 follows thousands rent expense 1995 1996 1997 293000 527000 1105000 respectively note 10income taxes result losses generated 1995 1996 company recorded provision income taxes years reconciliation federal statutory rate effective rate meaningful 1997 provision income taxes consists following thousands companys actual 1997 effective tax rate differs us statutory income tax rate follows invision technologies inc notes consolidated financial statements continued deferred tax assets liabilities consist following company provides valuation allowance deferred tax assets likely based upon currently available evidence including prior history losses portion deferred tax assets realized december 31 1997 company federal net operating loss carryforwards approximately 137 million available reduce future federal taxable income 20 million available reduce state taxable income companys net operating loss carryforwards expire 2005 2011 tax benefit net operating loss credit carryforwards may limited due impact tax reform act 1986 events may cause tax benefit limited include limited cumulative stock ownership change 50 defined three year period timing utilization various tax benefits carried forward note 11related party transactions 1995 1996 1997 company paid 116000 264000 165000 respectively certain companys directors professional andor consulting services note 12 license agreements november 1996 company entered research development license agreement egg astrophysics affiliate egg international ltd terms agreement company egg astrophysics committed contribute 1000000 fund joint research development effort develop explosive detection system enhanced capability reliable detection explosives higher rates throughput companys existing system new technology developed connection research development effort jointly owned october 1994 quantum entered twelve year license agreement third party amended may 1997 agreement provides quantum nonexclusive irrevocable license certain inprocess detection technology superconductor technology well equipment fair value 100000 exchange 330000 note payable due unequal quarterly payments plus 11 interest fair value technology license 230000 charged operations may 1997 balance note payable paid full january 1998 june 1997 quantum entered joint venture perform research development related certain detection technologies exchange 38 ownership interest joint venture quantum granted non exclusive royalty free perpetual transferable sublicense superconductor technology agreed joint venture sole source fabrication testing products developed joint venture agreed jointly guarantee 200000 working capital loan joint venture connection formation joint venture quantum sold equipment joint venture exchange eleven year note receivable bearing interest 67 per annum invision technologies inc notes consolidated financial statements continued march 1995 quantum executed tenyear exclusive license agreement third party quantum subject royalty payments based percentage net sales price certain products made used sold minimum annual royalties 20000 due beginning calendar year 1997 remaining term agreement quantum incur royalty expense agreement 1995 1996 paid minimum royalty 20000 1997 june 1995 quantum entered exclusive license agreement third party per agreement terms quantum subject royalty payments based percentage net sales price certain products sold additionally within first three years agreement quantum required spend minimum 300000 development certain related technology december 31 1997 quantum incurred costs approximately 150000 license declared nonexclusive quantum elected make required exclusivity payments quantum since requested extension exclusivity payments however request granted license may terminated time third party agreement relates technology quantum recently chosen pursue commercially consequently quantum intends transfer license third party recognition development costs incurred quantum design inc qd prior spinout quantum agreed pay qd royalty rate 4 net sales certain products whether sold quantum licensee period six years effective date agreement april 15 1994 agreement also established minimum royalty payments 50000 years 1997 1998 applied royalties may become due qd respective fiscal years note 13 litigation time company may involved litigation including litigation relating claims arising operations normal course business company currently party legal proceedings adverse outcome managements opinion individually aggregate would material adverse effect companys business financial condition results operations note 14balance sheet components thousands invision technologies inc notes consolidated financial statements continued selfconstructed assets manufactured company use system testing support include cost parts materials overhead allocation company depreciates selfconstructed assets respective estimated useful lives range three five years december 31 1996 1997 company 393000 625000 respectively capitalized lease equipment related accumulated amortization 114000 254000 respectivelyitem 14 exhibits financial statement schedules reports form 8k a2 financial statement schedules omitted applicable required information shown consolidated financial statements notes thereto a3 exhibits notes exhibits 1 filed exhibit registrants registration statement form s1 333380 amendments thereto incorporated herein reference 2 filed exhibit registrants quarterly report form 10q quarterly period ended june 30 1998 incorporated herein reference 3 filed exhibit registrants quarterly report form 10q quarterly period ended june 301997 incorporated herein reference 4 filed exhibit registrants registration statement form s1 33323413 incorporated herein reference 5 items management contracts compensatory plans arrangements required filed exhibits pursuant item 14c form 10k 6 filed appendix companys notice proxy statement annual meeting stockholders held may 28 1998 b reports form 8k registrant filed reports form 8k year ended december 31 1998 c see exhibits listed item 14a3 financial statement schedules required item listed item 14a2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 30th day march 1999 invision technologies inc sergio magistri sergio magistri president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated report independent accountants board directors stockholders invision technologies inc opinion accompanying consolidated balance sheets related consolidated statements operations cash flows changes stockholders equity deficit present fairly material respects financial position invision technologies inc subsidiaries december 31 1998 1997 results operations cash flows three years period ended december 31 1998 conformity generally accepted accounting principles financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed pricewaterhousecoopers llp san jose california february 19 1999 invision technologies inc consolidated balance sheets thousands except share data accompanying notes integral part consolidated financial statements invision technologies inc consolidated statements operations thousands except per share data accompanying notes integral part consolidated financial statements invision technologies inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements invision technologies inc consolidated statements stockholders equity deficit thousands accompanying notes integral part consolidated financial statements invision technologies inc notes consolidated financial statements note 1 company invision technologies inc invision together subsidiaries company worldwide leader explosive detection technology company develops manufactures markets supports explosive detection systems eds civil aviation security based advanced computed tomography ct technology invisions whollyowned subsidiary quantum magnetics inc quantum develops commercializes patented proprietary technologies including key quadrupole resonance qr patents licensed naval research laboratory based stateoftheart lowcost version magnetic resonance adapted explosive detection companys principal facilities located newark california san diego california corporate office manufacturing facility located newark california invision formed 1990 design develop eds based ct technology exited development stage 1995 upon first commercial sales product ctx 5000 system today company markets advanced ctx 5500 system products development date companys ctx 5000 system ctx 5500 system together ctx 5000 series eds certified federal aviation administration faa currently deployed use inspection checked luggage commercial flights ctx 5000 series sold airport regulatory authorities airlines throughout world 1997 invision acquired quantum privatelyheld developer explosive detection equipment based qr technology founded 1987 acquisition quantum invision added quantums portfolio complementary detection technologies quantums products prototype stage include advanced detection systems markets carryon luggage screening landmine detection drug detection postal inspection passive magnetic sensing detection concealed weapons quantum also leading supplier research development services area qr technology number government agencies note 2 summary significant accounting policies basis presentation consolidated financial statements include financial statements invision whollyowned subsidiaries elimination intercompany accounts transactions companys preparation consolidated financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates certain prior year amounts reclassified conform current year presentation stock split share information periods presented retroactively adjusted reflect 1for11 reverse stock split common stock preferred stock effected march 15 1996 2for1 common stock dividend effected february 7 1997 cash equivalents company considers liquid investments purchased original maturity three months less cash equivalents shortterm investments shortterm investments consist primarily commercial paper original maturities date purchase beyond three months less 12 months shortterm investments carried cost approximates fair market value due short period time maturity revenue recognition revenue product sales recognized upon shipment unless extended acceptance criteria exist case revenue recognized upon completion acceptance criteria provision estimated installation training warranty costs recorded time revenue recognized revenue maintenance service contracts recognized ratably term contract deferred revenue arises advance payments received customers systems delivered within next year maintenance service yet performed quantums research development contracts grants reported revenues prior acquisition invision quantums research development revenues classified reduction research development expense accordance companys policy inventories stated lower cost market cost determined firstin firstout basis includes materials labor overhead property equipment property equipment recorded cost depreciation computed using straightline method based upon estimated useful lives assets range two five years lease term respective assets applicable 1996 company adopted statement financial accounting standards 121 accounting impairment longlived assets longlived assets disposed accordingly company evaluates recoverability assets events changes circumstances indicate amounts may recoverable company determines recoverability carrying amount intangible asset reviewing following factors undiscounted value expected operating cash flows relation net capital investment estimated useful contractual life intangible asset contract product supporting intangible asset case purchased technology company periodically reviews recoverability asset value evaluating products respect technological advances competitive products longlived asset impairment losses income taxes company accounts income taxes accordance statement financial accounting standards 109 accounting income taxes prescribes use liability method whereby deferred tax asset liability account balances calculated balance sheet date using current tax laws rates effect valuation allowances established necessary reduce deferred tax assets amounts expected realized research development costs research development costs charged operations incurred contractually reimbursable costs certain research development activities reflected reduction research development expense period related costs incurred software development costs company capitalizes internally generated software development costs accordance statement financial accounting standards 86 sfas 86 accounting costs computer software sold leased otherwise marketed sfas 86 requires capitalization certain software development costs technological feasibility established company capitalized software development costs 803000 1998 amounts included noncurrent assets december 31 1998 prior years period achieving technological feasibility availability general release software included companys product short software development costs qualifying capitalization insignificant accordingly company capitalize software development costs prior 1998 amortization capitalized software development costs begins products available general release customers computed productbyproduct basis using greater ratio current gross revenues product total current anticipated future gross revenues product b straightline method remaining estimated economic life product amortization expense recorded 1998 product yet available general release customers stock compensation company grants stock options fixed number shares employees exercise price equal fair value shares date grant company accounts employee stockbased compensation accordance accounting principles board opinion 25 apb 25 accounting stock issued employees accordingly compensation expense recognized companys consolidated statements operations january 1996 company adopted disclosureonly requirements statement financial accounting standards 123 sfas 123 accounting stockbased compensation accordingly continue account stockbased compensation employees apb 25 dependence suppliers companys ability timely deliver products dependent upon availability quality components subsystems used products company depends part upon subcontractors manufacture assemble deliver certain items timely satisfactory manner company obtains certain components subsystems single limited number sources significant interruption delivery items could material adverse effect companys financial condition results operations comprehensive income 1998 company adopted statement financial accounting standards 130 sfas 130 reporting comprehensive income statement establishes standards reporting displaying comprehensive income components revenues expenses gains losses full set generalpurpose financial statements items may include foreign currency translation adjustments unrealized gainslosses investing hedging activities transactions company comprehensive income net income periods presented consolidated financial statements segment information june 1997 financial accounting standards board issued statement financial accounting standards 131 sfas 131 disclosures segments enterprise related information statement establishes standards way companies report information operating segments annual financial statements also establishes standards related disclosures products services geographic areas major customers accordance provisions sfas 131 company determined separately reportable operating segments concentration credit risk fair value financial instruments financial instruments potentially subject company significant concentrations credit risk consist primarily cash accounts receivable company limits amount credit exposure cash balances maintaining accounts high credit quality financial institutions company accounts receivable customers including research development reimbursements faa government agencies private entities located united states europe middle east pacific rim 16543000 6898000 2327000 827000 respectively company performs various evaluations customers financial condition credit worthiness date company experienced material credit losses accordingly recorded allowance doubtful accounts december 31 1998 1997 december 31 1998 three customers accounted 38 15 total accounts receivable company believes recorded value financial instruments including cash accounts receivable longterm debt approximate fair value balance sheet date companys revenues denominated us dollars significant customers represented 10 revenues respective periods follows company markets products internationally domestically product sales geographic region follows thousands net income loss per share 1997 company adopted statement financial accounting standards 128 sfas 128 earnings per share historical earnings per share information restated required sfas 128 basic earnings per share computed dividing income available common stockholders weightedaverage common shares outstanding period diluted earnings per share reflect weightedaverage common shares outstanding plus potential effect dilutive securities contracts convertible common shares options warrants convertible debt preferred stock using treasury stock method following reconciliation components basic diluted net income loss per share calculations periods presented thousands except per share data note 3 acquisition quantum magnetics inc september 30 1997 invision acquired quantum developer explosive detection equipment based upon quadrupole resonance technology transaction accounted pooling interests effective september 30 1997 therefore prior periods restated include historical results quantum nonrecurring expenses associated acquisition comprised primarily outside accounting legal fees amounted 685000 included acquisition costs statements operations revenues net income loss separate companies date acquisition included companys consolidated statements operations follows thousands note 4 federal aviation administration faa contract december 1996 company entered contract faa deliver 54 ctx 5000 systems various airports united states minimum amount due faa contract including related products associated installation support services 522 million 1998 company received modifications contract amount 173 million additional 15 ctx 5500 systems well order upgrade 59 ctx 5000 systems previously purchased faa companys secondgeneration ctx 5500 system december 31 1998 company delivered systems 32 59 ctx 5500 upgrade kits first quarter 1999 company received modification contract amount 189 million additional 21 ctx 5500 systems note 5 research development contracts grants company awarded various research development contracts grants faa government agencies private entities share costs developing enhancing companys products 1998 1997 1996 company entitled reimbursements 108 million 85 million 49 million respectively research development contracts grants reimbursements reflected reduction research development expense period presented billings contracts grants rendered monthly basis actual costs incurred december 31 1998 1997 related receivable balances contracts grants 47 million 24 million respectively company received additional 21 million research development grant end first quarter 1999 note 6 debt line credit 1997 company entered two oneyear revolving line credit agreements silicon valley bank april 1998 agreements extended april 1999 company process renewing agreements first agreement provides maximum borrowings amount lower 80 eligible domestic accounts receivable 45 million second agreement partially guaranteed exportimport bank united states provides maximum borrowings amount lower sum 90 eligible export accounts receivable plus 70 eligible raw materials workinprocess inventory designated export customers 45 million borrowings agreements bear interest banks prime rate 775 december 31 1998 secured companys assets intellectual property agreements require company maintain certain financial ratios levels tangible net worth profitability also prohibit company paying cash dividends proceeds loans lines credit may used general corporate purposes december 31 1998 company outstanding borrowings 29 million lines credit guarantees issuance letters credit customers secured lines credit totaling 16 million december 31 1997 company outstanding borrowings 40 million lines credit guarantees issuance letters credit customers secured lines credit totaling 24 million remaining available borrowing capacity lines credit 12 million december 31 1998 based eligible accounts receivable inventories date 1997 company entered committed equipment line credit agreement silicon valley bank transforms term loan draw april 1998 agreement extended april 1999 company process renewing agreement provides borrowings 175 million borrowings agreement bear interest banks prime rate 775 december 31 1998 plus 100 fixed rate equal 425 yield 36 60 month treasury notes based assets purchased financed treasury note rates december 31 1998 36 months 467 60 months 454 borrowings agreement secured assets purchased financed december 31 1998 1997 company outstanding borrowings 12 million remaining borrowing capacity 05 million line credit subordinated promissory note company note payable outstanding third party remaining balance 168000 december 31 1997 outstanding balance accrued interest rate 10 paid full january 1998 bridge loan december 1995 invision entered 2000000 bridge loan agreement bridge loan lender agreement invision borrowed 1000000 december 1995 additional 1000000 february 1996 principal outstanding agreement secured assets invision bridge loan repaid full may 1 1996 accordance terms connection bridge loan lender received warrants aggregate fair value bridge loan warrants determined respective dates issuance 1330000 value represents discount amortized financing cost period bridge loan outstanding note 7 stockholders equity common stock period april october 1998 company repurchased 115000 shares common stock prevailing market prices total 865000 terms acquisition quantum september 1997 777000 shares common stock either issued quantum shareholders exchange quantum capital stock outstanding reserved issuance connection quantum common stock options outstanding prior acquisition converted options purchase invision common stock second quarter 1997 company sold 1875000 shares common stock underwritten public offering 1200 per share offering generated net proceeds company approximately 212 million including proceeds underwriters overallotment option november 1996 company issued 183750 shares unregistered common stock egg international ltd 1088 per share reflecting 10 discount market price companys common stock connection signing research development license agreement net proceeds totaled 1974000 second quarter 1996 company issued 2070000 shares common stock 550 per share connection companys initial public offering ipo net proceeds company totaled 9532000 including proceeds exercise underwriters overallotment option connection companys ipo donald co securities inc underwriter received terms underwriting agreement fouryear warrant purchase 180000 shares companys common stock price 660 per share commencing april 23 1997 december 31 1998 shares companys common stock purchased warrant preferred stock conjunction companys ipo outstanding convertible preferred stock converted common stock december 31 1998 5000000 shares preferred stock authorized shares issued outstanding board directors authorized issue preferred stock one series fix rights preferences privileges restrictions thereof including dividend rights dividend rates conversion rights voting rights terms redemption prices liquidation preferences number shares constituting series designation series without action vote companys stockholders note 8 employee stock benefit plans equity incentive plan march 1996 board directors approved amended restated 1991 stock option plan renamed equity incentive plan option plan option plan provides granting incentive stock options nonqualified stock options purchase aggregate 2621818 shares companys common stock officers employees consultants directors company board directors responsible administration option plan board directors determines term option exercise price number shares option granted rate option exercisable options granted option plan generally vest four year period incentive nonqualified stock options may granted exercise price per share less 85 fair value per common share date grant less 110 fair value case holders 10 companys voting stock options granted option plan generally expire ten years date grant five years incentive stock options granted holders 10 companys voting stock options granted generally vest 25 one year issuance 116th quarter thereafter three years late october 1998 company offered employees consultants opportunity participate option repricing program employee consultant could elect november 9th existing option issued companys option plan converted repriced option per share exercise price repriced option would equal greater fair market value companys common stock conversion date november 9 1998 693 return lower exercise price repriced options issued would subject blackout period whereby options could exercised november 9 1998 may 8 1999 number shares vested converted option would vest immediately repriced option remaining shares subject repriced option vest period equivalent vesting period remaining converted option november 9 1998 fair market value companys common stock 650 options total 313986 shares repriced 693 per share officers company repriced options program weighted average per share exercise price outstanding shares subject options prior conversion 1055 range exercise prices 769 1456 connection grants stock options employees directors company recorded 240000 152000 deferred compensation representing difference deemed fair value companys common stock exercise price date grant 1997 1996 respectively deferred stock compensation recorded 1998 amortization deferred stock compensation 68000 425000 489000 1998 1997 1996 respectively remaining deferred stock compensation balance 131000 amortized remaining vesting period related options activity option plan follows thousands except per share data information relating stock options outstanding option plan december 31 1998 follows thousands except per share data 1996 employee stock purchase plan companys 1996 employee stock purchase plan purchase plan adopted march 1996 total 300000 shares common stock reserved issuance purchase plan december 31 1998 110000 shares issued purchase plan fair value disclosures compensation cost options granted 1998 1997 1996 companys option plan determined based fair value grant dates prescribed sfas 123 companys net income loss pro forma net income loss per share would follows thousands except per share data fair value option grant estimated date grant using minimum value method following assumptions used grants applicable period 1997 employee 401k plan invision technologies inc 401k plan 401k plan established 1992 provide retirement incidental benefits employees allowed section 401k internal revenue code 401k plan provides taxdeferred salary deductions eligible employees may contribute 20 annual compensation 401k plan limited maximum amount set periodically internal revenue service beginning july 1997 company began matching employee contributions rate 050 dollar maximum 6 gross compensation matching contributions vest immediately company matching contributions 401k plan totaled 294000 170000 1998 1997 respectively company matching contributions made 401k plan 1996 note 9 commitments company leases facilities equipment noncancelable leases expiring various times 2007 future minimum lease payments leases december 31 1998 follows thousands rent expense 1998 1997 1996 1357000 1105000 527000 respectively note 10 income taxes result losses generated 1996 company recorded provision income taxes year reconciliation federal statutory rate effective rate meaningful 1998 1997 provision income taxes consists following thousands companys actual effective tax rate 1998 1997 differs us statutory income tax rate follows company provides valuation allowance deferred tax assets likely based upon currently available evidence including prior history losses portion deferred tax assets realized december 31 1998 company federal net operating loss carryforwards approximately 60 million available reduce future federal taxable income 17 million available reduce state taxable income companys net operating loss carryforwards expire 2005 2011 tax benefit net operating loss credit carryforwards may limited due impact tax reform act 1986 events may cause tax benefit limited include limited cumulative stock ownership change 50 defined three year period timing utilization various tax benefits carried forward note 11 related party transactions 1998 1997 1996 company recorded professional consulting fees 205000 165000 264000 respectively compensation companys directors services provided members board directors well consulting services rendered company connection services directors august 1996 company entered consulting agreement bgi inc bgi virginiabased international consulting firm engaged assist company enhancing methods strategies contacts support marketing ctx 5000 us government march 1998 ambassador busby controlling shareholder bgi elected companys board directors company paid consulting fees 240000 1998 1997 respectively bgi consulting services bgi also received august 1996 option 6586 shares companys common stock vesting shares based achievement certain milestones based milestones 2684 3902 shares vested 1998 1997 respectively note 12 license agreements november 1996 company entered research development license agreement egg astrophysics affiliate egg international ltd terms agreement company egg astrophysics agreed participate cost sharing research development effort develop explosive detection system enhanced capability reliable detection explosives higher rates throughput companys existing system agreement terminated may 1998 difference costs incurred party material october 1994 quantum entered twelveyear license agreement third party amended may 1997 agreement provides quantum nonexclusive irrevocable license certain inprocess detection technology superconductor technology well equipment fair value 100000 exchange 330000 note payable due unequal quarterly payments plus 11 interest fair value technology license 230000 charged operations may 1997 balance note payable paid full january 1998 june 1997 quantum entered joint venture perform research development related certain detection technologies exchange 38 ownership interest joint venture quantum granted nonexclusive royalty free perpetual transferable sublicense superconductor technology agreed joint venture sole source fabrication testing products developed joint venture agreed guarantee onehalf 200000 working capital loan joint venture connection formation joint venture quantum sold equipment joint venture exchange elevenyear note receivable 100000 bearing interest 67 per annum january 1999 quantum sold sufficient shares reduce ownership joint venture 10 released obligation guarantee onehalf working capital loan joint venture agreed extend payment holiday note receivable joint venture july 10 2001 march 1995 quantum executed tenyear exclusive license agreement third party quantum subject royalty payments based percentage net sales price certain products made used sold minimum annual royalties 20000 due beginning calendar year 1997 remaining term agreement quantum incur royalty expense agreement 1995 1996 paid minimum royalty 20000 1997 1998 january 1999 quantum licensor agreed modify license expanding field use increasing minimum annual royalty 70000 extending term january 2009 quantum paid onetime fee 50000 obtain modification extension june 1995 quantum entered exclusive license agreement third party per agreement terms quantum subject royalty payments based percentage net sales price certain products sold additionally within first three years agreement quantum required spend minimum 300000 development certain related technology 1998 quantum determined pursue technology commercially license terminated date termination quantum incurred costs approximately 150000 consideration amount paid quantum terminate rights obligations license agreement material recognition development costs incurred quantum design inc qd prior spinout quantum agreed pay qd royalty rate 4 net sales certain products whether sold quantum licensee period six years effective date agreement april 15 1994 agreement also established minimum royalty payments 50000 years 1997 1998 applied royalties become due qd respective fiscal years note 13 litigation january 7 1999 vivid technologies inc vivid filed summons complaint superior court state california county san diego invision quantum esi international inc esi robert price sandra price collectively defendants complaint asserts causes action 1 misappropriation trade secrets 2 inducing breach contract 3 interference contractual relations 4 statutory unfair competition 5 common law unfair competition 6 interference prospective economic advantage 7 defamation 8 declaratory relief declaring vivid misappropriated trade secrets quantum february 8 1999 defendants invision quantum filed answer denied material allegations complaint asserted various affirmative defenses discovery recently commenced specific amount damages requested complaint filed vivid following efforts quantum esi private investigator hired quantum investigate alleged theft intellectual property quantum former key employee hired vivid bring certain evidence attention federal bureau investigation fbi united states attorney southern district california allegation vivid complaint relating alleged misappropriation trade secrets appears stem efforts collect evidence alleged theft quantum allegations including allegation relating quantums alleged defamation vivid appear relate quantums alleged statements faa describing alleged theft us attorney southern district california opened grand jury investigation alleged theft intellectual property quantum two subpoenas search warrant issued executed best companys knowledge investigation remains open february 10 1999 defendants invision quantum filed motion temporary stay civil proceedings including discovery period 90 days march 5 1999 court granted motion ordered entire case including discovery stayed 90 days status conference set june 11 1999 management believes outcome matter even adverse material adverse effect companys business financial condition results operations addition foregoing matter company may involved time litigation including litigation relating claims arising operations normal course business company currently party legal proceedings adverse outcome managements opinion individually aggregate would material adverse effect companys business financial condition results operations note 14 balance sheet components thousands selfconstructed assets manufactured company use system testing support include cost parts materials overhead allocation company depreciates selfconstructed assets respective estimated useful lives range three five years december 31 1998 1997 company 614000 625000 respectively capitalized lease equipment related accumulated amortization 273000 254000 respectivelyitem 14 exhibits financial statement schedules reports form 8k a1 financial statements consolidated financial statements required item submitted separate section beginning page report pricewaterhousecoopers llp independent accountants consolidated balance sheets december 31 1999 1998 f2 consolidated statements operations years ended december 31 1999 1998 1997 consolidated statements cash flows years ended december 31 1999 1998 1997f4 consolidated statements stockholders equity years ended december 31 1999 1998 1997f5 notes consolidated financial statementsf6 a2 financial statement schedules ii valuation qualifying accounts schedules listed omitted applicable required information shown consolidated financial statements notes thereto a3 exhibits exhibit number description 31 amended restated certificate incorporation registrant 1 32 bylaws registrant amended 2 41 reference made exhibits 31 32 101 technology license agreement dated september 11 1990 registrant imatron inc 1 103 representatives warrant agreement 1 104 registrants equity incentive plan amended february 19 1999 5 6 105 registrants 1996 employee stock purchase plan dated march 9 19961 5 1012 lease dated february 11 1997 registrant whlnf real estate lp 4 1013 purchase agreement dated december 24 1996 registrant us federal aviation administration 4 1017 loan security agreement dated february 20 1997 registrant silicon valley bank 4 1018 revolving promissory note dated february 20 1997 registrant silicon valley bank 4 1019 exportimport bank loan security agreement dated february 20 1997 registrant silicon valley bank 4 1020 intellectual property security agreement dated february 20 1997 registrant silicon valley bank 4 1022 key employee agreement dated april 22 1994 registrant sergio magistri amendment thereto dated october 16 1995 4 5 1023 key employee agreement dated march 1 1996 registrant david pillor 4 5 1025 loan modification agreement dated april 15 1998 domestic loan security agreement dated february 20 1997 exportimport bank loan security agreement dated february 20 1997 registrant silicon valley bank 2 1026 release security agreement dated april 15 1998 release security interest registrants trademarked works set forth intellectual property security agreement dated february 20 1997 registrant silicon valley bank 2 1027 release security agreement dated april 15 1998 release security interest registrants patented works set forth intellectual property security agreement dated february 20 1997 registrant silicon valley bank 2 1028 negative pledge agreement dated april 15 1998 covering registrants intellectual property registrant silicon valley bank 2 1029 consent letter dated june 1 1998 silicon valley bank registrants stock repurchase program connection loan security agreements dated february 20 1997 amended modification agreement dated april 15 1998 registrant silicon valley bank 2 1030 key employee agreement dated october 23 1998 registrant tim black 5 1031 amended restated loan security agreement dated may 4 1999 registrant silicon valley bank 7 1032 amended restated exportimport bank loan security agreement dated may 4 1999 registrant silicon valley bank 7 1033 negative pledge agreement dated may 4 1999 covering registrants intellectual property registrant silicon valley bank 7 1034 amendment 1 technology license agreement registrant imatron inc dated september 11 1990 1035 key employee agreement dated may 27 1999 registrant alfred v larrenaga 5 1036 form indemnity agreement registrant sergio magistri tim black alfred v larrenaga david pillor giovanni lanzara bruno trezza douglas boyd morris busby dated november 1 1999 231 consent pricewaterhousecoopers llp 271 financial data schedule fiscal year 1999 notes exhibits 1 filed exhibit registrants registration statement form s1 333380 amendments thereto incorporated herein reference 2 filed exhibit registrants quarterly report form 10q quarterly period ended june 30 1998 incorporated herein reference 3 filed exhibit registrants quarterly report form 10q quarterly period ended june 301997 incorporated herein reference 4 filed exhibit registrants registration statement form s1 33323413 incorporated herein reference 5 items management contracts compensatory plans arrangements required filed exhibits pursuant item 14c form 10k 6 filed appendix companys notice proxy statement annual meeting stockholders held july 15 1999 7 filed exhibit registrants quarterly report form 10q quarterly period ended march 31 1999 incorporated herein reference b reports form 8k registrant filed reports form 8k year ended december 31 1999 c see exhibits listed item 14a3 financial statement schedules required item listed item 14a2 report independent accountants board directors stockholders invision technologies inc opinion consolidated financial statements listed accompanying index present fairly material respects financial position invision technologies inc subsidiaries december 31 1999 1998 results operations cash flows three years period ended december 31 1999 conformity accounting principles generally accepted united states addition opinion financial statement schedule listed accompanying index presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance auditing standards generally accepted united states require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed pricewaterhousecoopers llp san jose california february 9 2000 invision technologies inc updated consolidated balance sheets thousands except share data invision technologies inc consolidated statements operations thousands except per share data invision technologies inc consolidated statements cash flows thousands invision technologies inc consolidated statements stockholders equity thousands invision technologies inc notes consolidated financial statements note 1 company invision technologies inc invision together subsidiaries company worldwide leader explosive detection technology company develops manufactures markets supports systems based advanced computed tomography ct technology explosive detection systems eds civil aviation security log scanning wood products industry drug detection applications invisions whollyowned subsidiary quantum magnetics inc quantum develops commercializes patented proprietary technologies including key quadrupole resonance qr patents licensed naval research laboratory based stateoftheart lowcost version magnetic resonance adapted explosive detection companys principal facilities located newark california san diego california corporate office manufacturing facility located newark california invision formed 1990 design develop eds based ct technology exited development stage 1995 upon first commercial sales product ctx 5000 system today company markets advanced ctx 5500 system next generation ctx 9000 system smaller lighter ctx 2500 system addition products company products development date companys ctx 5000 system ctx 5500 system together ctx 5000 series eds certified federal aviation administration faa currently deployed use inspection checked luggage commercial flights april 1999 ctx 9000 system successfully completed faa certification company sold first system third quarter 1999 additionally september 1999 ctx 2500 system successfully completed faa certification ctx systems sold airport regulatory authorities airlines throughout world 1997 invision acquired quantum privatelyheld developer explosive detection equipment based qr technology founded 1987 acquisition quantum invision added quantums portfolio complementary detection technologies quantums products prototype stage include advanced detection systems markets carryon luggage screening drug detection postal inspection detection concealed weapons landmines quantum also leading supplier research development services area qr technology passive magnetic sensing number government agencies quantums research development activities historically funded various us government agencies including faa eds defense advanced research projects agency darpa landmine detection third quarter 1999 quantum sold first qscan 160 eds united states navy mail parcel screening applications international location 1997 quantum began development sophisticated prototype system combines qr explosives detection metal detection thus capable detecting plasticcased metalcased landmines fourth quarter 1999 unique capabilities landmine detection system successfully demonstrated series department defensesponsored blind field tests carried fort leonard wood missouri february 2000 company created woodvision new division formed develop ct technology optimize lumber value yield harvested timber additionally february 2000 company acquired inovec inc inovec manufacturer advanced optimization equipment increasing yield forest products industry 52 million cash stock payable next two years potentially additional 14 million cash stock payable next two years based achievement certain performance milestones transaction accounted purchase effective january 1 2000 see note 15 note 2 summary significant accounting policies basis presentation consolidated financial statements include financial statements invision whollyowned subsidiaries elimination intercompany accounts transactions companys preparation consolidated financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates revenues cost revenues related quantums government contracts previously reported reduction research development expense prior year amounts reclassified reflect gross revenues cost invision technologies inc notes consolidated financial statements revenues associated quantums contracts conform 1999 presentation certain prior year amounts also reclassified conform current year presentation stock split share information periods presented retroactively adjusted reflect 1for11 reverse stock split common stock preferred stock effected march 15 1996 2for1 common stock dividend effected february 7 1997 cash equivalents company considers liquid investments purchased original maturity three months less cash equivalents shortterm investments shortterm investments consist primarily commercial paper original maturities date purchase beyond three months less 12 months shortterm investments carried cost approximates fair market value due short period time maturity revenue recognition revenue product sales recognized upon shipment unless extended acceptance criteria exist case revenue recognized upon completion acceptance criteria provision estimated installation training warranty costs recorded time revenue recognized adjusted periodically based historical anticipated experience revenue maintenance service contracts recognized ratably term contract deferred revenue arises advance payments received customers systems delivered within next year maintenance service yet performed revenue government contracts recognized using percentageofcompletion method based costs incurred date percentage total estimated costs completion deferred revenue recorded advance payments received work yet performed december 1999 securities exchange commission issued staff accounting bulletin 101 sab 101 revenue recognition provides guidance recognition presentation disclosure revenue financial statements filed securities exchange commission sab 101 outlines basic criteria must met recognize revenue provides guidance disclosures related revenue recognition policies sab 101 effective fiscal quarter beginning september 30 2000 however earlier adoption permitted company yet determined impact adoption consolidated financial statements inventories stated lower cost market cost determined firstin firstout basis includes materials labor overhead property equipment property equipment recorded cost depreciation computed using straightline method based upon estimated useful lives assets range two five years lease term respective assets applicable income taxes company accounts income taxes accordance statement financial accounting standards 109 accounting income taxes prescribes use asset liability method whereby deferred tax asset liability account balances calculated balance sheet date using current tax laws rates effect valuation allowances established necessary reduce deferred tax assets amounts expected realized research development costs research development costs charged operations incurred contractually reimbursable costs certain research development activities reflected reduction research development expense period related costs incurred invision technologies inc notes consolidated financial statements software development costs company capitalizes internally generated software development costs accordance statement financial accounting standards 86 sfas 86 accounting costs computer software sold leased otherwise marketed sfas 86 requires capitalization certain software development costs technological feasibility established software development costs qualifying capitalization significant 1999 1998 company capitalized software development costs 803000 included current assets noncurrent assets december 31 1999 1998 company began amortizing capitalized software development costs using straightline method forecasted units production amortization expense 50000 1999 amortization expense recorded 1998 product yet available general release customers stock compensation company grants stock options fixed number shares employees exercise price equal fair value shares date grant company accounts employee stockbased compensation accordance accounting principles board opinion 25 apb 25 accounting stock issued employees accordingly compensation expense recognized companys consolidated statements operations january 1996 company adopted disclosureonly requirements statement financial accounting standards 123 sfas 123 accounting stockbased compensation accordingly continue account stockbased compensation employees apb 25 dependence suppliers companys ability timely deliver products dependent upon availability quality components subsystems used products company depends part upon subcontractors manufacture assemble deliver certain items timely satisfactory manner company obtains certain components subsystems single limited number sources significant interruption delivery items could material adverse effect companys financial condition results operations comprehensive income 1998 company adopted statement financial accounting standards 130 sfas 130 reporting comprehensive income statement establishes standards reporting displaying comprehensive income components revenues expenses gains losses full set generalpurpose financial statements items may include foreign currency translation adjustments unrealized gainslosses investing hedging activities transactions company comprehensive income net income periods presented consolidated financial statements segment information june 1997 financial accounting standards board issued statement financial accounting standards 131 sfas 131 disclosures segments enterprise related information statement establishes standards way companies report information operating segments annual financial statements also establishes standards related disclosures products services geographic areas major customers accordance provisions sfas 131 company determined separately reportable operating segments concentration credit risk fair value financial instruments financial instruments potentially subject company significant concentrations credit risk consist primarily cash accounts receivable company limits amount credit exposure cash balances maintaining accounts high credit quality financial institutions company accounts receivable customers including research development reimbursements faa government agencies located united states europe pacific rim 75 million 16 million 15 million respectively company performs various evaluations customers financial condition credit worthiness december 31 199 1998 allowance bad debt 171000 40000 respectively december 31 1999 four customers accounted 414 126 111 108 total accounts receivable invision technologies inc notes consolidated financial statements company believes recorded value financial instruments including cash accounts receivable longterm debt approximate fair value balance sheet date companys total revenues denominated us dollars significant customers represented 10 total revenues respective periods follows company markets products internationally domestically total revenues geographic region follows thousands net income per share 1997 company adopted statement financial accounting standards 128 sfas 128 earnings per share historical earnings per share information restated required sfas 128 basic earnings per share computed dividing income available common stockholders weightedaverage common shares outstanding period diluted earnings per share reflect weightedaverage common shares outstanding plus potential effect dilutive securities contracts convertible common shares options warrants convertible debt preferred stock using treasury stock method following reconciliation components basic diluted net income per share calculations periods presented thousands except per share data note 3 acquisition quantum magnetics inc invision technologies inc notes consolidated financial statements september 30 1997 invision acquired quantum developer explosive detection equipment based upon quadrupole resonance technology transaction accounted pooling interests effective september 30 1997 therefore prior periods restated include historical results quantum nonrecurring expenses associated acquisition comprised primarily outside accounting legal fees amounted 685000 included acquisition costs consolidated statements operations revenues net income loss separate companies date acquisition included companys consolidated statements operations follows thousands note 4 federal aviation administration faa contracts december 1996 company entered contract faa deliver 54 ctx 5000 systems various airports united states minimum amount due faa contract including related products associated installation support services 522 million 1998 company received modifications contract amount 173 million additional 15 ctx 5500 systems well order upgrade 59 ctx 5000 systems previously purchased faa companys secondgeneration ctx 5500 system 1999 company received modifications contract amount 324 million additional 36 ctx 5500 systems december 31 1999 contract completed units shipped contract company currently negotiations new ctx 5500 ctx 2500 contracts october 1999 company received letter contract 28 million potential value 80 million three years faa ctx 9000 systems accessories note 5 research development contracts grants company awarded various research development contracts grants faa government agencies share costs developing enhancing companys products 1999 1998 1997 company entitled reimbursements 07 million 36 million 21 million respectively research development contracts grants reimbursements reflected reduction research development expense period presented billings research development contracts grants rendered monthly basis actual costs incurred december 31 1999 1998 related receivable balances contracts grants 47000 26 million respectively note 6 debt lines credit may 1999 company renewed two oneyear revolving line credit agreements bank first agreement provides maximum borrowings 50 million second agreement partially guaranteed invision technologies inc notes consolidated financial statements exportimport bank united states provides maximum borrowings amount lower sum 90 eligible export accounts receivable plus 70 eligible raw materials workinprocess inventory designated export customers net advance payments deposits 25 million borrowings agreements bear interest banks prime rate 85 december 31 1999 secured companys assets intellectual property agreements require company maintain certain financial ratios levels tangible net worth profitability also prohibit company paying cash dividends december 31 1999 company default covenant set forth loan agreement february 2000 company received waiver default loan agreement bank period ended december 31 1999 proceeds loans lines credit may used general corporate purposes december 31 1999 company outstanding guarantees customers issuance letters credit secured lines credit totaling 22 million outstanding borrowings lines credit december 31 1999 remaining available borrowing capacity lines credit 43 million december 31 1999 agreements expire april 2000 company process renewing revolving line credit agreements bank may 1999 company renewed committed equipment line credit agreement bank transforms term loan drawdown agreement provides borrowings 05 million borrowings agreement bear interest banks prime rate 85 december 31 1999 plus 025 banks prime rate plus 025 draw period fixed rate equal 35 yield 36 month treasury note 614 december 31 1999 amortization period borrowings secured assets purchased financed december 31 1999 company outstanding 05 million term loan due june 2003 04 million term loan due november 2001 drawdowns prior year line credit term loans bear interest 899 903 respectively company remaining borrowing capacity 05 million current year line credit december 31 1999 agreement expires april 2000 company process renewing line credit agreement bank note 7 stockholders equity common stock 1999 company repurchased 85600 shares common stock prevailing market prices total 334000 1998 company repurchased 114900 shares common stock prevailing market prices total 865000 terms acquisition quantum september 1997 777000 shares common stock either issued quantum shareholders exchange quantum capital stock outstanding reserved issuance connection quantum common stock options outstanding prior acquisition converted options purchase invision common stock 1997 company sold 1875000 shares common stock underwritten public offering 1200 per share offering generated net proceeds company approximately 212 million including proceeds underwriters overallotment option connection companys ipo donald co securities inc underwriter received terms underwriting agreement fouryear warrant purchase 180000 shares companys common stock price 660 per share commencing april 23 1997 december 31 1999 shares companys common stock purchased warrant note 8 employee stock benefit plans equity incentive plan march 1996 board directors approved amended restated 1991 stock option plan renamed equity incentive plan equity plan equity plan provides granting incentive nonqualified stock options stock bonus awards rights purchase restricted stock appreciation rights together stock awards purchase aggregate 2621818 shares companys common stock officers invision technologies inc notes consolidated financial statements employees consultants directors company board directors responsible administration equity plan board directors determines terms stock awardoptions granted equity plan generally vest four year period event change control transaction defined equity plan stock awards outstanding shall continued assumed surviving entity similar awards shall substituted therefor surviving entity refuses vesting rate lapse repurchase rights stock awards shall accelerate full date immediately prior effective date change control transaction respect officers directors even surviving entity continues assumes substitutes stock awards vesting rate lapse repurchase rights stock awards shall accelerate full upon involuntary termination without cause constructive termination terms defined officers directors respective option agreements within year following effective date change control transaction incentive nonqualified stock options may granted exercise price per share less 85 fair value per common share date grant less 110 fair value case holders 10 companys voting stock options granted equity plan generally expire ten years date grant five years incentive stock options granted holders 10 companys voting stock options granted generally vest 25 one year issuance 116th quarter thereafter three years october 1998 company offered employees consultants opportunity participate option repricing program employee consultant could elect november 9th existing option issued companys equity plan converted repriced option per share exercise price repriced option would equal greater fair market value companys common stock conversion date november 9 1998 693 return lower exercise price repriced options issued would subject blackout period whereby options could exercised november 9 1998 may 8 1999 number shares vested converted option would vest immediately repriced option remaining shares subject repriced option vest period equivalent vesting period remaining converted option november 9 1998 fair market value companys common stock 650 options total 313986 shares repriced 693 per share officers company repriced options program weighted average per share exercise price outstanding shares subject options prior conversion 1055 range exercise prices 769 1456 connection grants stock options employees directors company recorded 240000 deferred compensation representing difference deemed fair value companys common stock exercise price date grant 1997 deferred stock compensation recorded 1998 1999 amortization deferred stock compensation 68000 425000 1999 1998 1997 respectively remaining deferred stock compensation balance 63000 amortized remaining vesting period related options activity equity plan follows thousands except per share data invision technologies inc notes consolidated financial statements february 2000 options total 411400 shares granted equity plan information relating stock options outstanding equity plan december 31 1999 follows thousands except per share data 2000 nonofficer equity incentive plan february 2000 board directors approved 2000 nonofficer equity incentive plan nonofficer equity plan nonofficer equity plan provides granting nonqualified stock options stock bonuses rights purchase restricted stock awards aggregate 400000 shares companys common stock employees consultants company officers directors persons subject section 16 securities exchange act 1934 board directors responsible administration nonofficer equity plan board directors determines terms stock award respect nonqualified stock options stock awards granted date board determines term option exercise price number invision technologies inc notes consolidated financial statements shares option granted rate option exercisable options granted option plan generally vest four year period event change control transaction defined nonofficer equity plan stock awards outstanding shall continued assumed surviving entity similar awards shall substituted therefor surviving entity refuses vesting rate lapse repurchase rights stock awards shall accelerate full date immediately prior effective date change control transaction nonqualified stock options granted exercise price per share less 85 fair market value per common share date grant options granted 2000 nonofficer equity plan generally expire ten years date grant options granted generally vest 25 one year issuance 116th quarter thereafter three years february 2000 options total 306910 shares granted nonofficer equity plan 1996 employee stock purchase plan companys 1996 employee stock purchase plan purchase plan adopted march 1996 total 300000 shares common stock reserved issuance purchase plan december 1999 amendment approved board directors subject stockholders approval increased number reserved shares 450000 december 31 1999 207000 shares issued purchase plan invision technologies inc notes consolidated financial statements fair value disclosures compensation cost options granted 1999 1998 1997 companys option plan determined based fair value grant dates prescribed sfas 123 companys net income pro forma net income loss per share would follows thousands except per share data fair value option grant estimated date grant using minimum value method following assumptions used grants applicable period 1997 employee 401k plan invision technologies inc 401k plan 401k plan established 1992 provide retirement incidental benefits employees allowed section 401k internal revenue code 401k plan provides taxdeferred salary deductions eligible employees may contribute 20 annual compensation 401k plan limited maximum amount set periodically internal revenue service beginning july 1997 company began matching employee contributions rate 050 dollar maximum 6 employees gross compensation matching contributions vest immediately company matching contributions 401k plan totaled 351000 294000 170000 1999 1998 1997 respectively note 9 commitments company leases facilities equipment noncancelable leases expiring various times 2007 existing facilities lease includes option renew additional five years 2012 future minimum lease payments leases december 31 1999 follows thousands invision technologies inc notes consolidated financial statements rent expense 1999 1998 1997 1445000 1357000 1105000 respectively lease corporate office manufacturing facility newark california includes scheduled base rent increases term lease total amount base rent payments charged expense straightline method term lease addition base rent payment company pays monthly allocation buildings operating expenses december 31 1999 1998 company recorded longterm deferred rent 449000 318000 respectively reflect excess rent expense cash payments since inception lease company received advance payment customer maintenance service contract covering two years service beyond oneyear warranty period revenue contract deferred recognized ratably term contract december 31 1999 1998 company recorded longterm deferred revenue 107000 184000 respectively note 10 income taxes company provides valuation allowance deferred tax assets likely based upon currently available evidence including prior history losses portion deferred tax assets realized december 31 1999 company federal net operating loss carryforwards approximately 50 million available reduce future federal taxable income companys net operating loss carryforwards expire 2007 2011 tax benefit net operating loss credit carryforwards may limited due impact tax reform act 1986 events may cause tax benefit limited include limited cumulative stock ownership change 50 defined three year period note 11 related party transactions 1999 1998 1997 company recorded professional consulting fees 199000 205000 165000 respectively compensation companys directors services provided members board directors well consulting services rendered company connection services directors august 1996 amended september 1999 company entered consulting agreement bgi inc bgi virginiabased international consulting firm engaged assist company enhancing methods strategies contacts support marketing ctx 5000 series us government march 1998 ambassador busby controlling shareholder bgi elected companys board directors company paid consulting fees 120000 240000 1999 1998 1997 respectively bgi consulting services bgi also received august 1996 option 6586 shares companys common stock vesting shares based achievement certain milestones based milestones 2684 3902 shares vested 1998 1997 respectively note 12 license agreements april 1999 quantum entered technology license agreement international business machines ibm agreement 10year nonexclusive nontransferable worldwide license certain detection technology onetime license fee paid ibm quantum subject royalty payments based upon net sales price certain products sold otherwise transferred quantum minimum royalty payment sales would resulted royalty payment ibm 1999 october 1994 quantum entered twelveyear license agreement third party amended may 1997 agreement provides quantum nonexclusive irrevocable license certain inprocess detection technology superconductor technology well equipment fair value 100000 exchange 330000 note payable due unequal quarterly payments plus 11 interest fair value technology license 230000 charged operations may 1997 balance note payable paid full january 1998 june 1997 quantum entered joint venture perform research development related certain detection technologies exchange 38 ownership interest joint venture quantum granted nonexclusive royalty free perpetual transferable sublicense superconductor technology agreed joint venture sole source fabrication testing products developed joint venture agreed guarantee onehalf 200000 working capital loan joint venture connection formation joint venture quantum sold equipment joint venture exchange elevenyear note receivable 100000 bearing interest 67 per annum january 1999 quantum sold sufficient shares reduce ownership joint venture 10 released obligation guarantee onehalf working capital loan joint venture agreed extend payment holiday note receivable joint venture july 10 2001 march 1995 quantum executed tenyear exclusive license agreement third party quantum subject royalty payments based percentage net sales price certain products made used sold minimum annual royalties 20000 due beginning calendar year 1997 remaining term agreement quantum incur royalty expense agreement 1995 1996 paid minimum royalty 20000 1997 1998 january 1999 quantum licensor agreed modify license expanding field use increasing minimum annual royalty 70000 extending term january 2009 quantum paid onetime fee 50000 obtain modification extension paid minimum annual royalty 70000 1999 recognition development costs incurred quantum design inc qd prior spinout quantum agreed pay qd royalty rate 4 net sales certain products whether sold quantum licensee period six years effective date agreement april 15 1994 quantum paid minimum royalty 50000 years 1997 1998 1999 minimum royalty payment sales would resulted royalty payment qd note 13 litigation january 7 1999 vivid technologies inc vivid filed summons complaint superior court state california county san diego invision quantum esi international inc esi robert price sandra price collectively defendants complaint asserts causes action 1 misappropriation trade secrets 2 inducing breach contract 3 interference contractual relations 4 statutory unfair competition 5 common law unfair competition 6 interference prospective economic advantage 7 defamation 8 declaratory relief declaring vivid misappropriated trade secrets quantum february 8 1999 defendants invision quantum filed answer denied material allegations complaint asserted various affirmative defenses specific amount damages requested complaint filed vivid following efforts quantum esi private investigator hired quantum investigate alleged theft intellectual property quantum former key employee hired vivid bring certain evidence attention federal bureau investigation fbi united states attorney southern district california february 10 1999 defendants invision quantum filed motion temporary stay civil proceedings march 5 1999 judge granted motion stay remained effect february 19 2000 company currently awaiting response vivid discovery requests served prior initial stay management believes defenses allegations contained complaint addition believes outcome matter even adverse material adverse effect companys business financial condition results operations addition foregoing matter company may involved time litigation including litigation relating claims arising operations normal course business company currently party legal proceedings adverse outcome managements opinion individually aggregate would material adverse effect companys business financial condition results operations selfconstructed assets manufactured company use system testing support include cost parts materials overhead allocation company depreciates selfconstructed assets respective estimated useful lives range three five years december 31 1999 1998 company 343000 614000 respectively capitalized lease equipment related accumulated amortization 134000 273000 respectively note 15 subsequent event february 2000 company acquired inovec inc inovec manufacturer advanced optimization equipment increasing yield forest products industry 52 million cash stock payable next two years addition purchase agreement provides inovec shareholders paid additional 14 million cash stock next two years based achievement certain performance milestones transaction accounted purchase effective january 1 2000item 14 controls procedures within ninety days prior date form 10k carried evaluation supervision participation sergio magistri principal executive officer ross mulholland principal financial officer effectiveness design operation disclosure controls procedures based evaluation messrs magistri mulholland concluded disclosure controls procedures effective recording processing summarizing reporting within time periods specified sec’s rules forms information included periodic sec reports noted control system matter well conceived operated provide reasonable absolute assurance objectives control system met design control system must reflect fact resource constraints benefits controls must considered relative costs additionally controls circumvented individual acts persons collusion two people management override control design system controls also based part upon certain assumptions likelihood future events cannot assure investors design succeed achieving stated goals potential future conditions inherent limitations costeffective control system misstatements due error fraud may occur detected addition significant changes internal controls factors could significantly affect controls subsequent date last evaluation part iv item 15item 14 principal accountant fees services fees paid deloitte touche llp following table shows fees professional services rendered deloitte touche llp 2003 2002 audit fees consists fees professional services rendered audit financial statements review interim financial statements included quarterly reports auditrelated fees consists fees assurance related services reasonably related performance audit review financial statements reported “audit fees” services normally provided deloitte touche llp connection statutory regulatory filings engagements services include consultations connection acquisitions consultations concerning financial accounting reporting standards tax fees consists fees professional services tax compliance tax advice tax planning services include tax planning assistance preparation various tax returns services rendered connection acquisitions advice taxrelated matters fees consists fees reported categories 2003 services connection tax consultation board directors review government contracts 2002 services connection review accounting processes compensation infrastructure policy audit committee preapproval services performed independent auditors audit committee’s policy preapprove beginning fiscal year audit services provided independent auditors fiscal year addition audit committee preapproves nonaudit services casebycase basis part iv item 15item 14 exhibits financial statement schedules reports form 8k a1 list financial statements following list financial statements registrant appearing annual report incorporated herein reference item 8 consolidated balance sheets december 31 1995 1996 consolidated statements operations years ended december 31 1994 1995 1996 consolidated statements cash flows years ended december 31 1994 1995 1996 consolidated statements stockholders equity deficit years ended december 31 1994 1995 1996 notes consolidated financial statements a2 list financial statement schedules omitted applicable required information shown financial statements notes thereto a3 exhibits 31 amended restated certificate incorporation registrant 32 bylaws registrant 41 reference made exhibits 31 32 42 representatives warrant agreement 101 technology license agreement dated september 11 1990 registrant imatron inc 102 stockholders agreement formation registrant dated august 13 1990 imatron fimai amendment dated september 7 1990 amended termination agreement dated december 9 1992 among registrant fimai imatron 103 lease dated may 20 1992 amended may 4 1995 registrant bvy group 104 registrants equity incentive plan dated march 9 1996 105 registrants 1996 employee stock purchase plan dated march 9 1996 106 warrant purchase stock pursuant bridge loan financing agreement dated december 28 1995 registrant anaconda partners lp 107 standby financing agreement dated july 26 1991 company fimai 1010 investor rights agreement dated december 29 1995 registrant kays corporation 1012 lease dated february 11 1997 registrant whlnf real estate lp 1013 purchase agreement dated december 24 1996 registrant us federal aviation administration 1015 stock purchase agreement dated november 12 1996 registrant egg international ltd 1016 stock purchase agreement dated december 31 1996 registrant fredrick l roder 1017 loan security agreement dated february 20 1997 registrant silicon valley bank 1018 revolving promissory note dated february 20 1997 registrant silicon valley bank 1019 exportimport bank loan security agreement dated february 20 1997 registrant silicon valley bank 1020 intellectual property security agreement dated february 20 1997 registration silicon valley bank 1021 key employee agreement dated april 21 1994 registrant curtis p disibio 1022 key employee agreement dated april 22 1994 registrant sergio magistri amendment thereto dated october 16 1995 21 1023 key employee agreement dated march 1 1996 registrant david pillor 1024 key employee agreement dated april 21 1994 registrant benno stebler 111 statement computation regarding per share earnings 131 excerpt registrants annual report stockholders fiscal year ended december 31 1996 containing selected financial data managements discussion analysis financial condition results operations financial statements notes financial statements 231 consent price waterhouse llp filed exhibit registrants registration statement form s1 333380 amendments thereto incorporated herein reference filed exhibit registrants registration statement form s1 33323413 incorporated herein reference b reports form 8k registrant filed reports form 8k last quarter fiscal year ended december 31 1996 c see exhibits listed item 14a3 financial statement schedules required item listed item 14a2 22 signatures accordance requirements section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly organized 30th day march 1997 invision technologies inc sergio magistri sergio magistri president chief executive officer power attorney know persons presents person whose signature appears constitutes appoints sergio magistri curtis p disibio either attorneyinfact power substitution capacities sign amendments report file exhibits thereto documents connections therewith securities exchange commission hereby ratifying confirming said attorneysinfact substitute substitutes may cause done virtue hereof accordance requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates stated 23item 14 exhibits financial statement schedules reports form 8k a1 financial statements consolidated financial statements required item submitted separate section beginning page immediately following signature page report incorporated reference a2 financial statement schedule iivaluation qualifying accounts schedules listed omitted applicable required information shown consolidated financial statements notes thereto a3 exhibits exhibit number description 21 agreement plan merger reorganization dated february 23 2000 among invision technologies inc delaware corporation invision acquisition corporation delaware corporation inovec inc oregon corporation 7 22 form escrow agreement invision merger sub shareholders greater bay trust company dated february 23 2000 7 31 amended restated certificate incorporation registrant 1 32 bylaws registrant amended 2 41 reference made exhibits 31 32 101 technology license agreement dated september 11 1990 registrant imatron inc 1 102 registrants equity incentive plan amended 35 103 registrants 1996 employee stock purchase plan amended 3 5 104 registrants 2000 equity incentive plan 35 1012 lease dated february 11 1997 registrant whlnf real estate lp 4 1013 purchase agreement dated december 24 1996 registrant us federal aviation administration 4 1022 key employee agreement dated april 22 1994 registrant sergio magistri amendment thereto dated october 16 1995 4 5 1023 key employee agreement dated march 1 1996 registrant david pillor 4 5 1034 amendment 1 technology license agreement registrant imatron inc dated september 11 1990 6 1035 key employee agreement dated may 27 1999 registrant alfred v larrenaga 56 1036 form indemnity agreement registrant sergio magistri tim black alfred v larrenaga david pillor giovanni lanzara bruno trezza douglas boyd morris busby dated november 1 1999 56 1038 registrants 2000 nonofficer equity incentive plan adopted february 14 2000 8 1039 loan security agreement dated november 8 2000 registrant silicon valley bank 9 1040 loan security agreement exim program dated november 8 2000 registrant silicon valley bank 9 1041 key employment agreement dated november 28 2000 registrant donald e mattson 5 161 letter pricewaterhousecoopers llp registrants prior independent accountants 231 consent deloitte touche llp independent auditors 232 consent pricewaterhousecoopers llp independent accountants notes exhibits 1filed exhibit registrants registration statement form s1 333380 amendments thereto incorporated herein reference 2filed exhibit registrants quarterly report form 10q quarterly period ended june 30 1998 incorporated herein reference 3filed exhibit registrants registration statement form s8 33356340 filed february 28 2001 incorporated herein reference 4filed exhibit registrants registration statement form s1 33323413 amended originally filed march 14 1997 incorporated herein reference 5items management contracts compensatory plans arrangements required filed exhibits pursuant item 14c form 10k 6filed like numbered exhibit registrants annual report form 10k year ended december 31 1999 incorporated herein reference 7filed like numbered exhibit registrants current report form 8k filed may 18 2000 8filed exhibit registrants quarterly report form 10q quarterly period ended april 2 2000 incorporated herein reference 9filed exhibit registrants quarterly report form 10q quarterly period ended october 1 2000 incorporated herein reference breports form 8k1the company file current reports form 8k quarter ended december 31 2000 csee exhibits listed item 14a3 dthe financial statement schedules required item listed item 14a2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 28th day march 2001 invision technologies inc sergio magistri sergio magistri president chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date sergio magistri sergio magistri president chief executive officer director principal executive officer march 28 2001 alfred v larrenaga alfred v larrenaga senior vice president chief financial officer principal financial accounting officer march 28 2001 giovanni lanzara giovanni lanzara chairman board directors march 28 2001 douglas p boyd douglas p boyd director march 28 2001 bruno trezza bruno trezza director march 28 2001 morris busby morris busby director march 28 2001 david pillor david pillor senior vice president sales marketing director march 28 2001 independent auditors report board directors stockholders invision technologies inc newark california audited accompanying consolidated balance sheet invision technologies inc subsidiaries company december 31 2000 related consolidated statements operations stockholders equity cash flows year ended audit also included financial statement schedule year ended december 31 2000 listed index item 14a2 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audit conducted audit accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion consolidated financial statements present fairly material respects financial position invision technologies inc subsidiaries december 31 2000 results operations cash flows year ended conformity accounting principles generally accepted united states america also opinion financial statement schedule year ended december 31 2000 considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein deloitte touche llp deloitte touche llp san jose california february 9 2001 report independent accountants board directors stockholders invision technologies inc opinion consolidated financial statements listed item 14a present fairly material respects financial position invision technologies inc subsidiaries december 31 1999 results operations cash flows two years period ended december 31 1999 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed item 14a presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp pricewaterhousecoopers llp san jose california february 9 2000 invision technologies inc consolidated balance sheets thousands except share data accompanying notes integral part consolidated financial statements invision technologies inc consolidated statements operations thousands except per share data accompanying notes integral part consolidated financial statements invision technologies inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements invision technologies inc consolidated statements stockholders equity thousands accompanying notes integral part consolidated financial statements invision technologies inc notes consolidated financial statements note 1 company invision technologies inc company brings market advanced detection inspection products adapting various medical laboratory technologies government commercial uses security defense process control company develops manufactures markets supports systems based advanced computed tomography ct technology explosive detection systems civil aviation security log scanning wood products industry drug detection applications companys whollyowned subsidiary quantum magnetics inc quantum develops commercialization patented technologies magnetic resonance passive magnetic sensing landmine weapons detection applications companys wood segment including companys whollyowned subsidiary inovec inc inovec develops manufactures markets supports technologies scanning optimization control systems forest products industry company incorporated delaware 1990 headquarters principal manufacturing facilities located newark california company acquired quantum whollyowned subsidiary 1997 quantum california corporation located san diego california company acquired inovec wholly owned subsidiary effective january 1 2000 inovec delaware corporation headquarters manufacturing facilities located eugene oregon eds company develops manufactures markets supports explosive detection systems civil aviation security based advanced ct technology companys products first automated explosive detection system certified federal aviation administration faa meeting stringent requirements company sold 231 systems faa foreign aviation security agencies domestic foreign airports airlines quantum company whollyowned subsidiary quantum magnetics develops commercialization patented proprietary technology inspection detection analysis explosives materials quantums products based passive magnetic sensing technology quadrupole resonance qr technology form magnetic resonance quantum receives grants variety us government agencies research development military humanitarian landmine detection carryon luggage screening concealed weapon detection drug detection inprocess materials inspection wood february 2000 company announced formation woodvision division woodvision develop companys ct technology optimize value yield harvested timber previous studies indicated ct technology applied see inside log sawn company believes market product exists connection formation woodvision company acquired whollyowned subsidiary inovec inc effective january 1 2000 see note 3 inovec manufactures markets supports advanced optimization equipment sawmills based laser scanning optimization technologies since inception inovec installed 600 laser scanners optimization systems 300 sawmills worldwide note 2 summary significant accounting policies basis presentation consolidated financial statements include financial statements company whollyowned subsidiaries elimination intercompany accounts transactions companys preparation consolidated financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates certain prior year amounts reclassified conform current year presentation stock split share information periods presented retroactively adjusted reflect 1for11 reverse stock split common stock preferred stock effected march 15 1996 2for1 common stock dividend effected february 7 1997 cash equivalents company considers liquid investments purchased original maturity three months less cash equivalents shortterm investments shortterm investments consist primarily commercial paper original maturities date purchase beyond three months less 12 months shortterm investments carried cost approximates fair market value due short period time maturity revenue recognition revenue eds product sales recognized upon shipment unless extended acceptance criteria exist case revenue recognized upon completion acceptance criteria provision estimated installation training warranty costs recorded time revenue recognized adjusted periodically based historical anticipated experience revenue eds service maintenance contracts recognized ratably term agreements integration services performed deferred revenue arises advance payments received customers systems delivered within next year maintenance service yet performed revenue quantum government contracts inovec product sales automation control systems recognized using percentageofcompletion method based costs incurred date percentage total estimated costs completion deferred revenue recorded advance payments received work yet performed december 1999 securities exchange commission issued staff accounting bulletin 101 sab 101 revenue recognition provides guidance recognition presentation disclosure revenue financial statements filed securities exchange commission sab 101 outlines basic criteria must met recognize revenue provides guidance disclosures related revenue recognition policies sab 101 effective fiscal quarter beginning october 2 2000 however earlier adoption permitted adoption sab 101 material impact consolidated financial statements inventories stated lower cost market cost determined firstin firstout basis includes materials labor overhead property equipment property equipment recorded cost depreciation computed using straightline method based upon estimated useful lives assets range two seven years lease term respective assets applicable intangible assets company patents licenses developed technologies acquired workforce goodwill intangible assets totaling 44 million 03 million december 31 2000 1999 respectively net accumulated amortization 08 million 86000 respectively companys excess purchase cost fair value net assets acquired 23 million december 31 2000 net accumulated amortization 02 million identifiable intangible assets goodwill amortized estimated useful lives straightline basis three ten years amortization expense 07 million 24000 30000 years ended december 31 2000 1999 1998 respectively company periodically reevaluates goodwill intangibles based undiscounted operating cash flows whenever significant events changes occur might impair recovery recorded asset costs income taxes company accounts income taxes accordance statement financial accounting standards 109 accounting income taxes prescribes use asset liability method whereby deferred tax asset liability account balances calculated balance sheet date using current tax laws rates effect valuation allowances established necessary reduce deferred tax assets amounts expected realized research development costs research development costs charged operations incurred contractually reimbursable costs certain research development activities reflected reduction research development expense period related costs incurred software development costs company capitalizes internally generated software development costs accordance statement financial accounting standards 86 sfas 86 accounting costs computer software sold leased otherwise marketed sfas 86 requires capitalization certain software development costs technological feasibility established software development costs qualifying capitalization material 2000 1999 1998 company capitalized software development costs 803000 included current assets noncurrent assets december 31 2000 1999 company began amortizing capitalized software development based ratio units sold years total forecasted units sales amortization expense 171000 50000 2000 1999 respectively amortization expense recorded 1998 product yet available general release customers stock compensation company grants stock options fixed number shares employees exercise price equal fair value shares date grant company accounts employee stock based compensation accordance accounting principles board opinion 25 apb 25 accounting stock issued employees dependence suppliers companys ability timely deliver products dependent upon availability quality components subsystems used products company depends part upon subcontractors manufacture assemble deliver certain items timely satisfactory manner company obtains certain components subsystems single limited number sources significant interruption delivery items could material adverse effect companys financial condition results operations comprehensive income 1998 company adopted statement financial accounting standards 130 sfas 130 reporting comprehensive income statement establishes standards reporting displaying comprehensive income components revenues expenses gains losses full set generalpurpose financial statements items may include foreign currency translation adjustments unrealized gainslosses investing hedging activities transactions company comprehensive income net income loss periods presented consolidated financial statements segment information statement financial accounting standards 131 sfas 131 disclosures segments enterprise related information requires disclosures segment information management approach management approach designates internal organization used management making operating decisions assessing performance source companys reportable segments sfas 131 also requires disclosures products services geographic areas major customers adoption sfas 131 affect results operations financial position company prior years segment information presented reflect companys organizational structure 2000 derivative instruments hedging activities june 1998 financial accounting standards board issued sfas 133 sfas 133 accounting derivative instruments hedging activities sfas 133 amended establishes accounting reporting standards derivative instruments hedging activities effective fiscal years beginning june 15 2000 company adopted sfas 133 effective january 1 2001 sfas 133 requires companies recognize derivatives either assets liabilities balance sheet measure fair value gains losses resulting changes fair value would accounted depending use derivative whether designated qualifies hedge accounting adoption sfas 133 material effect companys consolidated results operations january 1 2001 december 31 2000 company 14 million aggregate foreign currency forward exchange contracts fair value financial instruments material december 31 2000 forward exchange contracts outstanding december 31 1999 concentration credit risk fair value financial instruments financial instruments potentially subject company significant concentrations credit risk consist primarily cash accounts receivable company limits amount credit exposure cash balances maintaining accounts high credit quality financial institutions december 31 2000 company accounts receivable customers including research development reimbursements faa government agencies located united states europe middle east pacific rim areas 173 million 31 million 14 million 05 million 02 million respectively company performs various evaluations customers financial condition credit worthiness december 31 2000 1999 allowance bad debts 302000 171000 respectively december 31 2000 one customer accounted 547 total accounts receivable individual customer accounted 10 accounts receivable december 31 2000 company believes recorded value financial instruments including cash equivalents accounts receivable longterm debt approximate fair value balance sheet date companys total revenues denominated us dollars significant customers represented 10 total revenues respective periods follows company markets products internationally domestically total revenues geographic region follows thousands net income loss per share basic earnings per share computed dividing income available common stockholders weightedaverage common shares outstanding period diluted earnings per share reflect weightedaverage common shares outstanding plus potential effect dilutive securities contracts convertible common shares options warrants convertible debt preferred stock using treasury stock method following reconciliation components basic diluted net income loss per share calculations periods presented thousands except per share data computation diluted net loss per share year ended december 31 2000 include shares issuable upon exercise options 1046222 issuance common stock related acquisition inovec payable april 2001 2002 based average share prices prior scheduled payment dates effect would antidilutive note 3 acquisition inovec inc effective january 1 2000 company acquired inovec inc manufacturer advanced optimization equipment increasing yield forest products industry 52 million cash stock payable next two years company paid 24 million cash issued 249000 shares common stock former shareholders inovec first two installments purchase price remaining obligation payable 17 million payable stock former shareholders april 2001 2002 based average share prices prior scheduled payment dates addition company contingently liable purchase agreement event inovec achieves certain operating milestones years ended december 31 2000 2001 december 31 2000 inovec achieved certain milestones additional 05 million recorded additional purchase price paid cash stock april 2001 additional 07 million would payable upon achievement certain milestones end 2001 transaction accounted purchase accordingly results operations inovec included consolidated financial statements year ended december 31 2000 company allocated purchase price based fair value assets acquired liabilities assumed portions purchase price including intangible assets identified independent appraisers utilizing accepted valuation procedures techniques intangible assets include approximately 15 million developed technologies 07 million acquired workforce 50000 covenants compete remaining 25 million goodwill intangibles amortized estimated useful lives ranging three ten years following unaudited pro forma data summarize results operations year ended december 31 1999 acquisition inovec occurred january 1 1999 pro forma data give effect actual operating results prior acquisition adjusted include pro forma effect amortization intangibles income taxes pro forma amounts purport indicative results would actually obtained acquisition occurred january 1 1999 may obtained future note 4 research development contracts grants company awarded various research development contracts grants faa government agencies share costs developing enhancing companys products 2000 1999 1998 company entitled reimbursements 09 million 07 million 36 million respectively research development contracts grants reimbursements reflected reduction research development expense period presented billings research development contracts grants rendered monthly basis actual costs incurred december 31 2000 1999 related receivable balances contracts grants 626000 47000 respectively note 5 debt lines credit november 2000 company renewed two line credit agreements bank first agreement provides maximum borrowings amount lower 80 eligible domestic eds receivables 50 million second agreement partially guaranteed exportimport bank united states provides maximum borrowings amount lower sum 80 eligible eds export accounts receivable plus lower 70 eligible raw materials workinprocess inventory designated export customers ii 60 outstanding loans agreement iii 20 million b 50 million borrowings agreements bear interest banks prime rate plus 15 110 december 31 2000 secured eds assets agreements expire november 2001 require eds segment maintain certain levels tangible net worth intercompany balances whollyowned subsidiaries also prohibit company paying cash dividends proceeds loans lines credit may used general corporate purposes december 31 2000 company borrowings outstanding 09 million domestic eds agreement additionally company outstanding guarantees customers issuance letters credit secured lines credit totaling 11 million foreign exchange contracts 10 reserve 141000 secured lines credit remaining available borrowing capacity lines credit 53 million december 31 2000 based eligible eds accounts receivable inventories date longterm debt company previously borrowed committed equipment line credit agreement bank converted term loan draw borrowings secured assets purchased financed december 31 2000 company outstanding 331000 term loan due june 2003 196000 term loan due november 2001 term loans bear interest banks prime rate plus 15 110 december 31 2000 note 6 stockholders equity common stock 2000 terms acquisition inovec company issued 249000 shares common stock former shareholders inovec first two installments purchase price remaining obligation purchase agreement 17 million payable stock former shareholders april 2001 2002 based average share prices prior scheduled payment dates december 31 2000 inovec achieved certain milestones within purchase agreement additional 03 million payable stock april 2001 based average share prices ten trading days prior ten trading days march 31 2001 1999 company repurchased 85600 shares common stock prevailing market prices total 334000 1998 company repurchased 114900 shares common stock prevailing market prices total 865000 terms acquisition quantum september 1997 777000 shares common stock either issued quantum shareholders exchange quantum capital stock outstanding reserved issuance connection quantum common stock options outstanding prior acquisition converted options purchase invision common stock 1997 company sold 1875000 shares common stock underwritten public offering 1200 per share offering generated net proceeds company approximately 212 million including proceeds underwriters overallotment option connection companys initial public offering donald co securities inc underwriter received terms underwriting agreement fouryear warrant purchase 180000 shares companys common stock price 660 per share commencing april 23 1997 december 31 2000 shares companys common stock purchased warrant note 7 employee stock benefit plans equity incentive plans company several stock option plans equity plans officers employees consultants directors company equity plans provides granting incentive nonqualified stock options stock bonus awards rights purchase restricted stock appreciation rights together stock awards purchase aggregate 4489355 shares companys common stock officers employees consultants directors company board directors responsible administration equity plans also determines terms stock award options granted equity plans generally vest four year period event change control transaction stock awards outstanding shall continued assumed surviving entity similar awards shall substituted therefor surviving entity refuses vesting rate lapse repurchase rights stock awards shall accelerate full date immediately prior effective date change control transaction respect officers directors even surviving entity continues assumes substitutes stock awards vesting rate lapse repurchase rights stock awards shall accelerate full upon involuntary termination without cause constructive termination terms defined officers directors respective option agreements within year following effective date change control transaction incentive nonqualified stock options may granted exercise price per share less 85 fair value per common share date grant less 110 fair value case holders 10 companys voting stock less 100 incentive stock options certain plans options granted equity plans generally expire ten years date grant five years incentive stock options granted holders 10 companys voting stock options granted generally vest 25 one year issuance 116th quarter thereafter three years october 1998 company offered employees consultants opportunity participate option repricing program employee consultant could elect november 9th existing option issued 1991 equity incentive plan converted repriced option per share exercise price repriced option would equal greater fair market value companys common stock conversion date november 9 1998 693 return lower exercise price repriced options issued would subject blackout period whereby options could exercised november 9 1998 may 8 1999 number shares vested converted option would vest immediately repriced option remaining shares subject repriced option vest period equivalent vesting period remaining converted option november 9 1998 fair market value companys common stock 650 options total 313986 shares repriced 693 per share officers company repriced options program weighted average per share exercise price outstanding shares subject options prior conversion 1055 range exercise prices 7691456 connection grants stock options employees directors company recorded 240000 deferred compensation representing difference deemed fair value companys common stock exercise price date grant 1997 deferred stock compensation recorded 2000 1999 1998 amortization deferred stock compensation 63000 68000 2000 1999 1998 respectively activity equity plans follows thousands except per share data information relating stock options outstanding equity plans december 31 2000 follows thousands except per share data 1996 employee stock purchase plan companys 1996 employee stock purchase plan purchase plan adopted march 1996 total 450000 shares common stock reserved issuance purchase plan december 31 2000 318000 shares issued purchase plan fair value disclosures compensation cost options granted 2000 1999 1998 companys equity plans determined based fair value grant dates prescribed statement financial accounting standards 123 sfas 123 accounting stockbased compensation companys net income loss pro forma net income loss per share would follows thousands except per share data fair value option grant estimated date grant using blackscholes pricing model following assumptions used grants applicable period 1997 employee 401k plan invision technologies inc 401k plan 401k plan established 1992 provide retirement incidental benefits employees allowed section 401k internal revenue code 401k plan provides taxdeferred salary deductions eligible employees may contribute 20 annual compensation 401k plan limited maximum amount set periodically internal revenue service beginning july 1997 company began matching employee contributions rate 050 dollar maximum 6 employees gross compensation matching contributions vest immediately company matching contributions 401k plan totaled 395000 351000 294000 2000 1999 1998 respectively note 8 commitments company leases facilities equipment noncancelable leases expiring various times 2007 existing facilities lease includes option renew additional five years 2012 future minimum lease payments leases december 31 2000 follows thousands rent expense facilities located newark california san diego california eugene oregon united kingdom 1529000 1445000 1357000 years ended december 31 2000 1999 1998 respectively lease corporate office manufacturing facility newark california includes scheduled base rent increases term lease total amount base rent payments charged expense straightline method term lease addition base rent payment company pays monthly allocation buildings operating expenses december 31 2000 1999 company recorded longterm deferred rent 539000 449000 respectively reflect excess rent expense cash payments since inception lease note 9 income taxes 2000 1999 1998 provision income taxes consists following thousands companys effective tax rate 2000 1999 1998 differs us statutory income tax rate follows deferred tax assets liabilities consist following thousands company provides valuation allowance deferred tax assets likely based upon currently available evidence including prior history losses portion deferred tax assets realized december 31 2000 company federal net operating loss carryforwards approximately 46 million available reduce future federal taxable income companys net operating loss carryforwards expire 2010 2012 tax credit carryforwards expire 2005 2018 tax benefit net operating loss credit carryforwards may limited due impact tax reform act 1986 events may cause tax benefit limited include limited cumulative stock ownership change 50 defined three year period timing utilization various tax benefits carried forward note 10 industry segments provisions sfas 131 company reporting segment information format regularly reviewed companys management deciding allocate resources assess performance 2000 company three reportable segments based types technology applications eds segment comprised business unit deals development manufacturing marketing support explosive detection systems based advanced ct technology quantum segment comprised business unit deals development technology inspection detection analysis explosives primarily landmine detection materials based quadrupole resonance technology passive magnetic sensing wood segment comprised business units deal development technology optimize value yield harvested timber based different types scanning technologies including ct technology prior years segment information presented reflect structure companys organization financial information business segment follows thousands substantially companys longlived assets located united states note 11 related party transactions 2000 1999 1998 company recorded professional consulting fees 188000 199000 205000 respectively compensation companys directors services provided members board directors well consulting services rendered company connection services directors august 1996 amended september 1999 company entered consulting agreement bgi inc bgi virginiabased international consulting firm engaged assist company enhancing methods strategies contacts support marketing ctx 5000 series us government march 1998 ambassador busby controlling shareholder bgi elected companys board directors company paid consulting fees bgi consulting services 120000 240000 2000 1999 1998 respectively recorded consulting expenses 108000 issuance 20468 shares common stock effective february 2001 agreement note 12 license agreements connection formation company obtained exclusive worldwide fullypaid license amended imatron inc regarding patents knowhow related scanners inspection mail freight parcels baggage wood products b compact medical scanners military field applications license allows company develop manufacture sell systems based different type ct technology currently incorporated companys ctx series license applies scanners inspection mail freight parcels baggage wood products b compact medical scanners military field applications company exchange granted imatron exclusive worldwide perpetual fully paid license companys existing future patents knowhow permit imatron utilize technology medical scanners compact medical scanners military field applications license expires 2009 april 1999 quantum entered technology license agreement international business machines ibm agreement 10year nonexclusive nontransferable worldwide license certain detection technology onetime license fee paid ibm quantum required make royalty payments based upon net sales price certain products sold otherwise transferred quantum minimum royalty payments sales would resulted royalty payment ibm 2000 1999 october 1994 quantum entered twelveyear license agreement third party amended may 1997 agreement provides quantum nonexclusive irrevocable license certain inprocess detection technology superconductor technology well equipment fair value 100000 exchange 330000 note payable due unequal quarterly payments plus 11 interest june 1997 quantum entered joint venture perform research development related certain detection technologies exchange 38 ownership interest joint venture quantum granted nonexclusive royalty free perpetual transferable sublicense superconductor technology agreed joint venture sole source fabrication testing products developed joint venture agreed guarantee onehalf 200000 working capital loan joint venture connection formation joint venture quantum sold equipment joint venture exchange elevenyear note receivable 100000 bearing interest 67 per annum january 1999 quantum sold sufficient shares reduce ownership joint venture 10 released obligation guarantee onehalf working capital loan joint venture agreed extend payment holiday note receivable joint venture july 10 2001 march 1995 quantum executed tenyear exclusive license agreement third party quantum subject royalty payments based percentage net sales price certain products made used sold minimum annual royalties 20000 due beginning calendar year 1997 remaining term agreement quantum incur royalty expense agreement 1995 1996 paid minimum royalty 20000 1997 1998 january 1999 quantum licensor agreed modify license expanding field use increasing minimum annual royalty 70000 extending term january 2009 quantum paid onetime fee 50000 obtain modification extension paid minimum annual royalty 70000 years 2000 1999 recognition development costs incurred quantum design inc qd prior spinout quantum agreed pay qd royalty rate 4 net sales certain products whether sold quantum licensee period six years effective date agreement april 15 1994 quantum paid minimum royalty 50000 1998 1999 2000 minimum royalty payment sales would resulted royalty payment qd agreement expired april 2000 note 13 litigation july 2000 company entered settlement agreement settlement agreement settled action brought january 7 1999 vivid technologies inc vivid superior court state california county san diego company esi international inc esi robert price sandra price collectively defendants vivid asserted causes action 1 misappropriation trade secrets 2 inducing breach contract 3 interference contractual relations 4 statutory unfair competition 5 common law unfair competition 6 interference prospective economic advantage 7 defamation 8 declaratory relief complaint filed vivid following efforts company esi private investigator hired company investigate alleged theft intellectual property company former key employee hired vivid bring certain evidence attention federal bureau investigation united states attorney southern district california part settlement agreement vivid represented longer pursuing qr technology agreed pursue qr technology two years date agreement vivid agreed file request dismissal complaint without prejudice would automatically convert dismissal prejudice second anniversary settlement agreement similarly company agreed voluntary dismissal federal court action filed served vivid based alleged theft would also automatically convert dismissal prejudice two years management believes terms settlement agreement material adverse effect companys business financial condition results operations addition foregoing matter company may involved time litigation including litigation relating claims arising operations normal course business company currently party legal proceedings adverse outcome managements opinion individually aggregate would material adverse effect companys business financial condition results operations note 14 balance sheet components unbilled receivables comprised amounts billable customers upon satisfaction certain perfunctory activities installation final acceptance selfconstructed assets manufactured company use system testing support include cost parts materials overhead allocation company depreciates selfconstructed assets respective estimated useful lives range three five years december 31 2000 1999 company 382000 343000 respectively capitalized lease equipment related accumulated amortization 195000 134000 respectively note 15 quarterly financial data unaudited invision technologies inc schedule iivaluation qualifying accounts years ended december 31 2000 1999 1998 thousands s1 part item 1 business executive officers registrant item 2 properties item 3 legal proceedings item 4 submission matters vote security holders part ii item 5 market registrants common equity related stockholder matters item 6 selected financial data item 7 managements discussion analysis financial condition results operations item 7a quantitative qualitative disclosures market risk item 8 financial statements supplementary data item 9 changes disagreements accountants accounting financial disclosure part iii item 10 directors executive officers registrant item 11 executive compensation item 12 security ownership certain beneficial owners management item 13 certain relationships related transactions part iv item 14 exhibits financial statement schedules reports form 8k signatures invision technologies inc schedule iivaluation qualifying accounts years ended december 31 2000 1999 1998 thousandsitem 14 exhibits financial statement schedules reports form 8k a1 financial statements consolidated financial statements required item submitted separate section beginning page immediately following signature page report incorporated reference deloitte touche llp independent auditors report pricewaterhousecoopers llp independent accountants consolidated balance sheets december 31 2001 2000 consolidated statements operations years ended december 31 2001 2000 1999 consolidated statements cash flows years ended december 31 2001 2000 1999 consolidated statements stockholders equity years ended december 31 2001 2000 1999 notes consolidated financial statements a2 financial statement schedule iivaluation qualifying accounts schedule listed set forth immediately following consolidated financial statements following signature page report incorporated reference schedules listed omitted applicable required information shown consolidated financial statements notes thereto a3 exhibits exhibit number description 21 agreement plan merger reorganization dated february 23 2000 among invision technologies inc delaware corporation invision acquisition corporation delaware corporation inovec inc oregon corporation 7 22 form escrow agreement invision merger sub shareholders greater bay trust company dated february 23 2000 7 31 amended restated certificate incorporation registrant 1 32 bylaws registrant amended 2 33 amendment amended restated certificate incorporation registrant 41 reference made exhibits 31 32 33 101 technology license agreement dated september 11 1990 registrant imatron inc 1 102 registrants 2001 equity incentive plan amended 35 103 registrants 1996 employee stock purchase plan amended 512 104 registrants 2000 equity incentive plan 3 5 1012 lease dated february 11 1997 registrant whlnf real estate lp 4 1013 purchase agreement dated december 24 1996 registrant us federal aviation administration 4 1021 key employee agreement dated april 22 1994 registrant sergio magistri amendment thereto dated october 16 1995 4 5 1022 key employee agreement dated march 1 1996 registrant david pillor 4 5 1034 amendment 1 technology license agreement registrant imatron inc dated july 12 1999 6 1036 form indemnity agreement registrant sergio magistri david pillor giovanni lanzara bruno trezza douglas boyd morris busby 5 6 1038 registrants 2000 nonofficer equity incentive plan adopted february 14 2000 8 1039 loan security agreement dated november 8 2000 registrant silicon valley bank 9 1040 loan security agreement exim program dated november 8 2000 registrant silicon valley bank 9 1041 key employment agreement dated november 28 2000 registrant donald e mattson 513 1042 key employment agreement dated march 6 2001 registrant ross mulholland 510 1043 form indemnity agreement registrant donald e mattson ross mulholland 510 b reports form 8k 1 company file current reports form 8k quarter ended december 31 2001 c see exhibits listed item 14a3 financial statement schedules required item listed item 14a2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 6th day march 2002 invision technologies inc sergio magistri sergio magistri president chief executive officer power attorney person whose signature appears constitutes appoints sergio magistri ross mulholland true lawful attorneyinfact agent acting alone full power substitution resubstitution name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneyinfact agent full power authority perform every act thing requisite necessary done premises fully intents purposes might could person hereby ratifying confirming said attorneyinfact agent substitute substitutes may lawfully cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date sergio magistri sergio magistri president chief executive officer director principal executive officer march 6 2002 ross mulholland ross mulholland senior vice president chief financial officer principal financial accounting officer march 6 2002 giovanni lanzara chairman board directors stephen blum stephen blum director march 6 2002 douglas p boyd douglas p boyd director march 6 2002 bruno trezza director louis turpen louis turpen director march 6 2002 morris busby morris busby director march 6 2002 david pillor david pillor senior vice president sales marketing director march 6 2002 independent auditors report board directors stockholders invision technologies inc newark california audited accompanying consolidated balance sheets invision technologies inc subsidiaries company december 31 2001 2000 related consolidated statements operations stockholders equity cash flows years ended audits also included consolidated financial statement schedule years ended december 31 2001 2000 listed index item 14a2 financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position invision technologies inc subsidiaries december 31 2001 2000 results operations cash flows years ended conformity accounting principles generally accepted united states america also opinion consolidated financial statement schedule years ended december 31 2001 2000 considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein deloitte touche llp san jose california february 11 2002 february 28 2002 note 16 report independent accountants board directors stockholders invision technologies inc opinion accompanying consolidated statements operations cash flows stockholders equity present fairly material respects results operations cash flows changes stockholders equity invision technologies inc subsidiaries year ended december 31 1999 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed item 14a presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audit conducted audit statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audit provides reasonable basis opinion pricewaterhousecoopers llp san jose california february 9 2000 invision technologies inc consolidated balance sheets thousands except share data accompanying notes integral part consolidated financial statements invision technologies inc consolidated statements operations thousands except per share data accompanying notes integral part consolidated financial statements invision technologies inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements invision technologies inc consolidated statements stockholders equity thousands accompanying notes integral part consolidated financial statements invision technologies inc notes consolidated financial statements note 1 description business invision technologies inc company incorporated delaware 1990 principal business manufacture computed tomography ct based detection products used aviation industry screen baggage companys headquarters principal manufacturing facilities located newark california 1997 company acquired quantum whollyowned subsidiary quantum california corporation located san diego california company acquired inovec whollyowned subsidiary effective january 1 2000 inovec delaware corporation headquarters manufacturing facilities located eugene oregon company organized three segments eds company designs manufactures markets ctbased detection products used aviation industry screen baggage explosives companys products first automated explosives detection systems eds certified federal aviation administration faa company sold 271 systems faa foreign aviation security agencies domestic foreign airports airlines quantum develops commercialization patented proprietary technology inspection detection analysis explosives materials quantums products based passive magnetic sensing technology quadrupole resonance qr technology form magnetic resonance quantum receives grants variety us government agencies research development military humanitarian landmine detection carryon luggage screening concealed weapon detection drug detection inprocess materials inspection wood february 2000 company announced formation woodvision division woodvision develop companys ct technology increase value harvested timber previous studies indicated ct technology applied scan log sawn determine optimal cut connection formation woodvision company acquired inovec effective january 1 2000 see note 3 inovec manufactures markets supports yield enhancement equipment sawmills based laser scanning technologies since inception inovec installed 600 laser scanners optimization systems 300 sawmills worldwide note 2 summary significant accounting policies basis presentation consolidated financial statements include financial statements company whollyowned subsidiaries intercompany accounts transactions eliminated consolidation financial statement estimates companys preparation consolidated financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period estimates include allowances potentially uncollectible accounts receivable warranty costs valuation allowances deferred tax assets total estimated costs completion contracts accounted using percentageofcompletion method actual results could differ estimates reclassifications certain prior year amounts reclassified conform current year presentation reclassifications change previously reported total assets liabilities stockholders equity operating income loss net income loss cash equivalents company considers highly liquid investments purchased original maturity three months less cash equivalents shortterm investments shortterm investments consist primarily commercial paper original maturities beyond three months less 12 months classified availableforsale shortterm investments carried cost approximates fair market value concentration credit risk financial instruments potentially subject company significant concentrations credit risk consist primarily cash equivalents shortterm investments accounts receivable company limits amount credit exposure cash balances shortterm investments maintaining accounts high credit quality financial institutions respect accounts receivable company regularly performs evaluations customers financial condition credit worthiness inventories stated lower cost market cost determined firstin firstout basis includes materials labor overhead property equipment property equipment recorded cost depreciation amortization computed using straightline method based upon estimated useful lives assets range two seven years lease term respective assets less useful life intangible assets company patents licenses developed technologies acquired workforce goodwill intangible assets amortized estimated useful lives straightline basis three ten years impairment longlived assets company evaluates longlived assets impairment whenever events changes circumstances indicate carrying amount asset may recoverable sum undiscounted future net cash flows expected result use asset eventual disposition less carrying amount impairment loss would measured based discounted cash flows compared carrying amount impairment charge recorded periods presented software development costs company capitalizes internally generated software development costs accordance statement financial accounting standards 86 sfas 86 accounting costs computer software sold leased otherwise marketed sfas 86 requires capitalization certain software development costs technological feasibility established software development costs qualifying capitalization material 2001 2000 1999 1998 company capitalized software development costs 803000 included assets december 31 2001 2000 company began amortizing capitalized software development costs based ratio units sold years total forecasted units sales amortization expense 131000 171000 50000 2001 2000 1999 respectively accrued warranty reserves estimated warranty costs recorded product revenues adjusted periodically based historical anticipated experience revenue recognition revenues recognized persuasive evidence arrangement exists delivery occurred services rendered price fixed determinable collectibility reasonably assured sales eds products faa domestic customers demonstrated meet product specifications prior shipment product revenues recognized shipment portion revenues relating installation training deferred services performed accepted customer deferred installation training revenues based fair value services performed separately customers installation generally complex completed within relatively short period time typically less one week company consistent history completing routine installations obtaining customer acceptance domestic international sales certain airport installations require involved integration baggage handling systems essential functionality machine take longer routine installations integration services separately priced products sales agreements company recognizes service revenues agreements services performed sales eds products services customers foreign countries varying contractual terms governed part regulations foreign jurisdictions accordingly revenue recognized based specific facts circumstances surrounding transaction foreign sales eds products demonstrated meet product specifications prior shipment customers title risk loss pass customer shipment company either enforceable claim balance sheet date remaining unbilled amounts ability invoice customer unbilled amounts fixed period time regardless whether installation completed product revenue recognized shipment fair value installation training revenue deferred recognized services performed sales eds products certain foreign customers title risk loss eds products pass upon completion installation product service revenues recognized completion installation acceptance customer certain sales eds products foreign customers portion contract price withheld installation completed company believe enforceable claim balance sheet date realize withheld amount greater portion contract price fair value installation training deferred recognized revenue completion installation acceptance customer deferred revenues eds product sales arise advance payments received customers systems delivered next period revenues separate eds service maintenance contracts recognized ratably term agreements services service revenues recognized services performed deferred revenue eds services arises advance payments received customers services yet performed revenues quantum government contracts inovec product sales automation control systems recognized using percentageofcompletion method based costs incurred date percentage total estimated costs completion provisions estimated losses accrued contracts anticipated result losses completion contract deferred revenue recorded advance payments received work yet performed research development costs research development costs charged operations incurred contractually reimbursable costs certain research development activities reflected reduction research development expense period related costs incurred stockbased compensation company grants stock options fixed number shares employees exercise price equal fair value shares date grant company accounts employee stockbased compensation accordance accounting principles board opinion 25 apb 25 accounting stock issued employees company accounts stockbased awards nonemployees accordance statement financial accounting standards 123 sfas 123 accounting stockbased compensation emerging issues task force eitf issue 9618 accounting equity instruments issued employees acquiring conjunction selling goods services income taxes company accounts income taxes accordance statement financial accounting standards 109 accounting income taxes prescribes use asset liability method whereby deferred tax asset liability account balances calculated balance sheet date using current tax laws rates effect valuation allowances established necessary reduce deferred tax assets likely portion deferred tax assets realized certain significant risks uncertainties company operates dynamic highly competitive industry accordingly affected variety factors example management company believes changes following areas could significant negative effect company terms future financial position results operations cash flows sufficient manufacturing capacity meet demand dependence upon limited number suppliers component parts product liability related claims products fail substantial reliance orders us government potential competition competing nonfaa certified equipment manufacturers limited number customers lengthy sales cycle could result able obtain sales orders risks associated international sales including limited political instability changes regulatory requirements foreign currency risk tariffs barriers negative tax consequences limitations companys intellectual property rights failure new eds products attain faa certification retaining key management personnel employees risks associated special contracting requirements governmental agencies budget processes could limit product demand inability adapt rapid technological change failure properly protect companys intellectual property enforce defend claims intellectual property infringement comprehensive income statement financial accounting standards 130 reporting comprehensive income establishes standards reporting displaying comprehensive income components revenues expenses gains losses full set generalpurpose financial statements items may include foreign currency translation adjustments unrealized gainslosses investing hedging activities transactions comprehensive income loss net income loss periods presented segment information statement financial accounting standards 131 disclosures segments enterprise related information requires disclosures segment information management approach company three reportable segments based financial information regularly reviewed companys management deciding allocate resources assess performance eds segment comprised business unit deals development manufacturing marketing support explosive detection systems based advanced ct technology quantum segment comprised business unit deals development technology inspection detection analysis explosives primarily landmine detection materials based quadrupole resonance technology passive magnetic sensing wood segment comprised business units deal development technology optimize value yield harvested timber based different types scanning technologies including ct technology fair value financial instruments companys financial instruments include cash equivalents shortterm investments accounts receivable shortterm debt longterm debt carrying values cash equivalents shortterm investments accounts receivable approximate fair values based quoted market values due shortterm maturities carrying values shortterm debt longterm debt approximate fair value due variable interest rates approximate market rates net income loss per share basic net income loss per share computed dividing income loss available common stockholders weightedaverage common shares outstanding period diluted net income loss per share reflects weightedaverage common shares outstanding plus potential effect dilutive securities contracts convertible common shares options warrants convertible debt preferred stock using treasury stock method shares issuable future periods except cases effect would antidilutive recently issued accounting standards derivative instruments hedging activities january 1 2001 company adopted statement financial accounting standards 133 sfas 133 accounting derivative instruments hedging activities sfas 133 amended requires every derivative instrument including certain derivative instruments embedded contracts recorded balance sheet fair value changes fair value derivatives recorded period current earnings comprehensive income depending whether derivative designated part hedge transaction type hedge transaction sfas 133 amended requires company formally document designate assess effectiveness transactions receive hedge accounting company adopted sfas 133 amended january 1 2001 elect hedge accounting defined sfas 133 adoption statement material impact companys financial position results operations companys international system sales maintenance contracts generally denominated us dollars instances significant international system sales contracts denominated foreign currency company enters forward contracts mitigate foreign exchange risk company enter market risk sensitive instruments trading purposes company aggregate foreign currency forward contracts notional amounts 169 million 14 million december 31 2001 2000 respectively fair value instruments included consolidated balance sheets 47000 4000 december 31 2001 2000 respectively business combinations goodwill intangible assets june 2001 financial accounting standards board issued statement financial accounting standards 141 sfas 141 business combinations statement financial accounting standards 142 sfas 142 goodwill intangible assets sfas 141 requires business combinations initiated june 30 2001 accounted purchase method addresses initial recognition measurement goodwill intangible assets acquired business combination sfas 142 addresses initial recognition measurement intangible assets acquired outside business combination accounting goodwill intangible assets subsequent acquisition sfas 142 provides intangible assets finite useful lives amortized goodwill intangible assets indefinite lives amortized rather tested least annually impairment company adopted sfas 142 fiscal year beginning january 1 2002 upon adoption sfas 142 company longer amortize carrying values goodwill 25 million acquired workforce 331000 january 1 2002 resulting reduction annual amortization expense 426000 company yet performed impairment tests required standard accounting impairment disposal longlived assets october 2001 financial accounting standards board issued statement financial accounting standards 144 sfas 144 accounting impairment disposal longlived assets sfas 144 supersedes sfas 121 accounting impairment longlived assets longlived assets disposed accounting reporting provisions accounting principles board opinion 30 reporting results operationsreporting effects disposal segment business extraordinary unusual infrequently occurring events transactions addresses financial accounting reporting impairment disposal longlived assets company adopted sfas 144 january 1 2002 adoption statement material impact consolidated financial statements note 3 acquisition inovec inc effective january 1 2000 company acquired inovec inc manufacturer yield enhancement equipment sawmills initial purchase price 52 million cash stock payable twoyear period company paid 24 million cash 18 million issuance 479000 shares common stock former shareholders inovec first three installments purchase price remaining obligation 10 million payable stock former shareholders april 2002 based average share prices ten trading days prior ten trading days march 31 2002 addition company contingently liable purchase agreement event inovec achieved certain operating milestones years ended december 31 2001 2000 inovec achieved certain milestones additional 366000 533000 recorded additional goodwill december 31 2001 2000 respectively result company paid 267000 cash 266000 issuance 91000 shares common stock 2001 remaining obligation 366000 payable cash stock april 2002 transaction accounted purchase accordingly results operations inovec included consolidated financial statements years ended december 31 2001 2000 company allocated purchase price based fair value assets acquired liabilities assumed portions purchase price including intangible assets identified independent appraisers utilizing accepted valuation procedures techniques intangible assets include approximately 15 million developed technologies 662000 acquired workforce 50000 covenants compete remaining 29 million goodwill intangibles amortized estimated useful lives ranging three ten years upon adoption sfas 142 company longer amortize carrying values goodwill 25 million acquired workforce 331000 january 1 2002 resulting reduction annual amortization expense 426000 following unaudited pro forma data summarizes results operations year ended december 31 1999 acquisition inovec occurred january 1 1999 pro forma data gives effect actual operating results prior acquisition adjusted include pro forma effect amortization intangibles income taxes pro forma amounts purport indicative results would actually obtained acquisition occurred january 1 1999 may obtained future note 4 research development contracts grants company awarded various research development contracts grants faa government agencies share costs developing enhancing companys products 2001 2000 1999 company entitled reimbursements 83 million 17 million 865000 respectively research development contracts grants reimbursements direct costs overhead general administrative expenses reflected reduction research development expense selling general administrative expense manufacturing customer support overhead pools period presented billings research development contracts grants submitted faa government agencies monthly basis actual costs incurred december 31 2001 2000 related receivable balances contracts grants 33 million 626000 respectively note 5 debt lines credit october 2001 company renewed two line credit agreements silicon valley bank first agreement provides maximum borrowings amount lower 80 eligible domestic eds receivables 50 million second agreement partially guaranteed exportimport bank exim united states provides maximum borrowings amount lower sum 70 90 eligible eds export accounts receivable plus lower 70 eligible raw materials workinprocess inventory designated export customers ii 60 outstanding loans agreement iii 20 million b 50 million borrowings agreements bear interest banks prime rate 475 december 31 2001 plus 15 secured eds assets agreements expire october 2002 require eds segment maintain certain levels tangible net worth intercompany balances whollyowned subsidiaries also prohibit company paying cash dividends proceeds loans lines credit may used general corporate purposes eds operations december 31 2001 company borrowings outstanding 18 million domestic eds agreement amounts outstanding exim agreement additionally company outstanding guarantees customers issuance letters credit secured lines credit totaling 14 million foreign exchange contracts 10 reserve 17 million secured lines credit remaining available borrowing capacity lines credit 51 million december 31 2001 based eligible eds accounts receivable inventories date august 2001 inovec entered line credit agreement pacific continental bank agreement provides 15 million working capital line credit secured assets inovec agreement bears interest banks prime rate 475 december 31 2001 plus 10 interest rate floor 725 agreement expires august 2002 requires inovec maintain certain levels tangible net worth debtworth ratios proceeds loans line credit may used general corporate purposes inovecs operations company amounts outstanding december 31 2001 longterm debt company previously borrowed committed equipment line credit agreement silicon valley bank converted term loan draw borrowings secured assets purchased financed december 31 2001 company outstanding 199000 term loan due june 2003 term loan bears interest banks prime rate 475 december 31 2001 plus 15 note 6 stockholders equity common stock september 2001 company entered agreement donald co investment advisory financing related services president donald co member board directors agreement donald co received 50000 cash retainer fullyvested warrant purchase 100000 shares companys common stock price 995 per share closing price companys common stock day prior date issuance warrant expires five years date issuance fair value warrant 650000 estimated date grant using blackscholes option pricing model following assumptions dividends riskfree interest rate 394 volatility 78 contractual life five years december 31 2001 shares common stock purchased warrant onehalf cash retainer warrant related ongoing investment financial advisory services recorded current assets amortized oneyear term agreement company recorded amortization expense 88000 2001 remaining balance 350000 related services provided connection followon offering recorded noncurrent assets netted proceeds offering 2002 october 2001 company issued nonqualified stock options consultant purchase 15000 shares common stock price 1406 per share options oneyear cliff vesting term expire ten years date issuance fair value options december 31 2001 403000 estimated december 31 2001 using blackscholes option pricing model following assumptions dividends riskfree interest rate 515 volatility 83 contractual life ten years company recording compensation expense vesting period options fair value adjusted changes fair value common stock subsequent periods year ended december 31 2001 company recorded compensation expense 67000 2001 2000 terms acquisition inovec company issued 570000 shares common stock former shareholders inovec remaining stock obligation purchase agreement 12 million payable former shareholders april 2002 based average share prices ten trading days prior ten trading days march 31 2002 1999 company repurchased 85600 shares common stock prevailing market prices total 334000 1998 company repurchased 114900 shares common stock prevailing market prices total 865000 terms acquisition quantum september 1997 777000 shares common stock either issued quantum shareholders exchange quantum capital stock outstanding reserved issuance connection quantum common stock options outstanding prior acquisition converted options purchase invision common stock december 31 2001 company reserved shares common stock issuance follows note 7 employee stock benefit plans equity incentive plans company several stock option plans equity plans officers employees consultants directors company equity plans provide granting incentive nonqualified stock options stock bonus awards rights purchase restricted stock appreciation rights together stock awards purchase aggregate 5166319 shares companys common stock officers employees consultants directors company board directors responsible administration equity plans also determines terms stock award options granted equity plans generally vest four year period event change control transaction stock awards outstanding shall continued assumed surviving entity similar awards shall substituted therefor surviving entity refuses vesting rate lapse repurchase rights stock awards shall accelerate full date immediately prior effective date change control transaction respect officers directors even surviving entity continues assumes substitutes stock awards vesting rate lapse repurchase rights stock awards shall accelerate full upon involuntary termination without cause constructive termination terms defined officers directors respective option agreements within year following effective date change control transaction incentive nonqualified stock options may granted exercise price per share less 85 fair value per common share date grant less 110 fair value case holders 10 companys voting stock less 100 incentive stock options certain plans options granted equity plans generally expire ten years date grant five years incentive stock options granted holders 10 companys voting stock options granted generally vest 25 one year issuance 116th quarter thereafter three years activity equity plans follows thousands except per share data information relating stock options outstanding equity plans december 31 2001 follows thousands except per share data 1996 employee stock purchase plan companys 1996 employee stock purchase plan purchase plan adopted march 1996 total 600000 shares common stock reserved issuance purchase plan december 31 2001 449965 shares issued purchase plan fair value disclosures compensation cost options granted 2001 2000 1999 companys equity plans determined based fair value grant dates prescribed statement financial accounting standards 123 accounting stockbased compensation companys net income loss pro forma net income loss per share would follows thousands except per share data fair value option grant estimated date grant using blackscholes option pricing model following assumptions used grants applicable period 1997 employee 401k plan invision technologies inc 401k plan 401k plan established 1992 provide retirement incidental benefits employees allowed section 401k internal revenue code 401k plan provides taxdeferred salary deductions eligible employees may contribute 20 annual compensation 401k plan limited maximum amount set periodically internal revenue service beginning july 1997 company began matching employee contributions rate 050 dollar maximum 6 employees gross compensation matching contributions vest immediately company matching contributions 401k plan totaled 524000 395000 351000 2001 2000 1999 respectively note 8 commitments company leases facilities equipment noncancelable leases expiring various times 2007 existing facilities lease corporate facility newark california includes option renew additional five years 2012 future minimum lease payments leases december 31 2001 follows thousands rent expense facilities located newark california san diego california eugene oregon united kingdom 1646000 1529000 1445000 years ended december 31 2001 2000 1999 respectively lease corporate office manufacturing facility newark california includes scheduled base rent increases term lease total amount base rent payments charged expense straightline method term lease addition base rent payment company pays monthly allocation buildings operating expenses december 31 2001 2000 company recorded longterm deferred rent 584000 539000 respectively reflect excess rent expense cash payments since inception lease note 9 net income loss per share following reconciliation components basic diluted net income loss per share calculations periods presented thousands except per share data computation diluted net loss per share year ended december 31 2000 include shares issuable upon exercise options 1046222 issuance common stock related acquisition inovec payable april 2001 2002 based average share prices prior scheduled payment dates effect would antidilutive note 10 income taxes 2001 2000 1999 provision benefit income taxes consists following thousands companys effective tax rate 2001 2000 1999 differs us federal statutory income tax rate follows deferred tax assets liabilities december 31 2001 2000 consist following thousands company provides valuation allowance deferred tax assets likely based upon currently available evidence factors portion deferred tax assets realized fourth quarter 2001 company determined valuation allowance longer necessary based evaluation current evidence including among things passage transportation security act effect companys estimates future earnings well contracts customer orders entered fourth quarter 2001 accordingly company reversed deferred tax asset valuation allowance 57 million fourth quarter 2001 offset provision current years income tax expense december 31 2001 company federal state net operating loss carryforwards approximately 50 million 11 million respectively available reduce future federal state taxable income companys federal net operating loss carryforwards expire 2010 2021 state net operating loss carryforwards expire 2011 companys tax credit carryforwards 13 million expire 2005 2021 tax benefit net operating loss credit carryforwards may limited due impact tax reform act 1986 events may cause tax benefit limited include limited cumulative stock ownership change 50 defined three year period timing utilization various tax benefits carried forward companys income taxes payable reduced income tax benefits associated employee stock transactions benefits credited directly stockholders equity amounted 22 million 2001 note 11 industry segments major customers geographic information provisions statement financial accounting standards 131 disclosures segments enterprise related information company three reportable segments based financial information regularly reviewed companys management deciding allocate resources assess performance financial information business segment follows thousands december 31 2001 company accounts receivable customers including research development reimbursements faa government agencies located united states europe middle east asia pacific areas 168 million 95 million 248000 156000 469000 respectively december 31 2001 one customer accounted 375 total accounts receivable second customer accounted 155 total accounts receivable december 31 2000 one customer accounted 547 total accounts receivable significant customers represented 10 total revenues respective periods follows company markets products domestically internationally total revenues geographic region based location customer placing order follows thousands substantially companys longlived assets located united states note 12 related party transactions 2001 2000 1999 company recorded professional consulting fees 284000 188000 199000 respectively compensation companys directors services provided members board directors well consulting services rendered company connection services directors september 2001 company entered agreement donald co investment advisory financing related services president donald co member board directors agreement donald co received 50000 cash retainer fullyvested warrant purchase 100000 shares companys common stock price 995 per share closing price companys common stock day prior date issuance warrant expires five years date issuance fair value warrant 650000 estimated date grant using blackscholes option pricing model following assumptions dividends riskfree interest rate 394 volatility 78 contractual life five years december 31 2001 shares common stock purchased warrant onehalf cash retainer warrant related ongoing investment financial advisory services recorded current assets amortized oneyear term agreement company recorded amortization expense 88000 2001 remaining balance 350000 related services provided connection followon offering recorded noncurrent assets netted proceeds offering 2002 august 1996 january 1997 january 1999 company entered consulting agreements bgi inc bgi virginiabased international consulting firm engaged assist company marketing companys eds products us government march 1998 morris busby president controlling shareholder bgi elected companys board directors company paid consulting fees bgi consulting services 120000 2000 1999 respectively recorded additional consulting expenses 108000 pursuant agreement issue common stock agreement expired december 31 2000 note 13 license agreements connection formation company obtained exclusive worldwide fullypaid license amended imatron inc regarding patents knowhow related scanners inspection mail freight parcels baggage wood products b compact medical scanners military field applications license allows company develop manufacture sell systems based different type ct technology currently incorporated companys ctx series license applies scanners inspection mail freight parcels baggage wood products b compact medical scanners military field applications company exchange granted imatron exclusive worldwide fully paid license companys existing future patents knowhow permit imatron utilize technology medical scanners compact medical scanners military field applications license expires 2009 april 1999 quantum entered technology license agreement international business machines ibm agreement 10year nonexclusive nontransferable worldwide license certain detection technology onetime license fee paid ibm quantum subject royalty payments based upon net sales price certain products sold otherwise transferred ibm minimum royalty payment june 1997 quantum entered joint venture perform research development related certain detection technologies exchange 38 ownership interest joint venture quantum granted nonexclusive royalty free perpetual transferable sublicense superconductor technology agreed joint venture sole source fabrication testing products developed joint venture agreed guarantee onehalf 200000 working capital loan joint venture connection formation joint venture quantum sold equipment joint venture exchange elevenyear note receivable 100000 bearing interest 67 per annum january 1999 quantum sold sufficient shares reduce ownership joint venture 10 released obligation guarantee onehalf working capital loan joint venture march 1995 quantum executed tenyear exclusive license agreement third party quantum subject royalty payments based percentage net sales price certain products made used sold minimum annual royalties 20000 due beginning calendar year 1997 remaining term agreement quantum incur royalty expense agreement 1995 1996 paid minimum royalty 20000 1997 1998 january 1999 quantum licensor agreed modify license expanding field use increasing minimum annual royalty 70000 extending term january 2009 quantum paid onetime fee 50000 obtain modification extension made minimum annual royalty 70000 years 1999 2001 recognition development costs incurred quantum design inc qd prior spinout quantum agreed pay qd royalty rate 4 net sales certain products whether sold quantum licensee period six years effective date agreement april 15 1994 agreement also established minimum royalty payments 50000 years 1997 1998 applied royalties become due qd respective fiscal years agreement expired 2000 note 14 litigation company may involved time litigation including litigation relating claims arising operations normal course business company currently party legal proceedings adverse outcome managements opinion individually aggregate would material adverse effect companys business financial condition results operations cash flows note 15 balance sheet components unbilled receivables comprised amounts billable customers upon satisfaction certain activities installation final acceptance amounts percentage completion contracts yet billed balance sheet date amounts yet billed due timing invoice preparation selfconstructed assets manufactured company use system testing support include cost parts materials overhead allocation company depreciates selfconstructed assets respective estimated useful lives range three five years ended december 31 2001 2000 1999 company recorded amortization expense intangible assets 794000 682000 24000 respectively december 31 2001 2000 company 256000 382000 respectively capitalized lease equipment related accumulated amortization 183000 195000 respectively note 16 subsequent events february 12 2002 company filed form s3 registration statement securities act 1933 expects sell 2500000 shares common stock secondary offering company expects use proceeds offering general corporate purposes including working capital expenditures acquire complementary products technologies businesses opportunity arises addition selling stockholder may sell another 500000 shares common stock offering company would receive proceeds sale shares february 2002 transportation security administration placed order company 100 eds units well parts build additional 300 eds units order equipment parts totalled approximately 1698 million february 28 2002 companys stockholders approved increase number authorized shares common stock previously approved board directors 20000000 shares 60000000 shares company filed amendment certificate incorporation effecting increase selected quarterly financial data unaudited invision technologies inc schedule iivaluation qualifying accounts years ended december 31 2001 2000 1999 thousands s1 exhibit index exhibit number description 21 agreement plan merger reorganization dated february 23 2000 among invision technologies inc delaware corporation invision acquisition corporation delaware corporation inovec inc oregon corporation 7 22 form escrow agreement invision merger sub shareholders greater bay trust company dated february 23 2000 7 31 amended restated certificate incorporation registrant 1 32 bylaws registrant amended 2 33 amendment amended restated certificate incorporation registrant 41 reference made exhibits 31 32 33 101 technology license agreement dated september 11 1990 registrant imatron inc 1 102 registrants 2001 equity incentive plan amended 35 103 registrants 1996 employee stock purchase plan amended 512 104 registrants 2000 equity incentive plan 3 5 1012 lease dated february 11 1997 registrant whlnf real estate lp 4 1013 purchase agreement dated december 24 1996 registrant us federal aviation administration 4 1021 key employee agreement dated april 22 1994 registrant sergio magistri amendment thereto dated october 16 1995 4 5 1022 key employee agreement dated march 1 1996 registrant david pillor 4 5 1034 amendment 1 technology license agreement registrant imatron inc dated july 12 1999 6 1036 form indemnity agreement registrant sergio magistri david pillor giovanni lanzara bruno trezza douglas boyd morris busby 5 6 1038 registrants 2000 nonofficer equity incentive plan adopted february 14 2000 8 1039 loan security agreement dated november 8 2000 registrant silicon valley bank 9 1040 loan security agreement exim program dated november 8 2000 registrant silicon valley bank 9 1041 key employment agreement dated november 28 2000 registrant donald e mattson 513 1042 key employment agreement dated march 6 2001 registrant ross mulholland 510 1043 form indemnity agreement registrant donald e mattson ross mulholland 510 1044 amendment loan documents dated october 12 2001 registrant silicon valley bank 11 part risks related business risks related ownership common stock part ii part iii summary compensation table part iv signatures independent auditors report invision technologies inc consolidated balance sheets thousands except share data invision technologies inc consolidated statements operations thousands except per share data invision technologies inc consolidated statements cash flows thousands invision technologies inc notes consolidated financial statements invision technologies inc schedule iivaluation qualifying accounts years ended december 31 2001 2000 1999 thousands exhibit index item 7 managements discussion analysis financial condition results operations following discussion contains forwardlooking statements involve risks uncertainties used discussion words anticipate believe estimate expect similar expressions relate company management intended identify forwardlooking statements companys actual results performance achievements could differ materially results expressed implied forwardlooking statements factors could cause contribute differences include risks related market acceptance companys current products new products development fluctuations companys quarterly annual operating results loss orders companys products including loss companys order faa failure obtain additional orders loss companys sole source suppliers intense competition reliance large orders concentration companys customers risks related lengthy sales cycles companys products budgeting limitations companys customers prospective customers well discussed item 1 business particularly business risks section thereof overview invision designs manufactures markets explosive detection system based advanced ct technology invision formed september 1990 design develop ctx 5000 remained development stage december 1994 june 1994 invision received first commercial order ctx 5000 system brussels international airport belgium since time received orders total 120 systems total 84 shipped december 31 1997 fiscal year ended december 31 1997 company revenues 564 million december 31 1997 orders backlog approximately 32 million september 30 1997 invision acquired quantum privatelyheld developer explosives detection equipment based quadrupole resonance technology transaction accounted pooling interests quarter ended september 30 1997 therefore prior periods restated include quantums results quantum currently development stage company products prototype stage recent order faa supply two qscan500 advanced technology systems option three units quantum also leading supplier research development services area electromagnetic sensing detection technologies number government agencies company considers research development vital part operating discipline continues dedicate substantial resources research enhance performance functionality reliability ctx 5000 series hardware software december 31 1997 company 103 fulltime employees engaged research development activities also using services approximately 20 specialized contract employees consultants area beginning 1991 total research development expenditures company partially offset amounts reimbursed development contracts grants company believes investment research development absolute dollars increase substantially meet future needs regardless level funding received development contracts year ended december 31 1997 company spent 159 million research development activities 85 million funded development contracts grants extent development contracts grant receipts decline future research development expenses borne company would increase company expects results operations would adversely impacted company markets products directly internal sales personnel indirectly authorized agents distributors systems integrators united states company markets ctx 5000 series primarily direct sales personnel internationally company utilizes direct sales force authorized agents sell products years ended december 31 1997 1996 international sales represented 449 762 respectively companys revenues sales cycle ctx 5000 series often lengthy due protracted approval process typically accompanies large capital expenditures time required manufacture ctx 5000 series install assimilate ctx 5000 series typically six twelve months may elapse new customers initial evaluation companys systems execution contract another three months year may elapse prior shipment ctx 5000 series customer site prepared ctx 5000 series manufactured period company expends substantial funds management resources recognizes associated revenue company recognizes revenue shipment unless extended acceptance criteria exist case revenue recognized upon achievement acceptance criteria company typically requires customer deposits advance shipment customer purchase orders provision estimated installation training warranty costs recorded time revenue recognized systems typically carry oneyear warranty results operations following table sets forth certain income expenditure items companys consolidated statement operations expressed percentage revenues periods indicated comparison fiscal years ended december 31 1997 1996 1995 revenues companys revenues comprised system revenues include sales ctx 5000 accessories installation configuration maintenance related product support quantum research development contracts reported revenues prior acquisition invision quantum research development revenues restated reduction research development expense accordance companys policy company typically ships backlog orders product backlog december 31 1997 decreased approximately 45 32 million approximately 58 million december 31 1996 backlog december 31 1995 approximately 57 million revenues increased 257 564 million 1997 158 million 1996 increase 1997 revenues attributable increased sales ctx 5000 reflecting 2111 increase unit shipments 56 units 1997 18 units 1996 lesser extent changes product configuration leading increase average selling price per unit sales addon products current customers commencement significant maintenance related revenues 91 million 1995 first year sales ctx 5000 occurred due lower unit sales ctx 5000 gross profit cost revenues primarily consists purchased materials procured use assembly companys products well manufacturing labor overhead warranty costs given period companys gross profit may affected several factors including revenue mix product configuration location installation complexity integration various airport environments gross profit increased 365 284 million 1997 61 million 1996 gross profit increased 167 61 million 1996 23 million 1995 gross margins 503 1997 385 1996 252 1995 increase gross margins primarily caused lower unit costs resulting increased manufacturing efficiency reduced overhead cost per unit due increased volume well changes product configurations leading increase average selling price increased operating efficiencies resulting larger installed base also reduced average cost maintenance warranty service research development research development expenditures consist primarily compensation paid personnel engaged research development activities amounts paid outside services costs materials utilized development hardware products including prototype units software hardware development costs expensed incurred beginning 1991 total research development expenditures company partially offset amounts reimbursed development contracts grants company believes investment research development absolute dollars increase substantially meet future needs regardless level funding received development contracts total research development expenditures increased 106 159 million 1997 77 million 1996 45 1996 53 million 1995 amounts 85 million 49 million 31 million respectively funded research development contracts grants 1997 1996 1995 percentage revenues total research development expenditures funding offsets declined approximately 282 1997 487 1996 582 1995 increase absolute dollar expenditures reflects effects personnel additions costs prototype development efforts increase throughput develop systems effective airport integration conceptual design research development expense net funding percentage revenues declined approximately 130 1997 177 1996 248 1995 sales marketing sales marketing expenses consist primarily compensation paid direct indirect sales marketing personnel payments consultants travel related sales process selling distribution costs sales marketing expenses increased 613 61 million 1997 38 million 1996 742 1996 21 million 1995 percentage revenues sales marketing expenses declined 108 1997 240 1996 increased levels expenditures absolute dollars 1997 1996 reflect increased selling costs associated higher unit sales including foreign travel trade shows public relations commissions general administrative general administrative expenses consist primarily compensation paid administrative personnel including directors payments consultants professional service fees insurance travel general expenses general administrative expenses increased 644 62 million 1997 38 million 1996 633 1996 23 million 1995 percentage revenues general administrative expenses 110 1997 238 1996 increase absolute dollars 1997 reflects increased costs operating public company addition increases 1997 1996 reflect additions support capabilities required growth revenues corporate headcount acquisition costs company incurred onetime costs professional fees costs related acquisition quantum acquisition costs 685000 12 total revenues interest expense interest expense decreased 428000 1997 16 million 1996 increased 1996 16 million 482000 1995 interest expense 1996 reflects effect 13 million amortization fair market value warrants issued connection bridge loan obtained december 1995 interest expense 1997 1995 resulted primarily shortterm debt outstanding period included 13000 148000 warrant discount respectively interest income net company recognized net interest income 242000 187000 34000 1997 1996 1995 respectively 1997 amount 242000 represents interest income 724000 offset loss 402000 sale quantum stock prior quantum acquisition expense 80000 income taxes companys effective tax rate 1997 152 companys effective tax rate 1997 lower statutory tax rates primarily due utilization net operating loss carryforwards provisions income taxes 1996 1995 1997 companys first year taxable income december 31 1997 company federal net operating loss carryforwards approximately 137 million available reduce future federal taxable income companys net operating loss carryforwards expire 2005 2011 liquidity capital resources since inception company financed operations primarily private sales 165 million preferred common stock 56 million represents indebtedness converted equity sale 95 million common stock companys initial public offering april 1996 sale 212 million common stock companys followon offering may 1997 shortterm borrowings working capital line credit december 31 1997 company 192 million cash equivalents outstanding short term borrowings 42 million february 1997 company entered two oneyear revolving line credit agreements silicon valley bank agreements extended april 1998 company intends renew agreements prior expiration extensions first agreement provides maximum borrowings amount lower 80 domestic eligible accounts receivable 45 million borrowings agreement generally bear interest banks prime rate plus 050 per annum 875 december 31 1997 second agreement partially guaranteed exportimport bank united states provides maximum borrowings amount lower sum 90 eligible export accounts receivable plus 70 eligible raw materials workinprocess inventory designated export customers 45 million borrowings agreement bear interest banks prime rate plus 025 per annum 850 december 31 1997 borrowings agreements secured companys assets agreements require company maintain certain financial ratios levels tangible net worth profitability also prohibit company paying cash dividends proceeds loans lines credit may used general corporate purposes december 31 1997 company outstanding borrowings 42 million remaining available borrowing capacity additional 24 million based eligible accounts receivables inventories date net cash used operations 18 million 1997 117 million 1996 net cash used operations 1997 primarily resulted net income 66 million plus 50 million increase accounts payable accrued liabilities offset 98 million increase accounts receivable 59 million increase inventories 1996 net cash used operations due primarily net loss 57 million increases accounts receivable inventories associated increased manufacturing sales activities totaling 72 partially offset noncash charges amortization warrant discount stock compensation expense depreciation collectively totaling 25 million net cash used investing activities 137 million 1997 13 million 1996 case due primarily purchase property equipment addition purchase 51 million shortterm investments 24 million restricted cash 1997 net cash provided financing activities 272 million 1997 117 million 1996 net cash provided financing activities 1997 due primarily 228 million proceeds issuance common stock primarily associated companys followon public offering may 1997 44 million proceeds debt financing net repayments increase 1996 due 140 million net proceeds issuance common stock associated companys initial public offering april 1996 offset 23 million net repayments debt financing company believes cash equivalents shortterm investments together available borrowing line credit funds expected generated operations sufficient finance working capital expenditure requirements least next 12 months item 8item 7 managements discussion analysis financial condition results operations following discussion contains forwardlooking statements involve risks uncertainties used discussion words anticipate believe estimate expect similar expressions relate company management intended identify forwardlooking statements companys actual results performance achievements could differ materially results expressed implied forwardlooking statements factors could cause contribute differences include risks related market acceptance companys main product including loss companys order faa failure obtain additional orders loss companys sole source suppliers intense competition reliance large orders concentration companys customers risks related lengthy sales cycles companys products budgeting limitations companys customers prospective customers risks inherent development production new products new applications certification certain products well discussed item 1 business particularly business risks section thereof overview invision technologies inc invision together subsidiaries company designs manufactures markets explosive detection systems eds based advanced computed tomography ct technology invision formed september 1990 design develop eds based ct technology exited development stage 1995 upon first commercial sales product ctx 5000 system since time company received orders total 148 ctx 5000 series systems total 146 shipped december 31 1998 today company markets advanced ctx 5500 explosive detection system products development date companys ctx 5000 system ctx 5500 system together ctx 5000 series explosive detection systems certified federal aviation administration faa currently deployed use inspection checked luggage commercial flights years ended december 31 1998 1997 1996 company revenues 633 million 564 million 158 million respectively december 31 1998 company backlog equipment orders service agreements approximately 101 million first quarter 1999 company received order faa amount 189 million additional 21 ctx 5500 systems september 30 1997 invision acquired quantum privatelyheld developer explosives detection equipment based quadrupole resonance qr technology transaction accounted pooling interests quarter ended september 30 1997 therefore prior periods restated include quantums results quantum currently development stage company products prototype stage quantum also leading supplier research development services area qr technology number government agencies company considers research development vital part operating discipline continues dedicate substantial resources research enhance performance functionality reliability ctx 5000 series hardware software well development next generation system ctx 9000 system december 31 1998 company 100 fulltime employees engaged research development activities also using services 7 specialized contract employees consultants area total research development expenditures company partially offset amounts reimbursed faa government agencies private entities research development contracts grants company believes investment research development absolute dollars increase substantially meet future needs regardless level funding received research development contracts grants years ended december 31 1998 1997 1996 company spent 181 million 159 million 77 million respectively research development activities amounts 108 million 85 million 49 million respectively funded research development contracts grants extent research development contracts grants receipts decline future research development expenses borne company would increase company expects results operations would adversely impacted december 31 1998 company backlog research development contracts grants approximately 53 million additional 21 million research development grant received end first quarter 1999 given year companys revenues principally consisted company believes continue consist orders multiple units limited number customers year ended december 31 1998 379 million 599 companys revenues generated sales companys largest customer us government year ended december 31 1997 revenues companys largest customer us government 321 million 569 companys revenues significant customers accounted 10 companys revenues 1998 1997 year ended december 31 1996 140 million 884 companys revenues generated six customers individually accounted 10 companys revenues generated sales us government 1996 company markets products directly internal sales personnel indirectly authorized agents distributors systems integrators united states company markets ctx 5000 series primarily direct sales personnel internationally company utilizes direct sales force authorized agents sell products years ended december 31 1998 1997 1996 international sales represented 337 430 762 respectively companys revenues sales cycle ctx 5000 series often lengthy due protracted approval process typically accompanies large capital expenditures time required manufacture install assimilate ctx 5000 series typically six twelve months may elapse new customers initial evaluation companys systems execution contract another three months year may elapse prior shipment ctx 5000 series customer site prepared system manufactured period company expends substantial funds management resources recognizes associated revenue company recognizes revenue shipment unless extended acceptance criteria exist case revenue recognized upon achievement acceptance criteria company typically requires customer deposits advance shipment customer purchase orders provision estimated installation training warranty costs recorded time revenue recognized systems typically carry oneyear warranty results operations following table sets forth certain income expenditure items companys consolidated statements operations expressed percentage revenues periods indicated comparison fiscal years ended december 31 1998 1997 revenues companys revenues comprised system revenues include sales ctx 5000 series accessories installation configuration maintenance related product support quantum research development contracts grants reported revenues prior acquisition invision quantum research development revenues classified reduction research development expense accordance companys policy revenues 633 million 1998 increase 122 564 million 1997 increase 1998 revenues primarily attributable increased sales ctx 5000 series reflecting 107 increase unit shipments 62 units 1998 37 units faa 4 units san francisco airport 21 units international customers 56 units 1997 32 units faa 24 units international customers plus shipment 32 59 ctx 5500 upgrade kits purchased faa commencement maintenance related revenues domestic market factors partially offset lower average selling prices systems shipped 1998 due configurations units shipped volume discounts second quarter 1998 company typically ships backlog orders products december 31 1998 company backlog equipment orders service agreements approximately 101 million first quarter 1999 company received order faa amount 189 million additional 21 ctx 5500 systems gross profit cost revenues primarily consists purchased materials procured use assembly companys products well manufacturing labor overhead warranty costs associated service agreements given period companys gross profit may affected several factors including revenue mix product configuration location installation complexity integration various airport environments gross profit 283 million 1998 compared 284 million 1997 gross margins 448 503 respectively decrease gross margins primarily due higher manufacturing overhead costs result companys relocation new facility late 1997 configurations units shipped volume discounts second quarter 1998 resulted lower average selling prices systems 1998 research development research development expenditures consist primarily compensation paid personnel engaged research development activities amounts paid outside services costs materials utilized development hardware products including prototype units research development expenditures company partially offset amounts reimbursed faa government agencies private entities research development contracts grants services provided cost plus basis company believes research development expenditures absolute dollars increase substantially future regardless level funding received faa government agencies private entities net research development expenses would 73 million 1998 without capitalization software development costs accordance statement financial accounting standards 86 sfas 86 accounting costs computer software sold leased otherwise marketed sfas 86 software production costs computer software used integral part product process capitalized technological feasibility established software research development activities components product process completed prior years period achieving technological feasibility availability software included companys product short software development costs qualifying capitalization insignificant considering impact software capitalization gross research development expenditures 181 million 1998 increase 139 159 million 1997 amounts 108 million 85 million respectively funded research development contracts grants faa government agencies private entities percentage revenues net research development expenditures 103 1998 compared 131 1997 increase gross research development expenditures primarily result personnel additions increased spending engineering materials services sales marketing sales marketing expenses consist primarily compensation paid direct indirect sales marketing personnel consultant fees travel related sales process selling distribution costs sales marketing expenses 63 million 1998 increase 27 61 million 1997 percentage revenues sales marketing expenses declined 99 1998 108 1997 increase sales marketing expenditures absolute dollars 1998 reflect increased selling costs associated higher unit sales including foreign travel trade shows public relations commissions well increases staffing general administrative general administrative expenses consist primarily compensation paid administrative personnel including directors consultant fees professional service fees insurance travel general expenses general administrative expenses 67 million 1998 increase 82 62 million 1997 percentage revenues general administrative expenses 106 1998 110 1997 increase general administrative expenses absolute dollars 1998 primarily result personnel additions increased professional consulting costs associated companys growth increased insurance costs increased costs operations associated publicly traded company acquisition costs 1997 company incurred onetime costs professional fees costs related acquisition quantum acquisition costs 685000 12 total revenues interest expense interest expense decreased 390000 1998 428000 1997 interest expense 1998 resulted primarily debt financing associated companys working capital lines credit equipment term loans capital leases interest expense 1997 resulted primarily shortterm debt outstanding period interest income net interest income net increased 697000 1998 242000 1997 1998 amount consists primarily interest income shortterm investments interest bearing cash accounts 754000 offset expense 57000 1997 amount 242000 consists primarily interest income shortterm investments interest bearing cash accounts 724000 offset loss 402000 sale quantum stock prior quantum acquisition expense 80000 income taxes companys effective tax rate 1998 1997 120 152 respectively companys effective tax rate 1998 1997 lower statutory tax rates primarily due utilization net operating loss carryforwards december 31 1998 company federal net operating loss carryforwards approximately 60 million available reduce future federal taxable income 17 million available reduce state taxable income companys net operating loss carryforwards expire 2005 2011 comparison fiscal years ended december 31 1997 1996 revenues increased 257 564 million 1997 158 million 1996 increase 1997 revenues attributable increased sales ctx 5000 system reflecting 211 increase unit shipments 56 units 1997 18 units 1996 lesser extent changes product configuration leading increase average selling price per unit sales addon products current customers commencement significant maintenance related revenues company typically ships backlog orders product backlog december 31 1997 decreased approximately 45 32 million approximately 58 million december 31 1996 gross profit gross profit increased 365 284 million 1997 61 million 1996 gross margins 503 1997 385 1996 increase gross margins primarily caused lower unit costs resulting increased manufacturing efficiency reduced overhead cost per unit due increased volume well changes product configurations leading increase average selling price increased operating efficiencies resulting larger installed base also reduced average cost maintenance warranty service research development total gross research development expenditures increased 106 159 million 1997 77 million 1996 amounts 85 million 49 million respectively funded research development contracts grants 1997 1996 percentage revenues total research development expenditures funding offsets declined approximately 282 1997 487 1996 increase absolute dollar expenditures reflects effects personnel additions costs prototype development efforts increase throughput develop systems effective airport integration conceptual design research development expense net funding percentage revenues declined approximately 130 1997 177 1996 sales marketing sales marketing expenses increased 61 million 1997 38 million 1996 percentage revenues sales marketing expenses declined 108 1997 240 1996 increased levels expenditures absolute dollars 1997 1996 reflect increased selling costs associated higher unit sales including foreign travel trade shows public relations commissions general administrative general administrative expenses increased 64 62 million 1997 38 million 1996 percentage revenues general administrative expenses 110 1997 238 1996 increase absolute dollars 1997 reflects increased costs operating public company addition increases 1997 reflect additions support capabilities required growth revenues corporate headcount acquisition costs company incurred onetime costs professional fees costs related acquisition quantum acquisition costs 685000 12 total revenues interest expense interest expense decreased 428000 1997 16 million 1996 interest expense 1997 resulted primarily shortterm debt outstanding period included 13000 warrant discount interest expense 1996 reflects effect 13 million amortization fair market value warrants issued connection bridge loan obtained december 1995 interest income net company recognized net interest income 242000 187000 1997 1996 respectively 1997 amount 242000 represents interest income 724000 offset loss 402000 sale quantum stock prior quantum acquisition expense 80000 income taxes companys effective tax rate 1997 152 companys effective tax rate 1997 lower statutory tax rates primarily due utilization net operating loss carryforwards provisions income taxes 1996 1997 companys first year taxable income december 31 1997 company federal net operating loss carryforwards approximately 137 million available reduce future federal taxable income companys net operating loss carryforwards expire 2005 2011 noncash charges company recorded noncash charges related grants stock options exercise prices fair market value date grant employees directors amounts 68000 425000 489000 1998 1997 1996 respectively liquidity capital resources since inception company financed operations primarily private sales 165 million preferred common stock 56 million represents indebtedness converted equity sale 95 million common stock companys initial public offering april 1996 sale 212 million common stock companys followon offering may 1997 shortterm borrowings working capital line credit december 31 1998 company 125 million cash equivalents shortterm investments compared 192 million december 31 1997 working capital 389 million december 31 1998 compared 318 million december 31 1997 net cash used operations 26 million 1998 compared 18 million 1997 net cash used operations 1998 primarily due net income 80 million plus 23 million increase accrued liabilities 20 million noncash effect depreciation amortization offset 101 million increase accounts receivable due timing sales latter part fourth quarter 1998 19 million decrease deferred revenues 17 million decrease accounts payable 12 million increase current assets 10 million increase inventories net cash used operations 1997 primarily due net income 66 million plus 49 million increase accounts payable accrued liabilities 13 million noncash effect depreciation amortization offset 99 million increase accounts receivable 59 million increase inventories net cash used investing activities 13000 1998 compared 137 million 1997 net cash used investing activities 1998 primarily due 29 million purchases new equipment 08 million additions noncurrent assets related capitalization software development costs offset 31 million proceeds sales shortterm investments net purchases 06 million release longterm restricted cash net cash used investing activities 1997 primarily due 63 million purchases property equipment 51 million proceeds sales shortterm investments net purchases 24 million additions longterm restricted cash december 31 1998 company material commitments purchase capital equipment net cash used financing activities 10 million 1998 compared 272 million provided financing activities 1997 net cash used financing activities 1998 primarily due 12 million net repayments shortterm debt financing principally shortterm borrowings lines credit 09 million repurchase 115000 shares companys common stock prevailing market prices partially offset 08 million proceeds sales employee stock purchase plan exercises incentive stock options 03 million proceeds longterm debt financing future repurchases companys common stock would based market conditions evaluated case basis net cash provided financing activities 1997 due primarily 212 million proceeds issuance common stock primarily associated companys followon public offering may 1997 44 million proceeds debt financing net repayments company two oneyear revolving line credit agreements silicon valley bank first agreement provides maximum borrowings amount lower 80 domestic eligible accounts receivable 45 million second agreement partially guaranteed exportimport bank united states provides maximum borrowings amount lower sum 90 eligible export accounts receivable plus 70 eligible raw materials workinprocess inventory designated export customers 45 million borrowings agreements bear interest banks prime rate 775 december 31 1998 secured companys assets intellectual property agreements require company maintain certain financial ratios levels tangible net worth profitability also prohibit company paying dividends proceeds loans lines credit may used general corporate purposes december 31 1998 company outstanding borrowings 29 million lines credit guarantees issuance letters credit customers secured lines credit totaling 16 million remaining available borrowing capacity lines credit 12 million december 31 1998 based eligible accounts receivable inventories date agreements expire april 1999 company process renewing revolving line credit agreements silicon valley bank company committed equipment line credit agreement silicon valley bank transforms term loan drawdown agreement provides borrowings 175 million borrowings agreement bear interest banks prime rate 775 december 31 1998 plus 100 fixed rate equal 425 yield 36 60 month treasury notes based assets purchased financed treasury note rates december 31 1998 36 months 467 60 months 454 borrowings secured assets purchased financed december 31 1998 company outstanding borrowings 12 million remaining borrowing capacity 05 million line credit agreement expires april 1999 company process renewing committed equipment line credit agreement silicon valley bank company believes cash equivalents shortterm investments together available borrowing lines credit funds expected generated operations sufficient finance working capital expenditure requirements least next 12 months interest rate risk companys exposure market risk changes interest rates relates primarily increase decrease amount interest income company earn investment portfolio increase decrease amount interest expense company must pay respect various outstanding debt instruments interest rates tied market rates company use derivative financial instruments investment portfolio company ensures safety preservation invested principal funds limiting default risks market risk reinvestment risk company mitigates default risk investing highcredit quality securities foreign exchange risk impact inflation companys international system sales maintenance contracts generally denominated us dollars purchases raw materials inventory components primarily denominated us dollars however denominated foreign currencies generally made needed basis company generally material advance purchase commitments foreign currencies certain costs providing warranty maintenance services systems sold foreign countries denominated local currencies extent exchange rates fluctuate could become expensive provide services date costs significant however company expects increase companys installed base increases company hedge foreign currency risks impact inflation material companys operations liquidity date year 2000 compliance definition year 2000 issue result common computer programming convention represents years two digits eg 98 1998 beginning year 2000 date code fields may need accept four digit entries distinguish 21st century dates 20th century dates millennium date change occurs date sensitive systems products may recognize year 2000 year 1900 inability recognize properly treat year 2000 may result system failure cause systems process critical operational financial information incorrectly since market explosive detection systems certified faa companys largest market faa companys largest customer company determined apply faa definition year 2000 compliance stated faas year 2000 certificate compliance products operations year 2000 compliant means information technology accurately processes datetime data including limited calculating comparing sequencing twentieth twentyfirst centuries years 1998 1999 2000 leap year calculations furthermore year 2000 compliant information technology used combination information technology shall accurately process datetime data information technology properly exchanges date time data methodology achieving year 2000 readiness 1997 company began year 2000 product assessment planning identify remediate compliance issues regarding product operation december 1998 company instituted comprehensive year 2000 project designed identify assess risks associated operations infrastructure information systems suppliers customers year 2000 compliant develop implement test remediation contingency plans mitigate risks project still process comprises four phases 1 identification risks 2 assessment risks 3 development remediation contingency plans 4 implementation testing status companys products ctx 5500 system upgrade kits faa tested certified current version ctx 5500 ctx 5500 upgrade kit compliant year 2000 compliance definition testing certification performed using faa year 2000 y2k repair process standards handbook managed thirdparty contracted faa ctx 5500 systems shipped beginning 1999 compliant ctx 5500 systems purchased faa shipped prior january 1 1999 upgraded compliance ctx 5500 systems shipped prior january 1 1999 compliant ctx 5500 systems shipped prior january 1 1999 compliant upgraded compliance faa standard invision charge customer invision warranty service contract ctx 5000 system identification assessment risks establishment fixes upgrades completed released product software respect hardware company recently completed component review embedded chips clocks supplier testing year 2000 compliance found material compliance issues although tested faa fix ctx 5000 designed meet faa year 2000 compliance definition company plans use test plan ctx 5000 similar one used faa certifying compliance ctx 5500 ctx 5000 year 2000 fix planned released end second quarter 1999 however schedule dependent investigation testing older configurations using older revision components yet complete customers warranty service contract receive fix charge alternatively ctx 5000 customers may purchase ctx 5500 upgrade kit provides compliance certified faa also offers operational benefits upgrade kit purchased installed ctx 5000 systems previously purchased faa company infrastructure respect companys internal computerized systems manufacturing information facilities financial administrative areas company completed phases one two identification assessment risks early stage phase three development remediation contingency plans outside consultants engaged assist director quality assurance executive staff direction chief operating officer complete process including implementation necessary solutions design necessary contingency plans point review company currently aware year 2000 problems relating systems operated company cannot resolved could material adverse effect companys business results operations financial condition company expects phases portion project completed end second quarter 1999 suppliers customers company submitted survey current suppliers products services process receiving evaluating responses however early phase stage project means company cannot yet predict whether significant problems identified cannot yet determine extent contingency planning may required even completed information provided subject verification internal testing company vulnerable failure major suppliers service providers customers including airports airlines endusers products identify full extent successfully remedy internal year 2000 issues failure could material adverse effect companys supplies orders installation schedules company unable estimate nature extent potential adverse impact resulting failure third parties achieve year 2000 compliance moreover third parties even year 2000 compliant could experience difficulties resulting year 2000 issues may affect suppliers service providers customers result although company currently anticipate experience material shipment delays major product suppliers material sales delays major customers due year 2000 issues based information developed current stage year 2000 project third parties may nonetheless experience year 2000 problems could material adverse effect companys results operations financial condition costs compliance based status companys efforts date prepare year 2000 company believes costs compliance respect products infrastructure including third party suppliers exceed 500000 december 31 1998 approximately 43000 already incurred risks noncompliance company yet completed assessments developed remediation contingency plans problems completely implemented tested remediation plans ctx 5500 system ctx 5500 upgrade year 2000 project continues company may discover additional year 2000 problems may able develop implement test remediation contingency plans may find costs activities exceed current estimates 500000 extent company identify material noncompliant systems operated company third parties companys suppliers service providers customers reasonably likely worstcase scenario systemic failure beyond control company prolonged telecommunications electrical failure general disruption united states global business activities could result significant downturn company believes primary business risks event failure disruption would include limited loss customers orders delays installation increased operating costs inability obtain inventory timely basis disruptions product shipments business interruptions material nature well claims mismanagement misrepresentation breach contract could material adverse effect companys business results operations financial condition item 8item 7 managements discussion analysis financial condition results operations following discussion contains forwardlooking statements involve risks uncertainties used discussion words anticipate believe estimate expect similar expressions relate company management intended identify forwardlooking statements companys actual results performance achievements could differ materially results expressed implied forwardlooking statements factors could cause contribute differences include risks related market acceptance companys main product including loss companys order faa failure obtain additional orders loss companys sole source suppliers intense competition including competition new supplier certified product begun accepting orders reliance large orders concentration companys customers risks related lengthy sales cycles companys products budgeting limitations companys customers prospective customers risks inherent development production new products new applications fluctuations amount government funding companys research development activities certification certain products well discussed item 1 business particularly business risks section thereof overview invision technologies inc invision together subsidiaries company develops manufactures markets supports systems based advanced computed tomography ct technology explosive detection systems eds civil aviation security log scanning wood products industry drug detection applications invision formed september 1990 design develop eds based ct technology exited development stage 1995 upon first commercial sale product ctx 5000 system today company markets advanced ctx 5500 system next generation ctx 9000 system smaller lighter ctx 2500 system addition products company products development date companys ctx 5000 system ctx 5500 system together ctx 5000 series explosive detection systems certified federal aviation administration faa currently deployed use inspection checked luggage commercial flights april 1999 ctx 9000 system successfully completed faa certification company sold first ctx 9000 system third quarter 1999 additionally september 1999 ctx 2500 system successfully completed faa certification company already seeing interest product existing potential customers since first ctx sale 1995 december 31 1999 company received orders total 196 ctx systems total 187 shipped october 1999 company received letter contract 28 million potential value 80 million three years faa ctx 9000 systems accessories years ended december 31 1999 1998 1997 company ctx product service revenues 476 million 633 million 564 million respectively december 31 1999 company backlog ctx equipment orders service agreements approximately 198 million january 2000 company received order valued approximately 25 million international customer multiple ctx 9000 systems accessories service invisions whollyowned subsidiary quantum magnetics inc quantum develops commercializes patented proprietary technology inspection detection analysis explosives materials based quadrupole resonance qr technology form magnetic resonance passive magnetic sensing products prototype stage include advanced detection systems markets carryon luggage screening drug detection postal inspection detection concealed weapons landmines quantum also leading supplier research development services area qr technology passive magnetic sensing number government agencies third quarter 1999 quantum sold first qscan 160 eds united states navy mail parcel screening applications international location 1997 quantum began development sophisticated prototype system combines qr explosives detection metal detection thus capable detecting plasticcased metalcased landmines fourth quarter 1999 unique capabilities landmine detection system successfully demonstrated series department defensesponsored blind field tests carried fort leonard wood missouri revenues cost revenues related quantums government contracts previously reported reduction research development expense prior year amounts reclassified reflect gross revenues cost revenues associated quantums contracts conform 1999 presentation years ended december 31 1999 1998 1997 company government contract revenues related quantum 107 million 72 million 55 million respectively december 31 1999 company backlog quantum government contracts 32 million first quarter 2000 quantum received additional awards several government agencies 61 million including 32 million related landmine detection 23 million related eds february 2000 company created woodvision new division formed develop ct technology optimize lumber value yield harvested timber additionally february 2000 company acquired inovec inc inovec manufacturer advanced optimization equipment increasing yield forest products industry 52 million cash stock payable next two years potentially additional 14 million cash stock payable next two years based achievement certain performance milestones transaction accounted purchase effective january 1 2000 company considers research development vital part operating discipline continues dedicate substantial resources research enhance performance functionality reliability ctx systems well development new products december 31 1999 company 113 fulltime employees engaged research development activities also using services 16 specialized contract employees consultants area total research development expenditures company partially offset amounts reimbursed faa government agencies research development contracts grants years ended december 31 1999 1998 1997 company spent 112 129 million 107 million respectively research development activities amounts 07 million 36 million 21 million respectively funded research development contracts grants extent research development contracts grants receipts decline future research development expenses borne company would increase company expects results operations would adversely impacted december 31 1999 company backlog research development contracts grants approximately 08 million companys product service revenues principally consisted company believes continue consist orders multiple units limited number customers years ended december 31 1999 1998 1997 371 million 379 million 321 million companys product service revenues generated sales companys largest customer faa representing 778 599 569 companys product service revenues respectively significant customers accounted 10 companys product service revenues 1999 1998 1997 companys government contract revenue historically derived funding provided various us government agencies years ended december 31 1999 1998 1997 61 million 22 million 12 million companys government contract revenues associated funding defense advanced research projects agency darpa primarily landmine detection representing 574 308 220 companys government contract revenues respectively additionally 1999 1998 1997 18 million 24 million 14 million related funding faa eds research development representing 171 326 259 companys government contract revenues respectively remaining revenue related contract work government agencies private entities none individually accounted 10 companys government contract revenues 1999 1998 1997 company markets products services directly internal sales personnel indirectly authorized agents distributors systems integrators united states company markets products services primarily direct sales personnel internationally company utilizes direct sales force authorized agents sell products years ended december 31 1999 1998 1997 international sales represented 180 337 430 respectively companys product service revenues sales cycle companys ctx product line often lengthy due protracted approval process typically accompanies large capital expenditures time required manufacture install assimilate product typically six twelve months may elapse new customers initial evaluation companys systems execution contract another three months year may elapse prior shipment product customer site prepared system manufactured period company expends substantial funds management resources recognizes associated revenue company recognizes product revenue shipment unless extended acceptance criteria exist case revenue recognized upon achievement acceptance criteria company typically requires customer deposits advance shipment customer purchase orders provision estimated installation training warranty costs recorded time revenue recognized adjusted periodically based historical anticipated experience systems typically carry oneyear warranty companys government contract revenue substantially derived quantum activities performed us government contracts typically form costplusfixedfee cpff firmfixedprice ffp awards company recognizes revenue contracts using percentageofcompletion method based costs incurred date percentage total estimated costs completion results operations following table sets forth certain income expenditure items companys consolidated statements operations expressed percentage total revenues periods indicated invision technologies inc condensed consolidated statements income percentage revenues comparison fiscal years 1999 1998 revenues companys revenues comprised product service revenues include sales ctx systems accessories installation configuration maintenance related product support government contract revenues include revenues primarily research development contracts utilizing qr passive magnetics technologies government agencies private entities product service revenues 477 million 1999 decrease 246 633 million 1998 decrease primarily attributable fewer systems shipped 1999 compared prior year partially offset increased service contract revenues primarily due commencement support maintenance agreements systems whose warranty periods expired year company shipped 41 systems 36 ctx 5500 5 ctx 9000 1999 compared 62 ctx 5500 systems 1998 company typically ships backlog orders products december 31 1999 company backlog equipment orders service agreements approximately 198 million government contract revenues 107 million 1999 increase 483 72 million 1998 increase primarily attributable accelerated activities related landmine detection technologies 1999 december 31 1999 company backlog government contract revenue approximately 32 million gross profit cost product service revenues primarily consists purchased materials procured use assembly companys products well manufacturing labor overhead warranty costs associated service agreements given period companys gross profit product services may affected several factors including revenue mix product configuration location installation complexity integration various airport environments gross profit product services 192 million 1999 compared 283 million 1998 gross margins 402 448 respectively decrease gross margins primarily result lower margins sale ctx 9000 systems made higher per unit costs related startup initial production process cost government contract revenues primarily consists direct labor purchased materials subcontract labor applicable overhead required support government funded activities gross profit government contracts 30 million 1999 compared 20 million 1998 gross margins 276 1999 1998 increase gross profit primarily due increased level work funded landmine detection technologies research development research development expenditures consist primarily compensation paid personnel engaged research development activities amounts paid outside services costs materials utilized development hardware products including prototype units research development expenditures company partially offset amounts reimbursed faa government agencies research development contracts grants services primarily provided cost basis net research development expenses 104 million year ended december 31 1999 net research development expenses would 93 million 1998 without capitalization software development costs 08 million accordance statement financial accounting standards 86 sfas 86 accounting costs computer software sold leased otherwise marketed sfas 86 software production costs computer software used integral part product process capitalized technological feasibility established software research development activities components product process completed software development costs qualifying capitalization insignificant 1999 third quarter 1999 company began amortizing capitalized software development costs using straightline method forecasted units production gross research development expenses 112 million 1999 decrease 134 129 million 1998 considering impact software capitalization amounts 07 million 36 million respectively funded research development contracts grants faa government agencies percentage total revenues net research development expenditures 179 1999 compared 121 1998 increase net research development costs percentage revenues primarily result lower revenues 1999 compared prior year decrease gross research development expenditures absolute dollars primarily due completion two significant development products early 1999 specifically development ctx 9000 qscan 160 company made first sale products 1999 december 31 1999 company backlog research development contracts grants 08 million extent research development contracts grants receipts decline future research development expenditures borne company increase companys results operations would adversely impacted selling general administrative selling general administrative expenses consist primarily compensation paid direct indirect sales marketing personnel administrative personnel including directors consultant fees professional service fees insurance travel selling distribution costs general expenses selling general administrative expenses 118 million 1999 decrease 95 130 million 1998 percentage total revenues selling general administrative expenses 201 184 1999 1998 respectively increase selling general administrative expenses percentage revenues primarily result lower revenues 1999 compared prior year decrease selling general administrative expenses absolute dollars primarily result decrease commission expense due changes structure sales incentive compensation plans lower revenues 1999 continued efforts reduce selling administrative expenses year interest expense interest expense decreased 227000 1999 390000 1998 interest expense 1999 1998 resulted primarily debt financing associated companys working capital lines credit equipment term loans capital leases decrease primarily due payments made term loans capital lease obligations new significant financing 1999 interest income net interest income net increased 754000 1999 697000 1998 1999 amount consists primarily interest income shortterm investments interest bearing cash accounts 813000 partially offset expense 59000 1998 amount consists primarily interest income shortterm investments interest bearing cash accounts 754000 partially offset expense 57000 income taxes companys effective tax rate 1999 1998 15 12 respectively companys effective tax rate 1999 1998 lower statutory tax rates primarily due utilization net operating loss carryforwards december 31 1999 company federal net operating loss carryforwards approximately 50 million available reduce future federal taxable companys net operating loss carryforwards expire 2007 2011 comparison fiscal years 1998 1997 revenues product service revenues 633 million 1998 increase 122 564 million 1997 increase primarily attributable increased sales ctx 5000 series reflecting 107 increase unit shipments 62 units 1998 56 units 1997 plus shipment 32 59 ctx 5500 upgrade kits purchased faa commencement maintenance related revenues domestic market factors partially offset lower average selling prices systems shipped 1998 due configurations units shipped volume discounts second quarter 1998 government contract revenues 72 million 1998 increase 303 55 million 1997 increase primarily attributable growth revenue associated additional landmine detection funding 1998 gross profit gross profit product services 283 million 1998 compared 284 million 1997 gross margins 448 503 respectively decrease gross margins primarily due higher manufacturing overhead costs result companys relocation new facility late 1997 configurations units shipped volume discounts second quarter 1998 resulted lower average selling prices systems 1998 gross profit government contracts 20 million 1998 compared 13 million 1997 gross margins 276 228 1998 1997 respectively increase primarily due growth funding activities 1998 primarily additional landmine detection funding earned fees research development net research development expenses would 93 million 1998 without capitalization software development costs 08 million accordance statement financial accounting standards 86 sfas 86 accounting costs computer software sold leased otherwise marketed sfas 86 software production costs computer software used integral part product process capitalized technological feasibility established software research development activities components product process completed prior years period achieving technological feasibility availability software included companys product short software development costs qualifying capitalization insignificant considering impact software capitalization gross research development expenditures 129 million 1998 increase 200 107 million 1997 amounts 36 million 21 million respectively funded research development contracts grants faa government agencies percentage total revenues net research development expenditures 121 1998 compared 139 1997 increase gross research development expenditures primarily result personnel additions increased spending engineering materials services selling general administrative selling general administrative expenses 130 million 1998 increase 55 123 million 1997 percentage total revenues selling general administrative expenses 184 199 1998 1997 respectively increase selling general administrative expenses absolute dollars 1998 primarily result personnel additions increased professional consulting costs associated companys growth increased insurance costs increased selling costs associated higher unit sales including foreign travel trade shows public relations commission expense increased costs operations associated publicly traded company acquisition costs 1997 company incurred onetime costs professional fees costs related acquisition quantum acquisition costs 685000 11 total revenues interest expense interest expense decreased 390000 1998 428000 1997 interest expense 1998 resulted primarily debt financing associated companys working capital lines credit equipment term loans capital leases interest expense 1997 resulted primarily shortterm debt outstanding period interest income net interest income net increased 697000 1998 242000 1997 1998 amount consists primarily interest income shortterm investments interest bearing cash accounts 754000 offset expense 57000 1997 amount 242000 consists primarily interest income shortterm investments interest bearing cash accounts 724000 offset loss 402000 sale quantum stock prior quantum acquisition expense 80000 income taxes companys effective tax rate 1998 1997 120 152 respectively companys effective tax rate 1998 1997 lower statutory tax rates primarily due utilization net operating loss carryforwards noncash charges company recorded noncash charges related grants stock options exercise prices fair market value date grant employees directors amounts 68000 425000 1999 1998 1997 respectively liquidity capital resources since inception company financed operations primarily private sales 165 million preferred common stock 56 million represents indebtedness converted equity sale 95 million common stock companys initial public offering april 1996 sale 212 million common stock companys followon offering may 1997 shortterm borrowings working capital lines credit december 31 1999 company 242 million cash equivalents shortterm investments compared 125 million december 31 1998 working capital 409 million december 31 1999 compared 389 million december 31 1998 net cash provided operating activities 170 million 1999 compared 20 million used operating activities 1998 net cash provided operating activities 1999 primarily due net income 383000 162 million decrease accounts receivable 29 million noncash effect depreciation amortization 17 million increase accounts payable 16 million increase deferred revenue partially offset 56 million increase inventories 08 million decrease accrued liabilities net cash used operations 1998 primarily due net income 80 million 23 million increase accrued liabilities 20 million noncash effect depreciation amortization offset 101 million increase accounts receivable due timing sales latter part fourth quarter 1998 17 million decrease deferred revenues 17 million decrease accounts payable 10 million increase inventories net cash used investing activities 55 million 1999 compared 06 million 1998 net cash used investing activities 1999 primarily due 39 million purchases shortterm investments net proceeds sales 17 million purchases new equipment net cash used investing activities 1998 primarily due 29 million purchases new equipment 08 million additions noncurrent assets related capitalization software development costs partially offset 31 million proceeds sales shortterm investments net purchases net cash used financing activities 37 million 1999 compared 10 million 1998 net cash used financing activities 1999 primarily due 30 million net repayments shortterm debt financing principally shortterm borrowings lines credit 09 million repayments longterm debt principally term loans capital lease obligations 03 million repurchase 85600 shares companys common stock prevailing market prices partially offset 05 million proceeds sales employee stock purchase plan exercises incentive stock options net cash used financing activities 1998 primarily due 12 million net repayments shortterm debt financing principally shortterm borrowings lines credit 09 million repurchase 114900 shares companys common stock prevailing market prices 03 million repayments longterm debt partially offset 08 million proceeds sales employee stock purchase plan exercises incentive stock options 07 million proceeds longterm debt financing future repurchases companys common stock would based market conditions evaluated case basis may 1999 company renewed two oneyear revolving line credit agreements bank first agreement provides maximum borrowings 50 million second agreement partially guaranteed exportimport bank united states provides maximum borrowings amount lower sum 90 eligible export accounts receivable plus 70 eligible raw materials workinprocess inventory designated export customers net advance payments deposits 25 million borrowings agreements bear interest banks prime rate 85 december 31 1999 secured companys assets intellectual property agreements require company maintain certain financial ratios levels tangible net worth profitability also prohibit company paying cash dividends september 30 december 31 1999 company default covenant set forth loan agreement october 1999 february 2000 company received waivers default loan agreement bank periods ended september 30 1999 december 31 1999 respectively proceeds loans lines credit may used general corporate purposes december 31 1999 company outstanding guarantees customers issuance letters credit secured lines credit totaling 22 million outstanding borrowings lines credit december 31 1999 remaining available borrowing capacity lines credit 43 million december 31 1999 based eligible accounts receivable inventories date agreements expire april 2000 company process renewing revolving line credit agreements bank may 1999 company renewed committed equipment line credit agreement bank transforms term loan drawdown agreement provides borrowings 05 million borrowings agreement bear interest banks prime rate 85 december 31 1999 plus 025 banks prime rate plus 025 draw period fixed rate equal 35 yield 36 month treasury note 614 december 31 1999 amortization period borrowings secured assets purchased financed december 31 1999 company outstanding 05 million term loan due june 2003 04 million term loan due november 2001 drawdowns prior year line credit term loans bear interest 899 903 respectively company remaining borrowing capacity 05 million current year line credit december 31 1999 agreement expires april 2000 company process renewing equipment line credit agreement bank company believes cash equivalents shortterm investments together available borrowing lines credit funds expected generated operations sufficient finance working capital expenditure requirements least next 12 months interest rate risk companys exposure market risk changes interest rates relates primarily increase decrease amount interest income company earn investment portfolio increase decrease amount interest expense company must pay respect various outstanding debt instruments interest rates tied market rates company use derivative financial instruments investment portfolio company ensures safety preservation invested principal funds limiting default risks market risk reinvestment risk company mitigates default risk investing highcredit quality securities foreign exchange risk impact inflation companys international system sales maintenance contracts generally denominated us dollars purchases raw materials inventory components primarily denominated us dollars however purchased foreign currencies generally made needed basis company generally material advance purchase commitments foreign currencies certain costs providing warranty maintenance services systems sold foreign countries denominated local currencies extent exchange rates fluctuate could become expensive provide services date costs significant however company expects increase companys installed base increases company hedge foreign currency risks 1999 impact inflation material companys operations liquidity date year 2000 compliance year 2000 issue arose result computer programs written using two digits rather four define applicable year company evaluated products sells internal computerized systems taking corrective action appropriate avoid potential year 2000 problems make products internal computerized systems determined mission critical year 2000 compliant company knows instances products internal computerized systems failed operate specified due date formatting issues associated calculating comparing sequencing twentieth twentyfirst centuries years 1998 1999 2000 leap year calculations additionally company identified third party suppliers whose products services mission critical developed contingency plans company knows instances third party suppliers experienced year 2000 problems companys costs compliance respect products infrastructure including third party suppliers cost contingency plans 285000 december 31 1999 significant additional costs anticipated incurred connection project item 8item 7 management’s discussion analysis financial condition results operations complete understanding financial condition results operations risks could affect future results see “businessrisk factors” item 1 section also read conjunction consolidated financial statements related notes item 8 overview organized three segments eds business manufactures ctbased detection products used aviation industry screen baggage explosives whollyowned subsidiary quantum utilizes qr magnetic sensing technologies inspection detection analysis explosives concealed weapons materials wood division consists inovec manufactures systems using laserbased technologies improve sawmill yield woodvision developing ct xray technology increase value harvested timber revenues primarily comprised • eds product revenues include revenues sales ctx systems related accessories spare parts related installation configuration eds service revenues include revenues maintenance contracts related product support integration services including complex integrations configurations separate product revenues • quantum government contract revenues include revenues primarily development contracts utilizing qr magnetic sensing technologies government agencies private entities • wood product revenues sales control automation systems timber processing equipment related accessories installation configuration service revenues maintenance contracts related product support repairs services market products services directly internal sales personnel indirectly authorized agents distributors systems integrators united states market products services primarily direct sales personnel internationally use direct sales force authorized representatives sell products international sales represented 117 total revenues year ended december 31 2002 325 total revenues year ended december 31 2001 262 total revenues year ended december 31 2000 eds given fiscal quarter year eds product revenues derived orders multiple units eds products limited number customers example 2002 ten customers accounted eds units sold number customers vary widely period dependent multiple orders small number customers substantial portion revenues therefore cancellation delay order customer could significant negative impact operations given period generated 3567 million eds sales largest customer faa following formation tsa representing 812 total revenues year ended december 31 2002 200 million representing 269 total revenues year ended december 31 2001 308 million representing 389 total revenues year ended december 31 2000 eds customers accounted 10 total revenues years ended december 31 2002 2001 2000 typically bill customers three stages generally provided contracts customers • amounts cover bill materials received suppliers typically 30 40 total system price • additional amount upon factory acceptance shipment ranging 30 60 • balance upon installation site acceptance ranging 5 30 payment terms effectively provide necessary working capital acquisition materials funding inventory manufacturing cycle anticipate potential future orders tsa continue provide payment terms provide necessary working capital us suppliers even production volumes rapidly increase future orders tsa contain different payment terms major increase production rates may require substantial additional working capital payment terms faa tsa invoices net 30 days terms international invoices vary amounts due upon receipt invoice 90 days consider research development vital part operations continue dedicate substantial resources research enhance performance functionality reliability ctx systems well development new products gross research development expenses eds 182 million 2002 107 million 2001 95 million 2000 quantum revenues substantially derived development activities funded various us government contract agencies government contract revenues contracts typically form costplusfixedfee firmfixedprice awards sold first qscan product late 1999 first iportal 100 system 2001 continue market products customers within aviation transportation security markets also perform independent research development activities quantum directly funded us government contracts grants many activities explore ways utilize technologies developed improved directly funded government contracts internal research development activity levels fluctuate level identified internal research development projects resource requirements funded government contracts grants wood product service revenues primarily derived inovec’s sales control automation systems timber processing equipment related service installed laser scanners 300 sawmills worldwide results operations following table sets forth certain income expenditure items consolidated statements operations expressed percentage total revenues periods indicated comparison fiscal years 2002 2001 revenues eds product revenues 4031 million 2002 increase 1004 365 million 2001 increase system sales related accessories reflects orders received faa tsa 2002 well international customers late 2001 2002 resulting increased focus aviation security following terrorist attacks september 11 2001 increase eds product revenues slightly offset volume discounts eds service revenues 137 million 2002 increase 434 96 million 2001 increase service revenues result signing agreement siemens retroactive november 2002 service eds units owned faa tsa united states territories service contract revenues international customers new support maintenance agreements ctx systems warranty periods expired year anticipate service revenues increase 2003 compared 2002 due agreement siemens larger installed base eds coming warranty typically ship backlog orders products december 31 2002 backlog eds equipment orders service agreements 2466 million quantum’s government contract revenues 121 million 2002 decrease 270 166 million 2001 2002 70 million government contract revenues us government development landmine technologies representing 531 quantum revenues compared 2001 126 million government contract revenues us government development landmine technologies representing 740 quantum revenues december 31 2002 quantum government contract backlog approximately 124 million approximately 61 million development landmine detection technologies anticipate government contract revenues landmine detection technologies decrease 2003 compared 2002 result reduced need subcontract support landmines contracts outsourced milestones completed reduction support needs reduces amounts revenue recognized rebilling subcontract support cost government addition quantum shifting internal resources develop upgrade ctx family explosives detection systems utilizing qr project combine qr ct technology partially funded grant 10 million tsa quantum’s product revenues 10 million 2002 compared 322000 2001 quantum commercial product 2001 increase quantum’s product revenues 2002 primarily due increased sales iportal systems greater span time compared period 2001 wood product revenues 73 million 2002 decrease 244 97 million 2001 decrease wood product revenues primarily due fewer system machinery equipment sales reflecting softness wood products industry 2002 compared 2001 wood service revenues 17 million 2002 increase 101 15 million 2001 increase wood service revenues primarily due increased replacement part sales increased customer purchases spare parts december 31 2002 backlog inovec equipment orders service agreements 714000 laserbased optimization scanning systems lumber manufacturing gross profit cost eds product revenues primarily consists purchased materials procured use assembly products well manufacturing labor overhead installation training warranty cost eds service revenues primarily consists direct labor materials customer support overhead given period gross profit products services may affected several factors including revenue mix volume systems manufactured given period product configuration location installation complexity integration various environments gross profit eds products 1743 million 2002 increase 1125 142 million 2001 gross margins eds products 432 2002 390 2001 addition significant tsa shipments 2002 improvement eds product gross profit partially due amounts reimbursable tsa ramp costs consist consulting expenses vendor expedite charges subcontractor manufacturing setup costs totaling 110 million amount reimbursable elements ramp costs would expensed overall improvement product gross profit partially offset 53 million inventory write downs accrued vendor cancellation fees 2002 anticipation receiving additional tsa orders ctx 5500 ds model purchased made commitments purchase large quantities critical components build ctx 5500 ds machines anticipated tsa orders largely replaced orders ctx 9000 dsi model yearend ctx 5500 ds raw material inventory levels excess anticipated requirements accordingly wrote portion ctx 5500 ds inventory accrued cancellation fees taken together totaled 53 million 2002 improvement eds product gross margin percentages primarily due lower manufacturing overhead per unit resulting larger increase units produced relative increase fixed costs 2002 gross profit eds services 39 million 2002 increase 202 32 million 2001 gross margins eds services 282 2002 337 2001 decrease gross margin percentages primarily due need increase eds customer support overhead costs necessary support increasing installed base eds units product sales initially covered support services warranty approximately 15 18 month time lag shipment recognizing significant service contract revenue tied increased sales eds products however eds product customer obligated purchase support services us warranty period additional service contract revenues assured product sales increased support costs immediate service revenue recent product sales primary reason lower gross margin 2002 compared 2001 cost quantum government contract revenues primarily consists direct labor purchased materials subcontract labor applicable overhead required support government funded activities gross profit government contracts 34 million 2002 48 decrease 35 million 2001 gross margins government contracts 279 2002 214 2001 decrease gross profit primarily due lower government contract revenues 2002 compared 2001 improvement gross margin percentages government contracts primarily due fewer outside engineering services required landmines contract related services typically carry slightly lower margin 2002 compared 2001 gross profit wood products 21 million 2002 decrease 380 34 million 2001 gross margins wood products 284 2002 346 2001 decrease wood products gross profit gross margin percentages primarily due softness industry gross profit wood services 931000 2002 increase 138 818000 2001 gross margins wood services 546 2002 529 2001 increase gross profit wood services primarily due higher service revenues 2002 compared prior year using number service personnel increase gross margin percentages wood services primarily due variations types services provided 2002 compared 2001 research development research development expenses consist primarily compensation paid personnel engaged research development activities amounts paid outside services costs materials utilized development hardware products including prototype units research development expenditures partially offset amounts reimbursed faa tsa government agencies private entities research development contracts grants services provided reimbursed cost basis gross research development expenses eds 182 million 2002 increase 709 107 million 2001 gross research development expenses eds percentage eds revenues 44 2002 231 2001 net research development expenses eds 177 million 2002 increase 2548 compared 50 million 2001 net research development expenses eds percentage eds revenues 42 2002 108 2001 increase gross research development expenses eds primarily due increased focus several initiatives support growth goal 100 checked baggage screening us airports expect eds machines operated near capacity extended periods investing sustaining engineering efforts ensure products achieve high levels serviceability reliability operated capacity also devoting significant engineering resources support rapid expansion manufacturing capacity continuing development argus program faasponsored program designed develop smaller lowcost eds product scan checked baggage small airports lowtraffic stations within larger airports product enhancements existing line eds machines anticipate commit less engineering resources 2003 argus program since program nearing completion increase net research development expenses eds primarily due quantums development upgrade ctx family explosives detection systems utilizing qr less funding received argus grant current year compared prior year anticipate continue incur unfunded costs continued development argus program next quarters approach end program decrease gross net research development expenses eds percentage revenues primarily due significant increase revenues research development expenses quantum 860000 2002 increase 133 759000 2001 research development expenses quantum percentage quantum revenues 65 2002 45 2001 increase expenses primarily due internal costs incurred development commercialization products 2002 compared 2001 iportal 100 system increase research development expenses quantum percentage revenues primarily due decrease revenues research development expenses wood 21 million 2002 decrease 70 23 million 2001 research development expenses wood percentage wood revenues 233 2002 201 2001 decrease expenses primarily due temporary reallocation engineering resources support rapid growth eds business wood development efforts increase research development expenses wood percentage revenues primarily due decrease revenues selling general administrative selling general administrative expenses consist primarily compensation paid direct indirect sales marketing personnel administrative personnel including directors consultant fees professional service fees insurance travel selling distribution costs general expenses selling general administrative expenses eds 246 million 2002 increase 1860 86 million 2001 selling general administrative expenses eds percentage eds revenues 59 2002 186 2001 part increase expenses eds result increase expenditures consultants professional fees 45 million investigations relating potential acquisitions investor public relations employee headcount 33 million insurance costs 22 million sales commissions 21 million related growth business compared prior year decrease selling general administrative expenses eds percentage revenues primarily due increase eds revenues selling general administrative expenses quantum constant 23 million 2002 2001 selling general administrative expenses quantum percentage quantum revenues 171 2002 138 2001 increase percentage revenues due decrease total revenue selling general administrative expenses wood 49 million 2002 increase 290 38 million 2001 selling general administrative expenses wood percentage wood revenues 542 2002 338 2001 net increase selling general administrative expenses primarily due 21 million impairment writedown goodwill related acquisition inovec partially offset reductions headcount efforts control expenses increase percentage revenue due decrease total revenue 21 million impairment writedown interest expense interest expense increased 399000 2002 289000 2001 increase interest expense primarily due increased activities within financing insurance premiums increased activities within lines credit standby letters credit issued secure guarantees customers 2002 compared 2001 interest income net interest income net 38000 2002 compared 570000 2001 2002 amount consists primarily interest income cash equivalents shortterm investments 19 million offset expenses 19 million primarily consisting 12 million net foreign exchange losses primarily related foreign exchange contracts entered advance adopting hedge accounting may 2002 contingent settlement amount 700000 2001 amount consists primarily interest income cash equivalents shortterm investments 297000 income net 273000 primarily reversal reserve due favorable outcome international claim partially offset foreign exchange losses provision benefit income taxes recorded income tax provision 539 million 2002 compared income tax benefit 46 million 2001 december 31 2002 federal state net operating loss carryforwards approximately 18 million 321000 respectively available reduce future federal state taxable income federal net operating loss carryforwards begin expire 2010 state net operating loss carryforwards expire 2011 tax benefit net operating loss carryforwards may limited due impact tax reform act 1986 events may cause tax benefit limited include limited cumulative stock ownership change 50 threeyear period timing utilization various tax benefits carried forward comparison fiscal years 2001 2000 revenues eds product revenues 365 million 2001 decrease 215 465 million 2000 decrease primarily attributable decreased ctx system revenue approximately 86 million resulting fewer ctx systems sold 2001 compared 2000 also due relatively newer lower priced ctx 2500 systems sold existing customers 2001 compared 2000 decrease also due 22 million reduction revenues fewer customer upgrades older ctx 5000 systems newer ctx 5500 ds systems upgrades mostly complete end 2000 decrease eds product revenues partially offset increased accessories spare parts revenues 2001 systems deployed operating field 2001 compared 2000 eds service revenues 96 million 2001 increase 158 83 million 2000 increase service revenues primarily due increased service contract revenues international customers new support maintenance agreements ctx systems warranty periods expired year increase eds service revenue also due noncontract services billed time material services data reporting complex integrations provided greater installed base systems 2001 compared 2000 typically ship backlog orders products december 31 2001 backlog eds equipment orders service agreements 560 million quantum’s government contract revenues 166 million 2001 increase 557 106 million 2000 increase government contract revenues primarily due increase efforts development landmine concealed weapons detection technologies partially offset decreases types development efforts government contracts grants completed last twelve months due expanded efforts develop landmine detection technologies 2001 quantum employed individuals work directly funded projects well increased subcontract support compared period 2000 2001 126 million government contract revenues us government development landmine technologies representing 740 quantum revenues compared 2000 60 million government contract revenues us government development landmine technologies representing 544 quantum revenues december 31 2001 quantum government contract backlog approximately 129 million primarily development landmine detection technologies quantum’s product revenues 322000 2001 compared 307000 2000 wood product revenues 97 million 2001 decrease 185 119 million 2000 decrease wood product revenues primarily due fewer system sales also due fewer machinery equipment sales reflecting softness wood products industry 2001 compared 2000 wood service revenues constant 15 million years ended december 31 2001 2000 december 31 2001 backlog inovec equipment orders service agreements 12 million laserbased optimization scanning systems lumber manufacturing gross profit gross profit eds products 142 million 2001 decrease 99 158 million 2000 gross margins eds products 2001 390 339 2000 decrease gross profit primarily due lower eds product revenues 2001 compared 2000 increase eds product gross margin percentages primarily due improvements manufacturing costs ctx 9000 dsi system first introduced late 1999 due competitive pricing factors international customers prior year increase gross margin percentages also due variations product types accessories sold 2001 compared 2000 increase revenues accessories typically carry higher margins 2001 added improvement eds product margins compared 2000 gross profit eds services 32 million 2001 increase 263 26 million 2000 gross margins eds services 337 2001 309 2000 increase gross profit primarily due higher eds service revenues 2001 compared 2000 increase eds service gross margin percentages primarily due variations types service revenue increased billed time materials services continued efforts maintain constant overhead costs greater installed base ctx systems 2001 compared 2000 increase gross margin percentages eds services also due revenues recorded 2001 services performed 2000 revenues services deferred prior year due uncertainty collection receivable end year revenues services recognized current year due collection receivable 2001 gross profit government contracts 35 million 2001 274 increase 28 million 2000 gross margins government contracts 214 2001 262 2000 increase gross profit primarily due higher government contract revenues 2001 compared 2000 partially offset decreased margins decrease gross margin percentages primarily due increased outside engineering services utilized landmines contract 2001 compared 2000 services typically carry lower margins gross profit wood products 34 million 2001 decrease 60 36 million 2000 gross margins wood products 346 2001 300 2000 decrease wood products gross profit primarily due lower revenues 2001 compared 2000 increase wood products gross margin percentages primarily due smaller portion revenues attributable machinery equipment typically carry lower margin system revenues 2001 compared 2000 gross profit wood services 819000 2001 increase 116 734000 2000 gross margins wood services 529 2001 482 2000 increase gross profit primarily due higher service revenues 2001 compared 2000 increase wood service gross margin percentages primarily due variations types services provided 2001 compared 2000 research development gross research development expenses eds 107 million 2001 increase 122 95 million 2000 research development contracts grants faa government agencies private entities funded 57 million gross research development expenses eds 2001 872000 2000 net research development expenses eds 50 million 2001 decrease 423 compared 86 million 2000 net research development expenses eds percentage eds revenues 108 2001 157 2000 increase gross research development expenses eds primarily due expanded efforts argus program 2001 compared 2000 decrease net research development expenses primarily due focused efforts argus development funded research development grants december 31 2001 backlog research development contracts grants 880000 representing remaining available funding argus program research development expenses quantum 759000 2001 increase 552 489000 2000 research development expenses quantum percentage quantum revenues 45 2001 2000 increase expenses primarily due internal costs incurred development commercialization products 2001 compared 2000 iportal 100 system research development expenses wood 23 million 2001 increase 177 19 million 2000 research development expenses wood percentage wood revenues 201 2001 143 2000 increase expenses primarily due increased efforts first half 2001 field trials research development log scanning system based ct technology optimize value harvested timber increase expenses percentage revenues due increase expenses 185 decrease wood product revenues selling general administrative selling general administrative expenses eds 86 million 2001 decrease 114 97 million 2000 selling general administrative expenses eds percentage eds revenues 186 2001 177 2000 decrease eds selling general administrative expenses primarily due efforts reduce selling general administrative spending levels first part 2001 compared 2000 primarily areas employee headcount travel entertainment professional services decrease also due reimbursement faa selling general administrative portion expenses related argus program 21 million 2001 compared 400000 2000 due expanded efforts argus development 2001 decreases partially offset increased external commission expense certain international sales representatives 2001 compared 2000 also due increases employee headcount bonuses consultants professional fees investor public relations incurred late 2001 anticipation greater demand eds products decrease eds selling general administrative expenses also partially offset approximately 373000 nonrecurring professional fees incurred latter part 2001 related possible acquisition longer pursued selling general administrative expenses quantum constant 23 million 2001 2000 selling general administrative expenses quantum percentage quantum revenues 138 2001 211 2000 decrease percentage revenues due efforts maintain selling general administrative spending levels expanded efforts government contract projects selling general administrative expenses wood 38 million 2001 decrease 164 46 million 2000 selling general administrative expenses wood percentage wood revenues 338 2001 339 2000 decrease selling general administrative expenses primarily due startup business development costs incurred 2000 newly formed woodvision division interest expense interest expense increased 289000 2001 195000 2000 interest expense resulted primarily debt financing associated working capital lines credit equipment term loans capital leases financing insurance premiums increase primarily due higher average debt balances year 2001 compared 2000 partially offset lower interest rates interest income net interest income net 570000 2001 compared 527000 2000 2001 amount consisted primarily interest income cash equivalents shortterm investments 297000 income net 273000 primarily reversal reserve due favorable outcome international claim partially offset foreign exchange losses 2000 amount consisted primarily interest income cash equivalents shortterm investments 917000 partially offset expense 390000 primarily net foreign exchange losses decrease interest income primarily due lower average cash balances lower interest rates balances year 2001 compared 2000 provision benefit income taxes recorded income tax benefit 46 million 2001 compared amounts recorded taxes 2000 fourth quarter 2001 determined deferred tax asset valuation allowance longer necessary based evaluation current evidence including among things passage transportation security act effect estimates future earnings well contracts customer orders entered fourth quarter 2001 accordingly reversed deferred tax asset valuation allowance 57 million fourth quarter 2001 offset provision 2001 income tax expense december 31 2001 federal net operating loss carryforwards approximately 50 million state net operating loss carryforwards approximately 11 million available reduce future federal state taxable income federal net operating loss carryforwards begin expire 2010 state net operating loss carryforwards expire 2011 tax credit carryforwards 13 million expire 2005 2021 related party transactions connection messrs blum turpen joining board directors 2001 directors received grant purchase 20000 shares common stock grants vested fouryear period february 2002 board directors amended grants cause vest oneyear period either mr blum mr turpen ceases director prior four years original date grant required take compensation charge equal difference fair market value common stock date amendment exercise price option multiplied number vested shares would vested option amended late september 2001 entered agreement donald co investment advisory services related potential acquisition fundraising activities considered alternatives chose donald co provide services time essence able react quickly meet business requirements based familiarity business stephen blum president donald co member board directors board approved agreement mr blum abstaining agreement donald co received 50000 cash retainer fullyvested warrant purchase 100000 shares common stock price 995 per share closing price common stock day prior date issuance board considered fee comparable alternatives given circumstances engagement warrant expires five years date issuance fair value warrant 650000 estimated date grant using blackscholes option pricing model following assumptions dividends riskfree interest rate 394 volatility 78 contractual life five years september 2002 issued 100000 shares common stock warrant however lieu paying cash shares 34153 shares valued 2913 per share returned us settle transaction shares recorded treasury stock allocated onehalf cash retainer warrant ongoing investment financial advisory services originally recorded current assets amortized oneyear term agreement recorded amortization expense 262000 2002 88000 2001 allocated remaining balance 350000 services provided connection followon offering april 2002 netted proceeds offering august 1996 january 1997 january 1999 entered consulting agreements bgi inc virginiabased international consulting firm assist us marketing eds products us government agreements agreed pay annual retainer bgi success fee payable 25 stock options november 2000 bgi agreed convert accrued stock portion accumulated success fees agreed cancel option purchase 6586 shares common stock consideration agreement us issue 20468 shares common stock bgi 2000 recorded consulting expenses 108000 common stock issued 9552 shares common stock 2001 issued remaining 10916 shares common stock 2002 march 1998 morris busby president controlling shareholder bgi elected board directors following ambassador busby’s election continued arrangement felt bgi continued provide needed services us comparable market rates paid consulting fees bgi 120000 2000 arrangement expired december 31 2000 noncash charges recorded noncash charges related grants stock options exercise prices fair market value date grant employees directors amounts 136000 2002 63000 2000 record noncash charges 2001 related grants stock options exercise prices fair value common stock date grant recorded noncash charges related grants warrant director stock options consultant amount 651000 2002 148000 2001 amounts recorded grants warrants stock options nonemployees 2000 recorded noncash charge related issuance common stock consultant amount 42000 2002 liquidity capital resources december 31 2002 1597 million cash equivalents compared 114 million december 31 2001 working capital 2271 million december 31 2002 compared 496 million december 31 2001 net cash provided operating activities 654 million 2002 compared 519000 2001 92 million used 2000 increase cash flows operations 2002 resulted primarily increase earnings approximately 708 million offset net decrease resulting changes operating assets liabilities approximately 149 million changes assets liabilities reflected longlead deposits delivery orders tsa resulting increase 819 million deferred revenues well increase accrued liabilities 502 million increase accounts payable 201 million however increases operating assets liabilities offset customer receivables processed late 2002 contributed 1184 million growth accounts receivable increases inventory 377 million prepayments 110 million including longlead inventory deposits 84 million cash flows operations 2001 resulted primarily increase earnings 93 million enhanced noncash items 38 million depreciation amortization year contributing factors improvement cash flows operations timing payments accounts payable 30 million income tax benefits employee stock transactions 22 million partially offset increases inventory 68 million accounts receivable 49 million net cash used operating activities 2000 resulted primarily increase accounts receivable 106 million contributing factors cash used operations net loss 18 million build increase 22 million inventory decrease upfront customer installment payments yearend resulting 30 million decrease deferred revenue net use cash operating activities partially offset increase 40 million accrued liabilities 38 million noncash effect depreciation amortization net cash used investing activities 29 million 2002 compared 42 million 2001 17 million provided investing activities 2000 net cash used investing activities 2002 resulted 47 million acquisitions capital equipment 183000 payment earnout former shareholders inovec accordance terms purchase agreement offset proceeds sale shortterm investments 19 million net cash used investing activities 2001 resulted 20 million purchases shortterm investments 19 million acquisitions capital equipment 267000 payment earnout former shareholders inovec accordance terms purchase agreement net cash provided investing activities 2000 primarily resulted 59 million sales shortterm investments partially offset 27 million acquisitions capital equipment cash payment 15 million purchase inovec net cash acquired net cash provided financing activities 859 million 2002 compared 31 million 2001 11 million 2000 net cash provided financing activities 2002 primarily resulted 878 million net proceeds sale common stock public employee stock purchase plan exercises stock options partially offset 17 million repayments shortterm debt net proceeds net cash provided financing activities 2001 primarily due 25 million proceeds sales employee stock purchase plan exercises stock options 10 million proceeds borrowings shortterm debt net payments partially offset 403000 repayments longterm debt net cash provided financing activities 2000 primarily due 890000 proceeds borrowings shortterm debt 669000 proceeds sales employee stock purchase plan exercises stock options partially offset 435000 repayments longterm debt effective july 2002 amended two line credit agreements silicon valley bank first agreement provides maximum borrowings amount 250 million second agreement partially guaranteed exportimport bank exim united states provides maximum borrowings amount lower sum 70 90 eligible eds export accounts receivable plus lower 1 70 eligible raw materials workinprocess inventory designated export customers 2 60 outstanding loans agreement b 100 million expect increase 150 million 2003 following approval increase guarantee exim borrowings agreements bear interest bank’s prime rate minus 05 375 december 31 2002 agreements expire july 2004 require eds segment maintain certain levels tangible net worth may use proceeds loans lines credit general corporate purposes december 31 2002 borrowings outstanding agreements however december 31 2002 outstanding guarantees customers issuance letters credit partial reserve 20 million secured lines credit foreign exchange contracts 10 reserve 35 million secured lines credit remaining available borrowing capacity lines credit 295 million december 31 2002 based eligible eds accounts receivable inventories date previously borrowed committed equipment line credit agreement silicon valley bank converted term loan draw borrowings secured assets purchased financed december 31 2002 outstanding 67000 term loan due june 2003 term loan bears interest bank’s prime rate plus 10 525 december 31 2002 august 2002 inovec renewed line credit agreement pacific continental bank agreement provides 15 million working capital line credit secured assets inovec agreement bears interest bank’s prime rate plus 10 interest rate floor 575 agreement expires august 2003 requires inovec maintain certain levels tangible net worth debtworth ratios inovec may use proceeds loans line credit general corporate purposes operations december 31 2002 inovec borrowings outstanding agreement contractual obligations commitments following table depicts contractual obligations december 31 2002 thousands december 31 2002 commitments 347 million foreign currency forward contracts used hedge existing receivables orders contracts expire within one year need provide euro currency forecasted customer receipts receive 347 million material obligations commitments obligations specified table commitments specified paragraph believe existing cash equivalents shortterm investments available borrowings lines credits funds expected generated operations sufficient finance working capital expenditure requirements least next twelve months however fail meet required financial covenants credit agreements receivables support upper limits credit agreements may able access funds agreements addition unable deliver eds units timely manner recent orders tsa fail adhere terms licensing agreement tsa may cancel orders place additional orders events occur capital resources would significantly impaired inflation impact inflation material operations cash flow liquidity date critical accounting policies estimates discussion analysis financial condition results operations based consolidated financial statements prepared conformity accounting principles generally accepted united states america preparation consolidated financial statements requires us make judgments estimates affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period base estimates historical experience various assumptions believe reasonable circumstances actual results may differ estimates different assumptions conditions following summarizes critical accounting policies significant estimates used preparing consolidated financial statements revenue recognition recognize revenues persuasive evidence arrangement exists delivery occurred services rendered price fixed determinable collectibility reasonably assured sales eds products faa tsa domestic customers demonstrated meet product specifications prior shipment recognize product revenues shipment defer portion revenues relating installation training services performed accepted customer deferred installation training revenues based fair value services generally represent less 5 arrangements installation generally completed within relatively short period time typically less one week consistent history completing routine installations obtaining customer acceptance domestic international sales airport installations require involved integration baggage handling systems essential functionality machine take longer routine installations integration services separately priced products sales agreements recognize service revenues agreements services performed sales eds products services customers foreign countries varying contractual terms governed part regulations foreign jurisdictions accordingly recognize revenue based specific facts circumstances surrounding transaction revenue recognition foreign sales affected determination legal title risk loss pass foreign customers well evaluation enforceable rights unbilled amounts balance sheet date transactions recognized revenues foreign sales eds products demonstrated meet product specifications prior shipment title risk loss pass customer shipment either enforceable claim balance sheet date remaining unbilled amounts ability invoice customer unbilled amounts fixed period time regardless whether installation completed recognize product revenue shipment defer recognize fair value installation training revenue services performed sales eds products foreign customers title risk loss eds products pass upon completion installation recognize product service revenues completion installation acceptance customer sales eds products foreign customers portion contract price withheld installation completed believe enforceable claim balance sheet date realize withheld amount defer recognize revenue greater portion contract price fair value installation training completion installation acceptance customer recognize revenues quantum government contracts inovec product sales automation control systems using percentageofcompletion method based costs incurred date percentage total estimated costs completion record provisions estimated losses contracts anticipated result losses completion contract percentageofcompletion method relies estimates total expected contract revenue costs use method revenue recognition since reasonably dependable estimates revenue costs applicable various stages contract made recognized revenues profit subject revisions contract progresses completion inventory purchases commitments made order build inventory meet future shipment schedules based forecasted demand products business environment operate subject rapid changes customer demand perform detailed assessment inventory segment period includes review among factors demand requirements product life cycle development plans component cost trends product pricing quality issues based analysis record adjustments inventory excess obsolescence impairment appropriate reflect inventory net realizable value revisions inventory adjustments may required actual demand component costs product life cycles differ estimates estimated costdown liability tsa delivery orders received faa tsa beginning april 2002 governed letter contract dated february 19 2002 contract specifies product prices reduced amount equal 75 actual bill material savings contract yet definitized accrued liability estimated amount material cost savings shared tsa estimate determined quantity product shipments tsa contract extended model 75 net decrease bill materials production units shipped estimated liability recorded reduction revenues contract definitized liability adjusted reflect agreed upon payments tsa anticipate contract definitized end second quarter 2003 accrued warranty reserves accrue estimated cost product warranties time revenues recognized engage extensive product quality programs processes including actively monitoring evaluating quality component suppliers warranty obligation affected actual warranty costs including usage material labor service delivery costs incurred correcting product failure actual material usage service delivery costs differ estimates revisions estimated warranty liability would required deferred tax asset valuation allowance record valuation allowance reduce deferred tax assets likely based upon currently available evidence factors realize portion deferred tax assets base determination need valuation allowance ongoing evaluation current evidence including among things estimates future earnings backlog customer orders expected timing deferred tax asset reversals charge credit adjustments valuation allowance income tax expense period determinations made determine would able realize deferred tax assets future excess net recorded amount adjustment deferred tax asset would increase income period determination made likewise determine would able realize part net deferred tax assets future would charge operations adjustment deferred tax asset period determination made valuation longlived assets including goodwill purchased intangible assets review property plant equipment goodwill purchased intangible assets impairment whenever events changes circumstances indicate carrying value asset may recoverable asset impairment review assesses fair value assets based future cash flows assets expected generate impairment loss recognized estimated discounted future cash flows expected result use asset plus net proceeds expected disposition asset less carrying value asset approach uses estimates future market growth forecasted revenue costs expected periods assets utilized appropriate discount rates evaluations impairment longlived assets including goodwill purchased intangible assets integral part limited strategic reviews business operations impairment identified carrying amount asset reduced estimated fair value deterioration business geographic region within business segment future could also lead impairment adjustments issues identified recently issued accounting standards accounting costs associated exit disposal activities june 2002 financial accounting standards board issued statement financial accounting standards 146 sfas 146 “accounting costs associated exit disposal activities” addresses accounting restructuring similar costs sfas 146 supersedes previous accounting guidance principally emerging issues task force eitf issue 943 adopted provisions sfas 146 restructuring activities initiated december 31 2002 sfas 146 requires liability costs associated exit disposal activity recognized liability incurred eitf issue 943 liability exit costs recognized date company’s commitment exit plan sfas 146 also establishes liability initially measured recorded fair value accordingly sfas 146 may affect timing recognizing future restructuring costs well amounts recognized accounting stockbased compensation december 2002 financial accounting standards board issued statement financial accounting standards 148 sfas 148 “accounting stockbased compensation transition disclosure amendment fasb statement 123” provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation addition sfas 148 amends disclosure requirements sfas 123 require prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method used reported results fourth quarter 2002 adopted amended disclosure requirements sfas 148 accounting disclosure requirements guarantees november 2002 financial accounting standards board issued fasb interpretation 45 fin 45 “guarantor’s accounting disclosure requirement guarantees including indirect guarantees indebtedness others” fin 45 requires upon issuance guarantee guarantor must recognize liability fair value obligation assumes guarantee disclosure provisions fin 45 effective financial statements interim annual periods end december 15 2002 provisions initial recognition measurement effective prospective basis guarantees issued modified december 31 2002 irrespective guarantor’s yearend yet determined impact adoption recognition provisions fin 45 results operations financial position revenue arrangements multiple deliverables november 2002 eitf reached consensus eitf issue 0021 eitf 0021 “revenue arrangements multiple deliverables” eitf 0021 addresses certain aspects accounting vendor arrangements vendor perform multiple revenue generating activities eitf 0021 effective fiscal periods beginning june 15 2003 yet determined impact adoption eitf 0021 results operations financial position item 7aitem 7 management’s discussion analysis financial condition results operations complete understanding financial condition results operations risks could affect future results see “businessrisk factors” item 1 section also read conjunction consolidated financial statements related notes item 8 overview leading provider transportation security administration tsa formerly federal aviation administration faa certified explosives detection systems eds used airports screening checked passenger baggage september 2003 completed private offering 1250 million aggregate principal amount 3 convertible senior notes due 2023 notes convertible common stock certain circumstances initial conversion rate 3125 shares per 1000 principal amount notes subject adjustment initial conversion rate notes convertible common stock conversion price 3200 per share notes redeemable cash option beginning october 1 2008 holders notes option require us purchase notes cash whole part october 1 2008 2013 2018 holders notes also ability require us purchase notes event undergo change control case redemption purchase price would 100 principal amount notes plus accrued unpaid interest excluding redemption purchase date case may march 31 2003 completed acquisition yxlon international holding gmbh 417 million cash calculated effective conversion rate euro incurred additional acquisition costs 21 million paid subsequent purchase price adjustment 483000 december 2003 total purchase price 443 million yxlon develops manufactures markets supports xray based nondestructive testing ndt systems wide range industrial applications systems use xray based diffraction xrd technology explosives detection would make additional payment ¬50 million yxlon’s xrd system certified explosives detection tsa june 30 2004 august 1 2003 completed acquisition hattinger pruf und entwicklungs gmbh hapeg engineering systems company provides industrial testing evaluation solutions utilizing computed tomography ¬29 million 34 million cash calculated effective conversion rate euro goodwill intangible assets increased 339 million 16 million december 31 2002 355 million december 31 2003 primarily result 317 million goodwill intangible assets acquired pursuant acquisition yxlon partially offset amortization intangible assets based independent valuation intangible assets acquired included 87 million developed core technology 28 million trademarks 187 million goodwill 15 million intangible assets determine segments based chief executive officer chief operating officer assess performance allocate resources first quarter 2003 presented segment information based three reportable segments eds quantum wood result acquisition yxlon two reportable segments eds ndt “eds” segment comprised business unit engaged development manufacturing marketing support explosives detection systems based advanced computed tomography technology “ndt” segment comprised yxlon business unit engaged development manufacturing marketing support nondestructive testing systems wide range industrial applications segments including quantum wood xrd aggregated form “all other” category meet threshold reportable segment see note 11 consolidated financial statements additional information reportable segments result completion initial deployment following september 11 2001 terrorist attacks time takes construct modifications retrofit airports accommodate inline eds equipment market many products period transition demand significant portion products also subject budgetary process federal government anticipate decline eds revenues 2004 result planning reduce costs ability reduce costs critical maintaining gross margins desired level earnings due number factors including timing size mix orders relatively small number customers particularly tsa revenues varied significantly time expect trend continue addition substantial components quarterly annual operating expenses continue relatively fixed nature means revenue fluctuations cause quarterly annual operating results vary substantially ability increase operating efficiency reduce costs components otherwise control costs period declining sales business already characterized significant fluctuations volume difficult predict revenues primarily comprised • eds product revenues include revenues sales ctx products accessories related installation configuration eds service revenues include revenues maintenance contracts related product support integration services including complex integrations configurations separate product revenues • ndt product revenues include revenues design assembly installation xray systems associated components industrial ndt service revenues include revenues maintenance contracts related product support market products services directly internal sales personnel indirectly authorized agents distributors system integrators united states market products services primarily direct sales personnel internationally use direct sales force authorized representatives sell products international sales represented 290 total revenues year ended december 31 2003 117 total revenues year ended december 31 2002 325 total revenues year ended december 31 2001 eds given fiscal quarter year eds product revenues derived orders multiple units products limited number customers example 2003 eighteen customers accounted eds products sold number customers vary widely period therefore cancellation delay order customer could significant negative impact operations given period eds product service sales faa following formation tsa accounted 779 eds revenues year ended december 31 2003 856 eds revenues year ended december 31 2002 434 eds revenues year ended december 31 2001 eds customers accounted 10 total revenues years ended december 31 2003 2002 2001 typically bill customers three stages generally provided contracts customers • amounts cover bill materials received suppliers typically 30 40 total system price • additional amount upon factory acceptance shipment ranging 30 60 • balance upon installation site acceptance ranging 5 30 payment terms generally provide necessary working capital acquisition materials funding inventory manufacturing cycle anticipate potential future orders tsa continue provide payment terms provide necessary working capital us suppliers even production volumes rapidly increase future orders tsa contain different payment terms major increase production rates may require substantial additional working capital payment terms tsa invoices net 30 days terms international invoices vary amounts due upon receipt invoice 160 days ndt product service revenues primarily derived sales xray based ndt products primarily automotive aerospace industries ndt customers accounted 10 total revenues since acquisition yxlon march 31 2003 results operations following table sets forth certain income expenditure items consolidated statements operations expressed percentage total revenues periods indicated march 31 2003 first day second quarter acquired yxlon’s results included results since acquisition date operating results ndt segment also included last three quarters 2003 comparison fiscal years 2003 2002 revenues eds product revenues 3030 million 2003 decrease 248 4031 million 2002 revenue decrease mainly due fulfillment end second quarter 2003 several large orders received tsa 2002 anticipate eds product revenues continue decline 2004 decline revenues primarily driven greater demand inline eds compared standalone eds result completion initial deployment following september 11 2001 terrorist attacks time takes construct modifications retrofit airports accommodate inline eds equipment eds service revenues 412 million 2003 increase 1995 137 million 2002 revenue increase results primarily larger number units installed united states services provided eds products owned tsa united states territories including extendedhour service anticipate service revenues increase 2004 compared 2003 primarily due larger installed based eds coming warranty december 31 2003 backlog eds equipment orders service agreements 656 million primarily consisting orders eds systems services international customers negotiations renew contract service eds products owned tsa united states territories anticipate disruption service result discussions ndt product revenues 346 million ninemonth period since acquisition yxlon ndt service revenues 87 million period december 31 2003 backlog ndt equipment orders service agreements 216 million primarily consisting orders standard industrial custom ndt systems gross profit cost eds product revenues primarily consists purchased materials procured use assembly products well manufacturing labor overhead contract manufacturing services installation training warranty cost eds service revenues primarily consists direct labor materials customer support overhead given period gross profit products services may affected several factors including product mix volume systems manufactured period product configuration location installation complexity integration various environments gross profit eds products 1351 million 2003 decrease 224 1743 million 2002 gross margin percentages eds products 446 2003 432 2002 decrease gross profit due decreased sales ctx products product gross margin percentages year remained approximately primarily result improved manufacturing overhead per unit offset decreases sales price result volume orders tsa gross profit eds services 169 million 2003 increase 3346 39 million 2002 gross margin percentages eds services 410 2003 282 2002 increase gross profit eds services primarily due increased eds service revenues growing installed base domestic systems covered agreement service eds products owned tsa united states territories calls extended 24hour coverage beyond standard warranty coverage service agreements international customers gross margin percentages improved primarily result service overhead costs spread larger base installed units addition 2002 incurred costs associated expansion customer support staff anticipation increase eds services units sold cost ndt product revenues primarily consists purchased materials procured use assembly products well manufacturing labor overhead installation training warranty cost ndt services revenues primarily consists direct labor materials customer support overhead gross profit ndt products 79 million ninemonth period since acquisition yxlon gross margin percentage ndt products 228 period process developing parts cost reduction programs ndt believe programs improve gross margins ndt products commencing third quarter 2004 although anticipated improvements may reduced due exchange rate fluctuations gross profit ndt service 32 million ninemonth period since acquisition yxlon gross margin percentage ndt services 370 period anticipate meaningful changes gross margin ndt services 2004 research development research development expenses consist primarily compensation paid personnel engaged research development activities amounts paid outside services costs materials utilized development hardware products including prototype units research development expenditures partially offset amounts reimbursed tsa government agencies private entities research development contracts grants services provided reimbursed cost basis net research development expenses eds 204 million 2003 increase 158 177 million 2002 net numbers reflect amounts reimbursed tsa government agencies 31 million 2003 566000 2002 net research development expenses eds percentage eds revenues 59 2003 42 2002 increase research development expenses eds 2003 primarily due increased spending several initiatives support growth partially offset receipt 31 million government funding research projects goal 100 checked baggage screening us airports expect eds machines operated near capacity extended periods continuing invest sustaining engineering efforts ensure products achieve high levels serviceability reliability operating capacity although anticipate amounts spent sustaining engineering efforts decrease 2004 also continuing develop product enhancements existing line eds machines addition continuing development ctx 1000 system argus program faasponsored program designed develop smaller lowcost eds product scan checked baggage small airports lowtraffic stations within larger airports research development expenses ndt 24 million ninemonth period since acquisition yxlon research development expenses ndt percentage ndt revenues 56 period order strengthen role world leading supplier xray solutions ndt applications plan increase research development expenses ndt 2004 selling general administrative selling general administrative expenses consist primarily compensation paid direct indirect sales marketing personnel administrative personnel including directors consultant fees professional service fees insurance costs travel selling distribution costs general expenses selling general administrative expenses eds 268 million 2003 increase 92 246 million 2002 selling general administrative expenses eds percentage eds revenues 78 2003 59 2002 increase selling general administrative expenses eds absolute dollars 2003 primarily due increase headcount employeerelated expenses 2003 compared prior year selling general administrative expenses ndt 119 million ninemonth period since acquisition yxlon selling general administrative expenses ndt percentage ndt revenues 274 period anticipate selling general administrative expenses percentage ndt revenues decline 2004 due expected increase ndt sales volume compared 2003 interest expense interest expense 17 million 2003 399000 2002 interest expense resulted primarily issuance 1250 million convertible senior notes september 2003 along fees associated working capital lines credit equipment term loans capital leases financing insurance premiums interest expense associated long term debt interest income net interest income net 39 million 2003 38000 2002 amount 2003 consisted interest income cash equivalents shortterm investments 21 million income 18 million including net 15 million foreign exchange gain amount 2002 consisted primarily interest income cash equivalents 19 million offset expenses 19 million primarily consisting 12 million net foreign exchange losses primarily related foreign exchange contracts entered advance adopting hedge accounting may 2002 contingent settlement amount 700000 increase interest income cash equivalents shortterm investments part due interest proceeds received september 2003 offering 3 convertible senior notes due 2023 also anticipate lead increase interest income 2004 provision income taxes provision income taxes 419 million 2003 539 million 2002 effective tax rate 424 2003 408 2002 increase effective tax rates 2003 compared 2002 mainly due 43 million expense inprocess research development associated acquisition yxlon’s xray diffraction business tax deductible effective tax rate different statutory tax rates primarily due inprocess research development expense described along certain permanent differences book taxable income expect effective tax rate reduced limited extent future years december 31 2003 federal state foreign net operating loss carryforwards approximately 12 million 321000 158 million available reduce future federal state foreign taxable income respectively federal net operating loss carryforwards begin expire 2010 state net operating loss carryforwards expire 2011 foreign net operating loss carryforwards may carried indefinitely expire tax benefit net operating loss carryforwards may limited due impact tax reform act 1986 events may cause tax benefit limited include limited cumulative stock ownership change 50 threeyear period timing utilization various tax benefits carried forward comparison fiscal years 2002 2001 revenues eds product revenues 4031 million 2002 increase 1004 365 million 2001 increase system sales related accessories reflects orders received faa tsa 2002 well international customers late 2001 2002 resulting increased focus aviation security following terrorist attacks september 11 2001 increase eds product revenues slightly offset volume discounts eds service revenues 137 million 2002 increase 434 96 million 2001 increase service revenues result signing agreement siemens retroactive november 2002 service eds units owned faa tsa united states territories service contract revenues international customers new support maintenance agreements ctx products warranty periods expired year gross profit gross profit eds products 1743 million 2002 increase 1125 142 million 2001 gross margins eds products 432 2002 390 2001 addition significant tsa shipments 2002 improvement eds product gross profit partially due amounts reimbursable tsa ramp costs consist consulting expenses vendor expedite charges subcontractor manufacturing setup costs totaling 110 million amount reimbursable elements ramp costs would expensed overall improvement product gross profit partially offset 53 million inventory write downs accrued vendor cancellation fees 2002 anticipation receiving additional tsa orders ctx 5500 ds model purchased made commitments purchase large quantities critical components build ctx 5500 ds machines anticipated tsa orders largely replaced orders ctx 9000 dsi model yearend ctx 5500 ds raw material inventory levels excess anticipated requirements accordingly wrote portion ctx 5500 ds inventory accrued cancellation fees taken together totaled 53 million 2002 improvement eds product gross margin percentages primarily due lower manufacturing overhead per unit resulting larger increase units produced relative increase fixed costs 2002 gross profit eds services 39 million 2002 increase 202 32 million 2001 gross margins eds services 282 2002 337 2001 decrease gross margin percentages primarily due need increase eds customer support overhead costs necessary support increasing installed base eds units product sales initially covered support services warranty approximately 15 18 month time lag shipment recognizing significant service contract revenue tied increased sales eds products however eds product customer obligated purchase support services us warranty period additional service contract revenues assured product sales increased support costs immediate service revenue recent product sales primary reason lower gross margin 2002 compared 2001 research development gross research development expenses eds 182 million 2002 increase 709 107 million 2001 gross research development expenses eds percentage eds revenues 44 2002 231 2001 net research development expenses eds 177 million 2002 increase 2548 compared 50 million 2001 net research development expenses eds percentage eds revenues 42 2002 108 2001 increase gross research development expenses eds primarily due increased focus several initiatives support growth increase net research development expenses eds primarily due quantum’s development upgrade ctx family explosives detection systems utilizing qr less funding received argus grant current year compared prior year decrease gross net research development expenses eds percentage revenues primarily due significant increase revenues selling general administrative selling general administrative expenses eds 246 million 2002 increase 1860 86 million 2001 selling general administrative expenses eds percentage eds revenues 59 2002 186 2001 part increase expenses eds result increase expenditures consultants professional fees 45 million investigations relating potential acquisitions investor public relations employee headcount 33 million insurance costs 22 million sales commissions 21 million related growth business compared prior year decrease selling general administrative expenses eds percentage revenues primarily due increase eds revenues interest expense interest expense increased 399000 2002 289000 2001 increase interest expense primarily due increased activities within financing insurance premiums increased activities within lines credit standby letters credit issued secure guarantees customers 2002 compared 2001 interest income net interest income net 38000 2002 compared 570000 2001 2002 amount consists interest income cash equivalents shortterm investments 19 million offset expenses 19 million primarily consisting 12 million net foreign exchange losses primarily related foreign exchange contracts entered advance adopting hedge accounting may 2002 contingent settlement amount 700000 2001 amount consists primarily interest income cash equivalents shortterm investments 297000 income net 273000 primarily reversal reserve due favorable outcome international claim partially offset foreign exchange losses provision benefit income taxes recorded income tax provision 539 million 2002 compared income tax benefit 46 million 2001 december 31 2002 federal state net operating loss carryforwards approximately 18 million 321000 respectively available reduce future federal state taxable income federal net operating loss carryforwards begin expire 2010 state net operating loss carryforwards expire 2011 tax benefit net operating loss carryforwards may limited due impact tax reform act 1986 events may cause tax benefit limited include limited cumulative stock ownership change 50 threeyear period timing utilization various tax benefits carried forward liquidity capital resources december 31 2003 2769 million cash equivalents shortterm investments compared 1597 million cash equivalents december 31 2002 net cash provided operating activities 514 million 2003 compared 654 million provided operating activities 2002 cash provided operating activities 2003 primarily resulted significant accounts receivable collections tsa resulting 1006 million decrease accounts receivable significant items include net income 569 million enhanced noncash effects 59 million depreciation amortization 43 million inprocess research development expense related yxlon acquisition partially offsetting increases net cash provided operating activities 798 million decrease deferred revenue primarily due shipment units tsa deposits received prior periods longlead shipments 624 million decrease accounts payable accrued liabilities also contributed decreasing net cash provided operating activities cash provided operating activities 2002 primarily resulted 819 million increase deferred revenues consisting primarily longlead deposits delivery orders tsa 703 million increase accounts payable accrued liabilities net income 783 million enhanced 92 million effect income tax benefits employee stock transactions 36 million noncash effect depreciation amortization partially offset 1184 million increase accounts receivable 377 million increase inventories 110 million increase current assets primarily consisting 83 million prepaid inventory purchases 16 million ramp costs recovered tsa 10 million recoverable valueadded tax net cash used investing activities 1452 million 2003 compared 29 million 2002 net cash used investing activities 2003 resulted primarily purchase shortterm investments 947 million payments 423 million net cash acquired connection yxlon acquisition addition net cash uses 33 million acquisition capital equipment 15 million payment equity investment product distribution rights safeview inc company developing advanced personnel screening portal system 34 million hapeg acquisition net cash used investing activities 2002 resulted primarily 47 million purchases capital equipment offset proceeds sale shortterm investments 19 million net cash provided financing activities 1158 million 2003 compared 859 million 2002 net cash provided financing activities 2003 primarily resulted issuance 1250 million convertible senior debt offset related debt issuance costs 45 million stock repurchase 125 million addition 35 million net proceeds shortterm borrowings 46 million net proceeds sale common stock employee stock purchase plan exercises stock options net cash provided financing activities 2002 primarily resulted 878 million net proceeds sale common stock public employee stock purchase plan exercises stock options partially offset 19 million repayments longterm shortterm debt net proceeds effective december 2003 line credit agreement us operations provides maximum borrowings amount 300 million borrowings agreement bear interest bank’s prime rate minus 05 35 december 31 2003 agreement expires december 2005 require eds segment maintain certain levels tangible net worth may use proceeds loans line credit general corporate purposes december 31 2003 borrowings outstanding agreements however december 31 2003 outstanding guarantees customers issuance letters credit partial reserve 170 million secured lines credit foreign exchange contracts 10 reserve 17 million secured lines credit remaining available borrowing capacity line credit 113 million december 31 2003 december 31 2003 letters credit totaling 170 million guarantees primarily customers performance delivery commitments foreign creditors subsidiary entities addition one guarantee insurance carrier premium payment commitments guarantees range two months nine years december 31 2003 expiration december 31 2003 two primary sources financing german banks yxlon first agreement line credit provides maximum borrowings amount 66 million 83 million december 31 2003 second agreement also line credit provides maximum borrowings amount 52 million 66 million december 31 2003 expiration date agreements march 2004 borrowings agreements bear interest rate 575 december 31 2003 debt balances 53 million outstanding agreements addition december 31 2003 outstanding guarantees customers issuance letters credit reserve 39 million secured lines credit therefore remaining available borrowing capacity lines credit approximately 45 million 57 million december 31 2003 contractual obligations commitments following table depicts contractual obligations december 31 2003 thousands december 31 2003 commitments 173 million foreign exchange forward contracts used hedge existing receivables orders contracts expire within one year need provide euro currency forecasted customer receipts receive 173 million material obligations commitments obligations specified table commitments specified paragraph believe existing cash equivalents shortterm investments available borrowings lines credits funds expected generated operations sufficient finance working capital expenditure requirements least next twelve months however fail meet required financial covenants credit agreements receivables support upper limits credit agreements may able access funds agreements addition unable deliver eds units timely manner recent orders tsa fail adhere terms licensing agreement tsa may cancel orders place additional orders events occur capital resources would significantly impaired inflation impact inflation material operations cash flow liquidity date critical accounting policies estimates discussion analysis financial condition results operations based consolidated financial statements prepared conformity accounting principles generally accepted united states america preparation consolidated financial statements requires us make judgments estimates affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period base estimates historical experience various assumptions believe reasonable circumstances actual results may differ estimates different assumptions conditions following summarizes critical accounting policies significant estimates used preparing consolidated financial statements revenue recognition recognize revenues persuasive evidence arrangement exists delivery occurred services rendered price fixed determinable collectibility reasonably assured sales eds products tsa demonstrated meet product specifications prior shipment recognize product revenues shipment defer portion revenues relating installation training services performed accepted customer deferred installation training revenues based fair value services generally represent less 5 arrangements installation generally completed within relatively short period time typically less one week consistent history completing routine installations obtaining customer acceptance domestic international sales airport installations require involved integration baggage handling systems take longer routine installations integration services separately priced products sales agreements recognize service revenues agreements services performed sales eds ndt products services customers foreign countries varying contractual terms governed part regulations foreign jurisdictions accordingly recognize revenue based specific facts circumstances surrounding transaction revenue recognition foreign sales affected determination legal title risk loss pass foreign customers well evaluation enforceable rights unbilled amounts balance sheet date transactions recognized revenues foreign sales eds ndt products demonstrated meet product specifications prior shipment title risk loss pass customer shipment either enforceable claim balance sheet date remaining unbilled amounts ability invoice customer unbilled amounts fixed period time regardless whether installation completed recognize product revenue shipment defer recognize fair value installation training revenue services performed sales eds ndt products foreign customers title risk loss products pass upon completion installation recognize product revenues completion installation acceptance customer sales eds ndt products foreign customers portion contract price withheld installation completed believe enforceable claim balance sheet date realize withheld amount defer recognize revenue greater portion contract price fair value installation training completion installation acceptance customer inventory purchases commitments made order build inventory meet future shipment schedules based actual forecasted demand products business environment operate subject rapid changes customer demand perform detailed assessment inventory segment period includes review among factors demand requirements product life cycle development plans component cost trends product pricing quality issues based analysis may record write inventory excess obsolescence impairment appropriate reflect inventory net realizable value accrued warranty reserves accrue estimated cost product warranties time revenues recognized engage extensive product quality programs processes including actively monitoring evaluating quality component suppliers warranty obligation affected actual warranty costs including usage material labor service delivery costs incurred correcting product failure actual material usage service delivery costs differ estimates revisions estimated warranty liability would required deferred tax asset valuation allowance record valuation allowance reduce deferred tax assets likely based upon currently available evidence factors realize portion deferred tax assets base determination need valuation allowance ongoing evaluation current evidence including among things estimates future earnings backlog customer orders expected timing deferred tax asset reversals charge credit adjustments valuation allowance income tax expense period determinations made determine would able realize deferred tax assets future excess net recorded amount adjustment deferred tax asset would increase income period determination made likewise determine would able realize part net deferred tax assets future would charge operations adjustment deferred tax asset period determination made valuation longlived assets including goodwill purchased intangible assets review property plant equipment goodwill purchased intangible assets impairment whenever events changes circumstances indicate carrying value asset may recoverable asset impairment review assesses fair value assets based future cash flows assets expected generate impairment loss recognized estimated discounted future cash flows expected result use asset plus net proceeds expected disposition asset less carrying value asset approach uses estimates future market growth forecasted revenue costs expected periods assets utilized appropriate discount rates evaluations impairment longlived assets including goodwill purchased intangible assets integral part limited strategic reviews business operations impairment identified carrying amount asset reduced estimated fair value deterioration business geographic region within business segment future could also lead impairment adjustments issues identified recently issued accounting standards revenue arrangements multiple deliverables november 2002 emerging issues task force eitf reached consensus issue 0021 “revenue arrangements multiple deliverables” eitf 0021 eitf 0021 addresses certain aspects accounting vendor arrangements vendor perform multiple revenue generating activities eitf 0021 effective fiscal periods beginning june 15 2003 impact adoption eitf 0021 consolidated financial statements accounting disclosure requirements guarantees december 2002 adopted financial accounting standards board fasb interpretation 45 “guarantor’s accounting disclosure requirement guarantees including indirect guarantees indebtedness others” fin 45 fin 45 requires upon issuance guarantee guarantor must recognize liability fair value obligation assumes guarantee provisions initial recognition measurement effective prospective basis guarantees issued modified december 31 2002 irrespective guarantor’s yearend adopted disclosure requirements fin 45 fourth quarter 2002 adoption fin 45 materially impact consolidated financial statements accounting costs associated exit disposal activities january 1 2003 adopted sfas 146 “accounting costs associated exit disposal activities” sfas 146 addresses accounting restructuring similar costs sfas 146 supersedes previous accounting guidance principally eitf issue 943 eitf 943 sfas 146 requires liability costs associated exit disposal activity recognized liability incurred eitf 943 liability exit costs recognized date company’s commitment exit plan sfas 146 also establishes liability initially measured recorded fair value accordingly sfas 146 may affect timing recognizing future restructuring costs well amounts recognized effect consolidated financial statements adoption sfas 146 consolidation variable interest entities fasb issued interpretation 46 “consolidation variable interest entities” fin 46 january 2003 revised interpretation fin 46 fin 46r december 2003 fin 46 requires certain variable interest entities vies consolidated primary beneficiary entity equity investors entity characteristics controlling financial interest sufficient equity risk entity finance activities without additional subordinated financial support parties provisions fin 46 effective immediately arrangements entered january 31 2003 since january 31 2003 invested entities believes variable interest entities primary beneficiary arrangements entered january 31 2003 required continue apply fin 46 end first quarter fiscal 2004 required adopt provisions fin 46r arrangements second quarter fiscal 2004 arrangements entered prior february 1 2003 required adopt provisions fin 46r second quarter fiscal 2004 expect adoption fin 46r impact consolidated financial statements accounting derivative instruments hedging activities april 2003 fasb issued sfas 149 “amendment statement 133 derivative instruments hedging activities” sfas 149 sfas 149 amends clarifies accounting derivative instruments including certain derivative instruments embedded contracts hedging activities sfas 133 sfas 149 generally effective contracts entered modified june 30 2003 hedging relationships designated june 30 2003 impact adoption sfas 149 consolidated financial statements accounting financial instruments characteristics liabilities equity may 2003 fasb issued sfas 150 “accounting certain financial instruments characteristics liabilities equity” sfas 150 requires certain financial instruments presented liabilities previously presented equity temporary equity instruments include mandatory redeemable preferred common stock certain options warrants sfas 150 effective financial instruments entered modified may 31 2003 effective beginning first interim period beginning june 15 2003 november 2003 fasb issued fasb staff position 1503 “effective date disclosures transition mandatorily redeemable financial instruments certain nonpublic entities certain mandatorily redeemable noncontrolling interests sfas 150” fsp 1503 defers effective date various provisions sfas 150 adoption sfas 150 modified fsp 1503 material impact consolidated financial statements revenue recognition december 2003 sec staff issued staff accounting bulletin 104 “revenue recognition corrected copy” sab 104 revises rescinds portions revenue recognition interpretive guidance included staff accounting bulletin codification make consistent current authoritative accounting auditing guidance sec rules regulations principal revisions relate revenue recognition guidance longer necessary due developments us gaap sab 104 also rescinds frequently asked questions answers document issued conjunction release staff accounting bulletin 101 adoption sab 104 materially impact consolidated financial statements item 7aitem 7 managements discussion analysis financial condition results operations item 8item 7 managements discussion analysis financial condition results operations discussion contains forwardlooking statements involve risks uncertainties used annual report form 10k words anticipate believe estimate expect similar expressions identify forwardlooking statements companys actual results performance achievements could differ materially results expressed implied forwardlooking statements factors could cause contribute differences include •risks related market acceptance companys products •fluctuations companys quarterly annual operating results •the loss orders companys products failure obtain additional orders •loss companys major suppliers •intense competition •reliance customers large orders •risks related lengthy sales cycles companys products •budgeting limitations companys customers prospective customers •risks inherent development production new products new applications certification certain products •risk certification competitors products •risk orders backlog canceled •those factors discussed item 1 business risk section thereof elsewhere annual report form 10k overview invision technologies inc company brings market advanced detection inspection products adapting various medical laboratory technologies government commercial uses security defense process control company reports financial information three segments explosive detection systems eds qauntum wood based types technology applications eds company develops manufactures markets supports explosive detection systems civil aviation security based advanced computed tomography ct technology companys products first automated explosive detection systems certified federal aviation administration faa meeting stringent requirements company sold 231 systems faa foreign aviation security agencies domestic foreign airports airlines quantum company whollyowned subsidiary quantum magnetics inc quantum develops commercialization patented proprietary technology inspection detection analysis explosives materials quantums products based passive magnetic sensing technology quadrupole resonance qr technology form magnetic resonance quantum receives grants variety us government agencies research development landmine detection carryon luggage screening concealed weapon detection drug detection inprocess materials inspection wood february 2000 company announced formation woodvision division woodvision develop companys ct technology optimize value yield harvested timber previous studies indicated ct technology applied see inside log sawn company believes market product exists connection formation woodvision company acquired whollyowned subsidiary inovec inc inovec effective january 1 2000 inovec manufactures markets supports advanced optimization equipment sawmills based laser scanning optimization technologies since inception inovec installed 600 laser scanners optimization systems 300 sawmills worldwide transaction accounted purchase accordingly results operations inovec included consolidated financial statements year ended december 31 2000 research development company considers research development vital part operating discipline continues dedicate substantial resources research development december 31 2000 company 132 fulltime employees engaged research development product development activities 47 eds 49 quantum 36 wood company also using services 16 specialized contract employees consultants area years ended december 31 2000 1999 1998 company spent 119 million 112 million 129 million respectively research development activities 09 million 07 million 36 million respectively funded faa agencies development contracts grants company backlog grants 67 million eds research development primarily development argus faasponsored program designed develop lowcost automated explosive detection system scan checked baggage small airports lowtraffic stations within larger airports company also expended significant efforts development new wood scanning products 2000 expects continue investing heavily development products future revenues companys eds product revenues principally consisted company believes continue consist orders multiple units limited number customers number individual customers may vary period company nevertheless dependent upon multiple orders substantial portion revenues company cannot assure obtain multiple orders consistent basis years ended december 31 2000 1999 1998 308 million 371 million 379 million respectively generated eds sales companys largest customer faa representing 389 635 538 respectively companys total revenues significant customers accounted 10 companys total revenues 2000 1999 1998 company markets products services directly internal sales personnel indirectly authorized agents distributors systems integrators united states company markets products services primarily direct sales personnel internationally company utilizes direct sales force authorized agents sell products years ended december 31 2000 1999 1998 international sales represented 262 147 302 respectively companys total revenues sales cycle companys ctx product line often lengthy due protracted approval process typically accompanies large capital expenditures time required manufacture install integrate product typically nine twelve months may elapse new customers initial evaluation companys product line execution contract another three months year may elapse prior shipment product customer site prepared system manufactured period company expends substantial funds management resources recognizes associated revenue company recognizes eds product revenue upon shipment unless extended acceptance criteria exist case revenue recognized upon achievement acceptance criteria company typically requires customer deposits advance shipment customer purchase orders provision estimated installation training warranty costs recorded time revenue recognized adjusted periodically based historical anticipated experience products typically carry oneyear warranty company recognizes eds service revenue service maintenance contracts ratably term agreements integration services performed companys government contract revenue substantially derived quantum activities performed us government contracts typically form costplusfixedfee firmfixedprice awards company recognizes revenue contracts using percentageofcompletion method based costs incurred date percentage total estimated costs completion company recognizes wood product revenues sale control automation systems inovec subsidiary using percentageofcompletion method based costs incurred date percentage total estimated costs completion results operations following table sets forth certain income expenditure items companys consolidated statements operations expressed percentage total revenues periods indicated comparison fiscal years 2000 1999 revenues companys revenues primarily comprised eds product revenues include revenues sales ctx systems related accessories installation configuration eds service revenues include revenues maintenance contracts related product support integration services ii quantum government contract revenues include revenues primarily research development contracts utilizing qr passive magnetic technologies government agencies private entities iii wood product revenues sales control automation systems material processing equipment primarily wood products industry related accessories installation configuration wood service revenues maintenance contracts related product support integration services eds product revenues 465 million 2000 increase 81 430 million 1999 increase primarily attributable system shipments sales companys higher priced ctx 9000dsi system 2000 eds service revenues 83 million increase 807 46 million 1999 increase service revenues primarily due increased service contract revenue new support maintenance agreements ctx systems warranty periods expired year company typically ships backlog orders products december 31 2000 company backlog eds equipment orders service agreements 81 million primarily consisting service agreements additionally first quarter 2001 company received orders valued approximately 105 million faa international customer multiple explosive detection systems accessories service quantums government contract revenues 106 million 107 million 2000 1999 respectively revenues relatively flat 2000 compared 1999 reflecting increase efforts development landmine detection technologies 2000 offset decrease types development efforts government contracts grants completed december 31 2000 company quantum government contract backlog approximately 236 million primarily development landmine detection technologies wood product revenues service revenues 119 million 15 million 2000 respectively revenues primarily attributable revenues inovec subsidiary acquired effective date january 1 2000 december 31 2000 company backlog inovec equipment orders service agreements 18 million first quarter 2001 company received orders valued approximately 22 million laserbased optimization scanning systems lumber manufacturing woodvision still developing ct based log scanner revenues backlog december 31 2000 gross profit cost eds product revenues primarily consists purchased materials procured use assembly companys products well manufacturing labor overhead warranty cost eds service revenues primarily consists direct labor materials customer support overhead given period companys gross profit products services may affected several factors including revenue mix volume systems manufactured given period product configuration location installation complexity integration various environments gross profit eds products 158 million 2000 decrease 133 182 million 1999 gross margins eds products 2000 1999 339 423 respectively decrease gross profit primarily due lower margins sale ctx 9000 systems 2000 primarily due competitive pricing factors international customers higher manufacturing costs related initial production process ctx 9000 systems gross profit eds services increased 26 million 2000 09 million 1999 gross margins eds services 309 197 respectively increase gross profit primarily due increased service contract revenue new support maintenance agreements ctx systems warranty periods expired year cost quantum government contract revenues primarily consists direct labor purchased materials subcontract labor applicable overhead required support government funded activities gross profit government contracts 28 million 2000 58 decrease 30 million 1999 gross margins 262 276 respectively decrease gross profit primarily due change mix types services materials carry different margins 2000 compared 1999 gross profit wood product revenues service revenues 36 million 07 million 2000 respectively gross margins wood products services 2000 1999 300 482 respectively gross profit primarily generated inovec product service revenues year research development research development expenses consist primarily compensation paid personnel engaged research development activities amounts paid outside services costs materials utilized development hardware products including prototype units research development expenditures company partially offset amounts reimbursed faa government agencies private entities research development contracts grants services provided cost basis gross research development expenses 119 million 2000 increase 68 112 million 1999 amounts 2000 1999 09 million 07 million respectively funded research development contracts grants faa government agencies private entities net research development expenses 110 million 2000 increase 57 compared 104 million 1999 percentage revenues net research development expenses 139 179 2000 1999 respectively increase gross research development expenses primarily due engineering services materials labor costs incurred development woodvision products also due expenses incurred companys newly acquired subsidiary inovec increases partially offset reduced expenses incurred quantum resources expended research development efforts funded government contracts grants less incurred internal research development activities decrease percentage revenues primarily due higher revenues 2000 compared prior year december 31 2000 company backlog research development contracts grants 67 million selling general administrative selling general administrative expenses consist primarily compensation paid direct indirect sales marketing personnel administrative personnel including directors consultant fees professional service fees insurance travel selling distribution costs general expenses selling general administrative expenses 166 million 2000 increase 407 118 million 1999 percentage total revenues selling general administrative expenses 209 201 2000 1999 respectively increase selling general administrative expenses primarily result startup operating costs woodvision amortization expense 07 million goodwill intangibles acquired purchase inovec also expenses incurred inovec 2000 interest expense interest expense decreased 195000 2000 227000 1999 interest expense 2000 1999 resulted primarily debt financing associated companys working capital lines credit equipment term loans capital leases decrease primarily due lower average debt balances 2000 compared 1999 interest income expense net interest income expense net decreased 527000 2000 754000 1999 2000 amount consists primarily interest income cash equivalents shortterm investments 917000 partially offset expense net 390000 1999 amount consists primarily interest income cash equivalents shortterm investments 813000 partially offset expense net 59000 decrease interest income primarily due lower average cash balances 2000 compared prior year provision income taxes tax provision benefit recorded 2000 company recorded provision income taxes 67000 1999 december 31 2000 company federal net operating loss carryforwards approximately 46 million available reduce future federal taxable income companys net operating loss carryforwards expire 2010 2012 tax credit carryforwards expire 2005 2018 comparison fiscal years 1999 1998 revenues eds product revenues 430 million 1999 decrease 293 609 million 1998 decrease primarily attributable fewer systems shipped 1999 compared prior year eds service revenues 46 million 24 million 1999 1998 respectively increase service revenues primarily due increased service contract revenues primarily due commencement support maintenance agreements systems warranty periods expired year government contract revenues 107 million 1999 increase 483 72 million 1998 increase primarily attributable accelerated activities related landmine detection technologies 1999 gross profit gross profit eds product 182 million 1999 compared 282 million 1998 gross margins 1999 1998 423 463 respectively decrease gross margins primarily result lower margins sale ctx 9000 systems made higher per unit costs related startup initial production process latter part year gross profit government contracts 30 million 1999 compared 20 million 1998 gross margins 276 1999 1998 increase gross profit primarily due increased level work funded landmine detection technologies research development net research development expenses 104 million year ended december 31 1999 net research development expenses would 93 million 1998 without capitalization software development costs 08 million software development costs qualifying capitalization insignificant 1999 third quarter 1999 company began amortizing capitalized software development costs using straightline method forecasted units production gross research development expenses 112 million 1999 decrease 134 129 million 1998 considering impact software capitalization amounts 1999 1998 07 million 36 million respectively funded research development contracts grants faa government agencies percentage total revenues net research development expenditures 179 1999 compared 121 1998 increase net research development costs percentage revenues primarily result lower revenues 1999 compared prior year decrease gross research development expenditures absolute dollars primarily due completion two significant development products early 1999 specifically development ctx 9000 qscan 160 company made first sale products 1999 selling general administrative selling general administrative expenses 118 million 1999 decrease 95 130 million 1998 percentage total revenues selling general administrative expenses 201 184 1999 1998 respectively increase selling general administrative expenses percentage revenues primarily result lower revenues 1999 compared prior year decrease selling general administrative expenses absolute dollars primarily result decrease commission expense due changes structure sales incentive compensation plans lower revenues 1999 continued efforts reduce selling administrative expenses year interest expense interest expense decreased 227000 1999 390000 1998 interest expense 1999 1998 resulted primarily debt financing associated companys working capital lines credit equipment term loans capital leases decrease primarily due payments made term loans capital lease obligations new significant financing 1999 interest income net interest income net increased 754000 1999 697000 1998 1999 amount consists primarily interest income shortterm investments interest bearing cash accounts 813000 partially offset expense 59000 1998 amount consists primarily interest income shortterm investments interest bearing cash accounts 754000 partially offset expense 57000 income taxes companys effective tax rate 1999 1998 15 12 respectively companys effective tax rate 1999 1998 lower statutory tax rates primarily due utilization net operating loss carryforwards noncash charges company recorded noncash charges related grants stock options exercise prices fair market value date grant employees directors amounts 63000 68000 2000 1999 1998 respectively liquidity capital resources since inception company financed operations primarily private sales 165 million preferred common stock 56 million represents indebtedness converted equity sale 95 million common stock companys initial public offering april 1996 sale 212 million companys followon offering may 1997 shortterm borrowings working capital lines credit december 31 2000 company 119 million cash equivalents shortterm investments compared 242 million december 31 1999 working capital 377 million december 31 2000 compared 409 million december 31 1999 net cash used operating activities 92 million 2000 compared 170 million provided operating activities 1999 cash used operating activities 2000 primarily resulted net loss 18 million 105 million increase accounts receivable 22 million increase inventories 30 million decrease deferred revenues partially offset 38 million noncash effect depreciation amortization 40 million increase accrued liabilities 06 million decrease current assets cash provided operating activities 1999 primarily resulted net income 04 million 30 million noncash effect depreciation amortization 162 million decrease accounts receivable 17 million increase accounts payable 16 million increase deferred revenues partially offset 56 million increase inventories 08 million decrease accrued liabilities net cash provided investing activities 17 million 2000 compared 55 million used investing activities 1999 net cash provided investing activities 2000 primarily resulted 59 million sales shortterm investments partially offset cash payment 15 million purchase inovec net cash acquired 27 million acquisitions capital equipment net cash used investing activities 1999 primarily resulted 39 million purchases shortterm investments net sales 17 million acquisitions capital equipment net cash provided financing activities 11 million 2000 compared 37 million used financing activities 1999 net cash provided financing activities 2000 primarily due 09 million net proceeds borrowings shortterm debt 07 million proceeds sales employee stock purchase plan exercises incentive stock options partially offset 04 million repayments longterm debt financing net cash used financing activities 1999 primarily due 39 million repayments debt financing principally shortterm borrowings lines credit 03 million repurchase 85600 shares companys common stock prevailing market prices partially offset 05 million proceeds sales employee stock purchase plan exercises incentive stock options november 2000 company renewed two line credit agreements bank first agreement provides maximum borrowings amount lower 80 eligible domestic eds receivables 50 million second agreement partially guaranteed exportimport bank united states provides maximum borrowings amount lower sum 80 eligible eds export accounts receivable plus lower 70 eligible raw materials workinprocess inventory designated export customers ii 60 outstanding loans agreement iii 20 million b 50 million borrowings agreements bear interest banks prime rate plus 15 110 december 31 2000 secured eds assets agreements expire november 2001 require eds segment maintain certain levels tangible net worth intercompany balances whollyowned subsidiaries also prohibit company paying cash dividends proceeds loans lines credit may used general corporate purposes december 31 2000 company borrowings outstanding 09 million domestic eds agreement additionally company outstanding guarantees customers issuance letters credit secured lines credit totaling 11 million foreign exchange contracts 10 reserve 141000 secured lines credit remaining available borrowing capacity lines credit 53 million december 31 2000 based eligible eds accounts receivable inventories date company previously borrowed committed equipment line credit agreement bank converted term loan draw borrowings secured assets purchased financed december 31 2000 company outstanding 331000 term loan due june 2003 196000 term loan due november 2001 term loans bear interest banks prime rate plus 15 110 december 31 2000 december 31 2000 company noncancelable annual lease commitments amount 16 million 2001 decreasing 13 million 2005 see note 8 notes consolidated financial statements item 8 annual report form 10k company believes existing cash equivalents shortterm investments together available borrowings lines credits funds expected generated operations sufficient finance working capital expenditure requirements least next 12 months item 7aitem 7 managements discussion analysis financial condition results operations discussion includes forwardlooking statements within meaning section 27a securities act 1933 section 21e securities exchange act 1934 intend forwardlooking statements covered safe harbor provisions forwardlooking statements contained private securities litigation reform act 1995 including statement purposes complying safe harbor provisions based forwardlooking statements current expectations projections future events forwardlooking statements guarantees future performance subject risks uncertainties assumptions including section entitled risk factors actual results may vary materially forwardlooking statements result risks references us mean invision technologies inc whollyowned subsidiaries quantum magnetics inc inovec inc words expect anticipate intend plan believe estimate variations words similar expressions intended identify forwardlooking statements undertake obligations publicly update revise forwardlooking statements whether result new information future events otherwise unless required law light risks uncertainties assumptions forwardlooking events discussed might occur overview invision organized three segments eds business manufactures ctbased detection products used aviation industry screen baggage explosives whollyowned subsidiary quantum utilizes qr magnetic sensing technologies inspection detection analysis explosives concealed weapons materials wood division consists inovec manufactures systems using laserbased technologies improve sawmill yield woodvision developing ct technology increase value harvested timber revenues primarily comprised •eds product revenues include revenues sales ctx systems related accessories spare parts related installation configuration eds service revenues include revenues maintenance contracts related product support integration services including complex integrations configurations separate product revenues •quantum government contract revenues include revenues primarily development contracts utilizing qr magnetic sensing technologies government agencies private entities •wood product revenues sales control automation systems material processing equipment related accessories installation configuration service revenues maintenance contracts related product support repairs services market products services directly internal sales personnel indirectly authorized agents distributors systems integrators united states market products services primarily direct sales personnel internationally use direct sales force authorized representatives sell products year ended december 31 2001 international sales represented 325 total revenues year ended december 31 2000 international sales represented 262 total revenues year ended december 31 1999 international sales represented 147 total revenues eds given fiscal quarter year eds product revenues derived orders multiple units eds products limited number customers example 2001 seven customers accounted eds units sold number customers vary widely period dependent multiple orders small number customers substantial portion revenues therefore cancellation delay order customer could significant negative impact operations given period year ended december 31 2001 generated 200 million eds sales largest customer faa representing 269 total revenues year ended december 31 2000 generated 308 million eds sales faa representing 389 total revenues year ended december 31 1999 generated 371 million eds sales faa representing 635 total revenues eds customers accounted 10 total revenues years ended december 31 2001 2000 1999 february 2002 transportation security administration ordered 100 eds units consisting ctx 2500 ctx 5500 ds models time transportation security administration placed order us acquire parts sufficient build additional 300 eds units also consisting ctx 2500 ctx 5500 ds models order equipment parts totaled approximately 1698 million order calls delivery 100 ctx systems end second quarter 2002 connection order transportation security administration informed us places order additional 300 eds units require grant transportation security administration royaltybearing license enable manufacturers build eds products transportation security administration based technology believe additional funding becomes available transportation security administration place orders 300 eds units utilizing parts ordered us continue remain active discussions transportation security administration regarding us governments needs additional systems additional orders ctx equipment including systems built parts ordered dependent various factors including future us government funding appropriations typically bill customers three stages generally provided contracts customers •amounts cover bill materials received suppliers typically 30 40 total system price •an additional amount upon factory acceptance shipment ranging 30 60 •the balance upon installation site acceptance ranging 5 30 payment terms effectively provide necessary working capital acquisition materials funding inventory manufacturing cycle anticipate potential future orders faa transportation security administration continue provide payment terms provide necessary working capital us suppliers even production volumes rapidly increase future orders faa transportation security administration contain different payment terms major increase production rates may require substantial additional working capital payment terms faa transportation security administration invoices net 30 days terms international invoices vary amounts due upon receipt invoice 90 days consider research development vital part operations continue dedicate substantial resources research enhance performance functionality reliability ctx systems well development new products gross research development expenses eds 107 million 2001 95 million 2000 102 million 1999 quantum revenues substantially derived development activities funded various us government contract agencies government contract revenues contracts typically form costplusfixedfee cpff firmfixedprice ffp awards sold first qscan product late 1999 first iportal 100 2001 continue market products customers within aviation transportation security markets date sold products also perform independent research development activities quantum directly funded us government contracts grants many activities explore ways utilize technologies developed improved directly funded government contracts internal research development activity levels fluctuate level identified internal research development projects resource requirements funded government contracts grants wood product service revenues primarily derived inovecs sales control automation systems material processing equipment related service installed laser scanners 300 sawmills worldwide perform research development activities develop new ctbased products wood industry well enhance performance functionality reliability control automation systems results operations following table sets forth certain income expenditure items consolidated statements operations expressed percentage total revenues periods indicated comparison fiscal years 2001 2000 revenues eds product revenues 365 million 2001 decrease 215 465 million 2000 decrease primarily attributable decreased ctx system revenue approximately 86 million resulting fewer ctx systems sold 2001 compared 2000 also due relatively newer lower priced ctx 2500 systems sold existing customers 2001 compared 2000 decrease also due 22 million reduction revenues fewer customer upgrades older ctx 5000 systems newer ctx 5500 systems upgrades mostly complete end 2000 decreases eds product revenues partially offset increased accessories spare parts revenues 2001 systems deployed operating field 2001 compared 2000 eds service revenues 96 million 2001 increase 158 83 million 2000 increase service revenues primarily due increased service contract revenues international customers new support maintenance agreements ctx systems warranty periods expired year increase eds service revenue also due noncontract services billed time material services data reporting complex integrations provided greater installed base systems 2001 compared 2000 typically ship backlog orders products december 31 2001 backlog eds equipment orders service agreements 560 million subsequent december 31 2001 received orders faa international customers multiple ctx systems accessories services totaling approximately 276 million additionally received order transportation security administration 100 eds units parts sufficient build additional 300 eds units order totaled approximately 1698 million quantums government contract revenues 166 million 2001 increase 557 106 million 2000 increase government contract revenues primarily due increase efforts development landmine concealed weapons detection technologies partially offset decreases types development efforts government contracts grants completed last twelve months due expanded efforts develop landmine detection technologies 2001 quantum employed individuals work directly funded projects well increased subcontract support compared period year ago 2001 126 million government contract revenues us government development landmine technologies representing 740 quantum revenues compared 2000 60 million government contract revenues us government development landmine technologies representing 544 quantum revenues december 31 2001 quantum government contract backlog approximately 129 million primarily development landmine detection technologies anticipate government contract revenues landmine detection technologies decrease 2002 compared 2001 result reduced need subcontract support landmine contracts 2002 outsourced milestones completed however expect receive new grants awards development activities 2002 continued growth quantums commercial product revenues quantums product revenues 322000 2001 compared 307000 2000 wood product revenues 97 million 2001 decrease 185 119 million 2000 decrease wood product revenues primarily due fewer system sales also due fewer machinery equipment sales reflecting softness wood products industry 2001 compared 2000 wood service revenues constant 15 million years ended december 31 2001 2000 december 31 2001 backlog inovec equipment orders service agreements 12 million laserbased optimization scanning systems lumber manufacturing continuing develop ctbased log scanner related revenues backlog december 31 2001 gross profit cost eds product revenues primarily consists purchased materials procured use assembly products well manufacturing labor overhead installation training warranty cost eds service revenues primarily consists direct labor materials customer support overhead given period gross profit products services may affected several factors including revenue mix volume systems manufactured given period product configuration location installation complexity integration various environments gross profit eds products 142 million 2001 decrease 99 158 million 2000 gross margins eds products 2001 390 339 2000 decrease gross profit primarily due lower eds product revenues 2001 compared 2000 increase eds product gross margins primarily due improvements manufacturing costs ctx 9000 system first introduced late 1999 due competitive pricing factors international customers prior year increase gross margins also due variations product types accessories sold 2001 compared 2000 increase revenues accessories typically carry higher margins current year added improvement eds product margins compared prior year gross profit eds services 32 million 2001 increase 263 26 million 2000 gross margins eds services 337 2001 309 2000 increase gross profit primarily due higher eds service revenues 2001 compared 2000 increase eds service gross margins primarily due variations types service revenue increased billed time materials services continued efforts maintain constant overhead costs greater installed base ctx systems 2001 compared 2000 increase gross margins eds services also due revenues recorded 2001 services performed 2000 revenues services deferred prior year due uncertainty collection receivable end year revenues services recognized current year due collection receivable 2001 cost quantum government contract revenues primarily consists direct labor purchased materials subcontract labor applicable overhead required support government funded activities gross profit government contracts 35 million 2001 274 increase 28 million 2000 gross margins government contracts 214 2001 262 2000 increase gross profit primarily due higher government contract revenues 2001 compared 2000 partially offset decreased margins decrease gross margins primarily due increased outside engineering services utilized landmines contract 2001 compared 2000 services typically carry lower margins gross profit wood products 34 million 2001 decrease 60 36 million 2000 gross margins wood products 346 2001 300 2000 decrease wood products gross profit primarily due lower revenues 2001 compared 2000 increase wood products gross margins primarily due smaller portion revenues attributable machinery equipment typically carry lower margin system revenues 2001 compared 2000 gross profit wood services 819000 2001 increase 116 734000 2000 gross margins wood services 529 2001 482 2000 increase gross profit primarily due higher service revenues 2001 compared prior year increase wood service gross margins primarily due variations types services provided 2001 compared 2000 research development research development expenses consist primarily compensation paid personnel engaged research development activities amounts paid outside services costs materials utilized development hardware products including prototype units research development expenditures partially offset amounts reimbursed faa government agencies private entities research development contracts grants services provided reimbursed cost basis gross research development expenses eds 107 million 2001 increase 122 95 million 2000 research development contracts grants faa government agencies private entities funded 57 million gross research development expenses eds 2001 872000 2000 net research development expenses eds 50 million 2001 decrease 423 compared 86 million 2000 net research development expenses eds percentage eds revenues 108 2001 157 2000 increase gross research development expenses eds primarily due expanded efforts argus program 2001 compared prior year decrease net research development expenses primarily due focused efforts argus development funded research development grants december 31 2001 backlog research development contracts grants 880000 representing remaining available funding argus program anticipate incurring costs next quarters approach end argus program reimbursed faa representing costsharing portion program however extent research development contracts grant receipts decline future intend manage research development expenditures mitigate impact operations research development expenses quantum 759000 2001 increase 552 489000 2000 research development expenses quantum percentage quantum revenues 45 2001 2000 increase expenses primarily due internal costs incurred development commercialization products 2001 compared 2000 iportal 100 system research development expenses wood 23 million 2001 increase 177 19 million 2000 research development expenses wood percentage wood revenues 201 2001 143 2000 increase expenses primarily due increased efforts first half 2001 field trials research development log scanning system based ct technology optimize value harvested timber selling general administrative selling general administrative expenses consist primarily compensation paid direct indirect sales marketing personnel administrative personnel including directors consultant fees professional service fees insurance travel selling distribution costs general expenses selling general administrative expenses eds 86 million 2001 decrease 114 97 million 2000 selling general administrative expenses eds percentage eds revenues 186 2001 177 2000 decrease eds selling general administrative expenses primarily due efforts reduce selling general administrative spending levels first part 2001 compared 2000 primarily areas employee headcount travel entertainment professional services decrease also due reimbursement faa selling general administrative portion expenses related argus grant 21 million 2001 compared 400000 2000 due expanded efforts argus development current year decreases partially offset increased external commission expense certain international sales representatives 2001 compared 2000 also due increases employee headcount bonuses consultants professional fees investor public relations incurred late 2001 anticipation greater demand eds products decrease eds selling general administrative expenses also partially offset approximately 373000 nonrecurring professional fees incurred latter part 2001 related possible acquisition longer pursued selling general administrative expenses quantum constant 23 million 2001 2000 selling general administrative expenses quantum percentage quantum revenues 138 2001 211 2000 decrease percentage revenues due efforts maintain selling general administrative spending levels expanded efforts government contract projects selling general administrative expenses wood 38 million 2001 decrease 164 46 million 2000 decrease selling general administrative expenses primarily due startup business development costs incurred 2000 newly formed woodvision division interest expense interest expense increased 289000 2001 195000 2000 interest expense resulted primarily debt financing associated working capital lines credit equipment term loans capital leases financing insurance premiums increase primarily due higher average debt balances year 2001 compared 2000 partially offset lower interest rates interest income net interest income net 570000 2001 compared 527000 2000 2001 amount consists primarily interest income cash equivalents shortterm investments 297000 income net 273000 primarily reversal reserve due favorable outcome international claim partially offset foreign exchange losses 2000 amount consists primarily interest income cash equivalents shortterm investments 917000 partially offset expense net 390000 primarily foreign exchange losses net decrease interest income primarily due lower average cash balances lower interest rates balances year 2001 compared 2000 provision benefit income taxes recorded income tax benefit 46 million 2001 compared amounts recorded taxes 2000 fourth quarter 2001 determined deferred tax asset valuation allowance longer necessary based evaluation current evidence including among things passage transportation security act effect estimates future earnings well contracts customer orders entered fourth quarter 2001 accordingly reversed deferred tax asset valuation allowance 57 million fourth quarter 2001 offset provision current years income tax expense december 31 2001 federal net operating loss carryforwards approximately 50 million state net operating loss carryforwards approximately 11 million available reduce future federal state taxable income federal net operating loss carryforwards expire 2010 2021 state net operating loss carryforwards expire 2011 tax credit carryforwards 13 million expire 2005 2021 comparison fiscal years 2000 1999 revenues eds product revenues 465 million 2000 increase 81 430 million 1999 increase primarily attributable system shipments sales higher priced ctx 9000dsi system 2000 eds service revenues 83 million increase 807 46 million 1999 increase service revenues primarily due increased service contract revenue new support maintenance agreements ctx systems warranty periods expired year quantums government contract revenues 106 million 2000 107 million 1999 revenues relatively flat 2000 compared 1999 reflecting increase efforts development landmine detection technologies 2000 offset decrease types development efforts government contracts grants completed 2000 60 million government contract revenues us government development landmine technologies representing 544 quantum revenues compared 1999 64 million government contract revenues us government development landmine technologies representing 590 quantum revenues quantums product revenues 307000 2000 compared 159000 1999 wood product revenues 119 million 2000 service revenues 15 million 2000 revenues primarily attributable revenues inovec subsidiary acquired effective date january 1 2000 gross profit gross profit eds products 158 million 2000 decrease 133 182 million 1999 gross margins eds products 2000 339 423 1999 decrease gross profit primarily due lower margins sale ctx 9000 systems 2000 primarily due competitive pricing factors international customers higher manufacturing costs related initial production process ctx 9000 systems gross profit eds services increased 26 million 2000 904000 1999 gross margins eds services 309 2000 197 1999 increase gross profit primarily due increased service contract revenue new support maintenance agreements ctx systems warranty periods expired year gross profit government contracts 28 million 2000 58 decrease 30 million 1999 gross margins 262 2000 276 1999 decrease gross profit primarily due change mix types services materials carry different margins 2000 compared 1999 gross profits wood product revenues 36 million 2000 service revenues 734000 2000 gross margins wood products 2000 300 482 services 2000 gross profit primarily generated inovec product service revenues year research development gross research development expenses eds 95 million 2000 decrease 70 102 million 1999 research development contracts grants faa government agencies private entities funded 872000 research developments expenses 2000 686000 research development expenses 1999 net research development expenses eds 86 million 2000 decrease 92 compared 95 million 1999 percentage eds revenues net research development expenses 157 2000 200 1999 decrease gross eds research development expenses primarily due lower depreciation expense decreased salaries resulting fewer employees partially offset increases prototype materials research development expenses quantum 489000 2000 decrease 479 939000 1999 percentage quantum revenues research development expenses quantum 45 2000 87 1999 decrease research development expenses quantum primarily due resources expended research development efforts funded government contracts grants less incurred internal research development activities research development expenses wood 19 million 2000 percentage wood revenues 143 2000 amounts include engineering services materials labor costs incurred development woodvision products also due expenses incurred newly acquired subsidiary inovec selling general administrative selling general administrative expenses eds 97 million 2000 1999 percentage eds revenues selling general administrative expenses eds 177 2000 203 1999 decrease percentage revenues primarily due higher revenues 2000 selling general administrative expenses quantum 23 million 2000 increase 107 21 million 1999 percentage quantum revenues selling general administrative expenses quantum 211 2000 192 1999 increase expenses primarily due increased efforts market products commercial sales selling general administrative expenses wood 46 million 2000 percentage wood revenues 339 amounts include startup operating costs woodvision amortization expense 682000 goodwill intangibles acquired purchase inovec also expenses incurred inovec 2000 interest expense interest expense decreased 195000 2000 227000 1999 interest expense 2000 1999 resulted primarily debt financing associated working capital lines credit equipment term loans capital leases financing insurance premiums decrease primarily due lower average debt balances 2000 compared 1999 interest income expense net interest income expense net decreased 527000 2000 754000 1999 2000 amount consists primarily interest income cash equivalents shortterm investments 917000 partially offset expense net 390000 1999 amount consists primarily interest income cash equivalents shortterm investments 813000 partially offset expense net 59000 increase interest income primarily due higher average cash balances 2000 compared prior year provision income taxes tax provision benefit recorded 2000 recorded provision income taxes 67000 1999 related party transactions late september 2001 entered agreement donald co investment advisory services related potential acquisition fundraising activities considered alternatives chose donald co provide services time essence able react quickly meet business requirements based familiarity business stephen blum president donald co member board directors board approved agreement mr blum abstaining agreement donald co received 50000 cash retainer fullyvested warrant purchase 100000 shares common stock price 995 per share closing price common stock day prior date issuance board considered fee comparable alternatives given circumstances engagement warrant expires five years date issuance fair value warrant 650000 estimated date grant using blackscholes option pricing model following assumptions dividends riskfree interest rate 394 volatility 78 contractual life five years december 31 2001 shares common stock purchased warrant allocated onehalf cash retainer warrant ongoing investment financial advisory services recorded current assets amortized oneyear term agreement recorded amortization expense 88000 2001 allocated remaining balance 350000 services provided connection offering recorded noncurrent assets netted proceeds offering 2002 august 1996 january 1997 january 1999 entered consulting agreements bgi inc virginiabased international consulting firm assist us marketing eds products us government agreements agreed pay annual retainer 120000 bgi success fee payable 25 stock options november 2000 bgi agreed convert accrued stock portion accumulated success fees agreed cancel option purchase 6586 shares common stock consideration agreement us issue 20468 shares common stock bgi 2000 recorded consulting expenses 108000 common stock issued 9552 shares common stock 2001 currently process issuing remaining 10916 shares common stock march 1998 morris busby president controlling shareholder bgi elected board directors following ambassador busbys election continued arrangement felt bgi continued provide needed services us market comparable rates paid consulting fees bgi 120000 2000 1999 arrangement expired december 31 2000 noncash charges recorded noncash charges related grants stock options exercise prices fair market value date grant employees directors amounts 63000 2000 68000 1999 record noncash charges 2001 related grants stock options exercise prices fair value common stock date grant recorded noncash charges related grants warrant director stock options consultant amount 148000 2001 amounts recorded grants warrants stock options nonemployees 2000 1999 liquidity capital resources december 31 2001 114 million cash equivalents compared 119 million december 31 2000 working capital 496 million december 31 2001 compared 377 million december 31 2000 net cash provided operating activities 519000 2001 compared 92 million used operating activities 2000 cash provided operating activities 2001 primarily resulted 75 million net income 38 million noncash effect depreciation amortization 45 million increase accounts payable accrued liabilities 22 million noncash effect income tax benefits employee stock transactions 22 million increase deferred revenues partially offset 68 million increase inventories 58 million noncash effect deferred income taxes 49 million increase accounts receivable 25 million increase current assets cash used operating activities 2000 primarily resulted net loss 18 million 106 million increase accounts receivable 22 million increase inventories 30 million decrease deferred revenues partially offset 40 million increase accrued liabilities 38 million noncash effect depreciation amortization 10 million decrease current assets net cash used investing activities 42 million 2001 compared 17 million provided investing activities 2000 net cash used investing activities 2001 resulted 20 million purchases shortterm investments 19 million acquisitions capital equipment 267000 payment earnout former shareholders inovec accordance terms purchase agreement net cash provided investing activities 2000 primarily resulted 59 million sales shortterm investments partially offset 27 million acquisitions capital equipment cash payment 15 million purchase inovec net cash acquired net cash provided financing activities 31 million 2001 compared 11 million 2000 net cash provided financing activities 2001 primarily due 25 million proceeds sales employee stock purchase plan exercises stock options 10 million proceeds borrowings shortterm debt net payments partially offset 403000 repayments longterm debt net cash provided financing activities 2000 primarily due 890000 proceeds borrowings shortterm debt 669000 proceeds sales employee stock purchase plan exercises stock options partially offset 435000 repayments longterm debt october 2001 renewed two line credit agreements silicon valley bank first agreement provides maximum borrowings amount lower 80 eligible domestic eds receivables 50 million second agreement partially guaranteed exportimport bank exim united states provides maximum borrowings amount lower 1 sum 70 90 eligible eds export accounts receivable plus lower 70 eligible raw materials workinprocess inventory designated export customers b 60 outstanding loans agreement c 20 million 2 50 million borrowings agreements bear interest banks prime rate plus 15 secured eds assets agreements expire october 2002 require eds segment maintain certain levels tangible net worth intercompany balances whollyowned subsidiaries also prohibit us paying cash dividends may use proceeds loans lines credit general corporate purposes eds operations december 31 2001 borrowings outstanding 18 million domestic eds agreement amounts outstanding exim agreement additionally outstanding guarantees customers issuance letters credit secured lines credit totaling 14 million foreign exchange contracts 10 reserve 17 million secured lines credit remaining available borrowing capacity lines credit 51 million december 31 2001 based eligible eds accounts receivable inventories date august 2001 inovec entered line credit agreement pacific continental bank agreement provides 15 million working capital line credit secured assets inovec inc agreement bears interest banks prime rate plus 10 interest rate floor 725 agreement expires august 2002 requires inovec maintain certain levels tangible net worth debtworth ratios may use proceeds loans line credit general corporate purposes inovecs operations amounts outstanding december 31 2001 previously borrowed committed equipment line credit agreement silicon valley bank converted term loan draw borrowings secured assets purchased financed december 31 2001 outstanding 199000 term loan due june 2003 term loan bears interest banks prime rate plus 15 following table depicts contractual obligations december 31 2001 thousands december 31 2001 lines credit aggregate 115 million expire within one year amount reduced amounts secured lines including 14 million standby letters credit 17 million foreign currency forward contracts reflects 10 reserve foreign currency forward contracts 84 million available lines credit december 31 2001 also commitments 169 million foreign currency forward contracts used hedge existing receivables orders amount 101 million expires within one year 68 million expires within thirteen months believe existing cash equivalents shortterm investments together proceeds followon offering common stock offering 25 million shares sale us anticipate closing 2002 available borrowings lines credit funds expected generated operations sufficient finance working capital expenditure requirements least next 12 months however offering completed could occur number reasons including existing financial market conditions time pricing substantially limit capital resources fail meet required financial covenants credit agreements receivables support upper limits credit agreements may able access funds agreements addition unable deliver eds units timely manner recent order transportation security administration fail enter adhere terms proposed licensing agreement transportation security administration transportation security administration may cancel order place additional orders events occurs capital resources would significantly impaired critical accounting policies estimates discussion analysis financial condition results operations based consolidated financial statements prepared conformity accounting principles generally accepted united states america preparation consolidated financial statements requires us make judgments estimates affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period base estimates historical experience various assumptions believe reasonable circumstances actual results may differ estimates different assumptions conditions following summarizes critical accounting policies significant estimates used preparing consolidated financial statements revenue recognition recognize revenues persuasive evidence arrangement exists delivery occurred services rendered price fixed determinable collectibility reasonably assured sales eds products faa domestic customers demonstrated meet product specifications prior shipment recognize product revenues shipment defer portion revenues relating installation training services performed accepted customer deferred installation training revenues based fair value services generally represent less 5 arrangements installation generally completed within relatively short period time typically less one week consistent history completing routine installations obtaining customer acceptance domestic international sales airport installations require involved integration baggage handling systems essential functionality machine take longer routine installations integration services separately priced products sales agreements recognize service revenues agreements services performed sales eds products services customers foreign countries varying contractual terms governed part regulations foreign jurisdictions accordingly recognize revenue based specific facts circumstances surrounding transaction revenue recognition foreign sales affected determination legal title risk loss pass foreign customers well evaluation enforceable rights unbilled amounts balance sheet date transactions recognized revenues foreign sales eds products demonstrated meet product specifications prior shipment title risk loss pass customer shipment either enforceable claim balance sheet date remaining unbilled amounts ability invoice customer unbilled amounts fixed period time regardless whether installation completed recognize product revenue shipment defer recognize fair value installation training revenue services performed sales eds products foreign customers title risk loss eds products pass upon completion installation recognize product service revenues completion installation acceptance customer sales eds products foreign customers portion contract price withheld installation completed believe enforceable claim balance sheet date realize withheld amount defer recognize revenue greater portion contract price fair value installation training completion installation acceptance customer recognize revenues quantum government contracts inovec product sales automation control systems using percentageofcompletion method based costs incurred date percentage total estimated costs completion record provisions estimated losses contracts anticipated result losses completion contract percentageofcompletion method relies estimates total expected contract revenue costs use method revenue recognition since reasonably dependable estimates revenue costs applicable various stages contract made recognized revenues profit subject revisions contract progresses completion accrued warranty reserves accrue estimated cost product warranties time revenues recognized engage extensive product quality programs processes including actively monitoring evaluating quality component suppliers warranty obligation affected actual warranty costs including material usage service delivery costs incurred correcting product failure actual material usage service delivery costs differ estimates revisions estimated warranty liability would required deferred tax asset valuation allowance record valuation allowance reduce deferred tax assets likely based upon currently available evidence factors realize portion deferred tax assets base determination need valuation allowance ongoing evaluation current evidence including among things estimates future earnings backlog customer orders expected timing deferred tax asset reversals charge credit adjustments valuation allowance income tax expense period determinations made determine would able realize deferred tax assets future excess net recorded amount adjustment deferred tax asset would increase income period determination made likewise determine would able realize part net deferred tax assets future would charge operations adjustment deferred tax asset period determination made recently issued accounting standards derivative instruments hedging activities january 1 2001 adopted statement financial accounting standards 133 sfas 133 accounting derivative instruments hedging activities sfas 133 amended requires every derivative instrument including certain derivative instruments embedded contracts recorded balance sheet fair value changes fair value derivatives recorded period current earnings comprehensive income depending whether derivative designated part hedge transaction type hedge transaction sfas 133 amended requires formally document designate assess effectiveness transactions receive hedge accounting adopted sfas 133 amended january 1 2001 elect hedge accounting defined sfas 133 2001 adoption statement material impact financial position results operations international system sales maintenance contracts generally denominated us dollars instances significant international system sales contracts denominated foreign currency enter forward contracts mitigate foreign exchange risk enter market risk sensitive instruments trading purposes december 31 2001 169 million aggregate foreign currency forward contracts december 31 2000 14 million fair value instruments 47000 december 31 2001 4000 december 31 2000 business combinations goodwill intangible assets june 2001 financial accounting standards board issued statement financial accounting standards 141 sfas 141 business combinations sfas 142 goodwill intangible assets sfas 141 requires account business combinations initiated june 30 2001 purchase method addresses initial recognition measurement goodwill intangible assets acquired business combination sfas 142 addresses initial recognition measurement intangible assets acquired outside business combination accounting goodwill intangible assets subsequent acquisition sfas 142 provides intangible assets finite useful lives amortized goodwill intangible assets indefinite lives amortized rather tested least annually impairment adopted sfas 142 fiscal year beginning january 1 2002 upon adoption sfas 142 longer amortize carrying values goodwill 25 million acquired workforce 331000 january 1 2002 resulting reduction annual amortization expense 426000 yet performed impairment tests required standard accounting impairment disposal longlived assets october 2001 financial accounting standards board issued statement financial accounting standards 144 sfas 144 accounting impairment disposal longlived assets sfas 144 supersedes sfas 121 accounting impairment longlived assets longlived assets disposed accounting reporting provisions accounting principles board opinion 30 reporting results operationsreporting effects disposal segment business extraordinary unusual infrequently occurring events transactions addresses financial accounting reporting impairment disposal longlived assets adopted sfas 144 january 1 2002 adoption statement material impact consolidated financial statements item 7a nannannanitem 7a quantitative qualitative disclosures market risk international system sales maintenance contracts generally denominated us dollars instances significant international system sales contracts denominated foreign currency enter forward contracts mitigate foreign exchange risk enter market risk sensitive instruments trading purposes year ended december 31 2002 entered foreign exchange forward contracts notional values approximately 436 million hedge foreign exchange risk contracts international customers denominated euros december 31 2002 outstanding contracts notional values totaling 347 million negative fair value approximately 49 million following table depicts maturities outstanding contract amounts purchases raw materials inventory components primarily denominated us dollars purchased foreign currencies generally made needed basis advance purchase commitments foreign currencies european suppliers currently hedge purchase commitments foreign exchange rate fluctuations material adverse impact purchases however continue monitor foreign exchange rates may enter forward contracts mitigate foreign exchange risk appropriate certain costs providing warranty maintenance services systems sold foreign countries denominated local currencies extent exchange rates fluctuate could become expensive provide services date costs significant however expect increase installed base increases exposed foreign currency exchange rate risk inherent sales commitments anticipated sales anticipated purchases assets liabilities denominated currencies us dollar transact business 3 currencies worldwide significant operations euro situations net receiver foreign currencies therefore benefit weaker us dollar adversely affected stronger us dollar relative foreign currencies transact significant amounts business performed sensitivity analysis december 31 2002 using modeling technique measures change fair values arising hypothetical 10 15 adverse movement levels foreign currency exchange rates relative us dollar strengthening us dollar variables held constant analysis covers foreign exchange forward contracts offset underlying exposures foreign currency exchange rates used based market rates effect december 31 2002 cash flow impacts sensitivity analysis summarized following table firm orders represent orders received signed purchase order cash flow impact changes exchange rates december 31 2002 significantly different cash flow impact changes exchange rates december 31 2001 expect impact changes interest rates material impact operations cash flow liquidity addition impact inflation material operations cash flow liquidity date item 8item 7a quantitative qualitative disclosures market risk consider investments purchased original remaining maturity less three months date purchase cash equivalents maintain investment portfolio various holdings types maturities see note 16 consolidated financial statements securities classified available sale consequently recorded consolidated balance sheets fair value unrealized gains losses reported separate component accumulated comprehensive income loss net tax following table summarizes cash equivalents shortterm investments periods indicated thousands time sharp rise interest rates could material adverse impact fair value investment portfolio conversely declines interest rates could material impact interest earnings investment portfolio currently hedge interest rate exposures following table presents changes fair value investment securities held december 31 2003 sensitive changes interest rates thousands based hypothetical adjustments applicable interest rates instruments leveraged held purposes trading modeling technique used measures change fair value arising selected potential changes interest rates using threemonth investment horizon hypothetical parallel shifts yield curve plus minus 50 basis points “bps” 100 bps 150 bps international system sales maintenance contracts generally denominated us dollars instances significant international system sales contracts denominated foreign currency often enter forward contracts mitigate foreign exchange risk enter market risk sensitive instruments trading purposes year ended december 31 2003 entered foreign exchange forward contracts total notional value approximately 63 million hedge foreign exchange risk contracts international customers denominated euros december 31 2003 december 31 2002 december 31 2001 outstanding contracts convert euros dollars notional values totaling 173 million 347 million 169 million respectively negative fair value approximately 14 million 49 million positive fair value 47000 respectively following table depicts maturities outstanding contract amounts thousands purchases raw materials inventory components primarily denominated us dollars purchased foreign currencies generally made needed basis advance purchase commitments foreign currencies european suppliers currently hedge purchase commitments foreign exchange rate fluctuations material adverse impact purchases however continue monitor foreign exchange rates may enter forward contracts mitigate foreign exchange risk appropriate certain costs providing warranty maintenance services systems sold foreign countries denominated local currencies extent exchange rates fluctuate could become expensive provide services date costs significant however expect increase installed base increases exposed foreign currency exchange rate risk inherent sales commitments anticipated sales anticipated purchases assets liabilities denominated currencies us dollar transact business primarily four currencies worldwide significant operations euro situations net receiver foreign currencies therefore benefit weaker us dollar adversely affected stronger us dollar relative foreign currencies transact significant amounts business performed sensitivity analysis december 31 2003 december 31 2002 december 31 2001 using modeling technique measures change fair values arising hypothetical 10 15 adverse movement levels foreign currency exchange rates relative us dollar strengthening us dollar variables held constant analysis covers foreign exchange forward contracts offset underlying exposures analysis excludes balances transactions pertaining yxlon foreign exchange rate risk relatively low yxlon given primarily transacts business euros cash flow impacts sensitivity analysis december 31 2003 summarized following table foreign currency exchange rates used based market rates effect december 31 2003 firm orders represent orders received signed purchase order cash flow impact changes exchange rates december 31 2003 significantly different cash flow impact changes exchange rates december 31 2002 expect impact changes interest rates material impact operations cash flow liquidity cash flow impact changes exchange rates december 31 2002 significantly different cash flow impact changes exchange rates december 31 2001 item 8nanitem 7a quantitative qualitative disclosures market risk foreign exchange risk impact inflation companys international system sales maintenance contracts generally denominated us dollars instances significant international system sales contracts denominated foreign currency company enters forward exchange contracts mitigate foreign exchange risk 2000 company entered forward exchange contracts approximately 63 million hedge foreign exchange risk contracts international customers december 31 2000 outstanding contracts totaling 14 million company hedge foreign exchange risk 1999 purchases raw materials inventory components primarily denominated us dollars purchased foreign currencies generally made needed basis company advance purchase commitments foreign currencies european suppliers company currently hedge purchase commitments foreign exchange rate fluctuations material adverse impact purchases however company continue monitor foreign exchange rates enter forward exchange contracts mitigate foreign exchange risk appropriate june 1998 financial accounting standards board issued sfas 133 sfas 133 accounting derivative instruments hedging activities sfas 133 amended establishes accounting reporting standards derivative instruments hedging activities effective fiscal years beginning june 15 2000 company adopted sfas 133 effective january 1 2001 sfas 133 requires companies recognize derivatives either assets liabilities balance sheet measure fair value gains losses resulting changes fair value would accounted depending use derivative whether designated qualifies hedge accounting adoption sfas 133 material effect companys consolidated results operations january 1 2001 certain costs providing warranty maintenance services systems sold foreign countries denominated local currencies extent exchange rates fluctuate could become expensive provide services date costs significant however company expects increase companys installed base increases impact inflation material companys operations liquidity date item 8item 7a quantitative qualitative disclosures market risk foreign exchange risk impact inflation international system sales maintenance contracts generally denominated us dollars instances significant international system sales contracts denominated foreign currency enter forward contracts mitigate foreign exchange risk enter market risk sensitive instruments trading purposes year ended december 31 2001 entered foreign exchange forward contracts notional values approximately 210 million hedge foreign exchange risk contracts international customers december 31 2001 outstanding contracts notional values totaling 169 million fair value approximately 47000 following table depicts maturities outstanding contract amounts purchases raw materials inventory components primarily denominated us dollars purchased foreign currencies generally made needed basis advance purchase commitments foreign currencies european suppliers currently hedge purchase commitments foreign exchange rate fluctuations material adverse impact purchases however continue monitor foreign exchange rates may enter forward contracts mitigate foreign exchange risk appropriate january 1 2001 adopted sfas 133 amended statement requires every derivative instrument including certain derivative instruments embedded contracts recorded balance sheet fair value changes fair value derivatives recorded period current earnings comprehensive income depending whether derivative designated part hedge transaction type hedge transaction sfas 133 amended requires formally document designate assess effectiveness transactions receive hedge accounting adopted sfas 133 amended january 1 2001 elect hedge accounting defined sfas 133 2001 adoption statement material impact financial position results operations certain costs providing warranty maintenance services systems sold foreign countries denominated local currencies extent exchange rates fluctuate could become expensive provide services date costs significant however expect increase installed base increases impact inflation material operations liquidity date item 8 item 8 financial statements supplementary data companys consolidated financial statements notes thereto appear pages annual report form 10k item 9item 8 financial statements supplementary data companys consolidated financial statements notes thereto appear pages annual report form 10k item 9item 8 financial statements supplementary data companys consolidated financial statements notes thereto appear pages annual report form 10k item 9item 8 financial statements supplementary data consolidated financial statements notes thereto supplementary financial data appear pages annual report incorporated reference herein consistent section 10ai2 securities exchange act 1934 added section 202 sarbanesoxley act 2002 responsible listing nonaudit services approved audit committee performed deloitte touche llp external auditor nonaudit services defined services provided connection audit review financial statements audit committee approved recurring engagements deloitte touche llp following nonaudit services • assurance services includes 1 filing work performed connection filing registration statements 2 issuance various consents • tax services includes consulting related 1 federal state local tax issues 2 international tax issues 3 value added tax issues performed certain foreign countries • consulting services includes review business processes • merger acquisition services includes 1 due diligence services 2 consulting related structuring mergers acquisitions item 9item 8 financial statements supplementary data consolidated financial statements notes thereto supplementary financial data appear pages annual report incorporated reference herein consistent section 10ai2 securities exchange act 1934 added section 202 sarbanesoxley act 2002 responsible listing nonaudit services approved audit committee performed deloitte touche llp external auditor nonaudit services defined services provided connection audit review financial statements since filing quarterly report form 10q quarter ended september 28 2003 audit committee approved engagements deloitte touche llp following nonaudit services tax services includes services related review tax returns yxlon international holding gmbh item 9item 8 financial statements supplementary data item 9item 8 financial statements supplementary data companys consolidated financial statements notes thereto appear pages annual report form 10k incorporated reference supplementary financial information respect quarters years ended december 31 2000 1999 set forth note 15 notes consolidated financial statements item 9item 8 financial statements supplementary data consolidated financial statements notes thereto supplementary financial data appear pages annual report form 10k incorporated reference item 9 nannannanitem 15 exhibits financial statement schedules reports form 8k a1 financial statements consolidated financial statements required item submitted separate section beginning page immediately following signature page report incorporated reference herein deloitte touche llp independent auditors’ report consolidated balance sheets december 31 2002 2001 consolidated statements operations years ended december 31 2002 2001 2000 consolidated statements cash flows years ended december 31 2002 2001 2000 consolidated statements stockholders’ equity years ended december 31 2002 2001 2000 notes consolidated financial statements a2 financial statement schedule iivaluation qualifying accounts schedule listed set forth immediately following consolidated financial statements following signature page report incorporated reference herein schedules listed omitted applicable required information shown consolidated financial statements notes thereto a3 exhibits 31 amended restated certificate incorporation registrant1 32 bylaws registrant amended2 33 amendment amended restated certificate incorporation registrant3 41 reference made exhibits 31 33 101 technology license agreement dated september 11 1990 registrant imatron inc4 102 registrant’s 2000 equity incentive plan amended516 103 registrant’s 2002 employee stock purchase plan616 104 lease dated february 11 1997 registrant whlnf real estate lp7 105 purchase agreement dated december 24 1996 registrant us federal aviation administration7 106 amendment 1 technology license agreement registrant imatron inc dated july 12 19998 107 form indemnity agreement registrant sergio magistri david pillor giovanni lanzara bruno trezza douglas boyd morris busby816 108 registrant’s 1991 equity incentive plan916 109 registrant’s 2000 nonofficer equity incentive plan adopted february 14 20009 1010 loan security agreement dated november 8 2000 registrant silicon valley bank10 1011 loan security agreement exim program dated november 8 2000 registrant silicon valley bank10 1012 form indemnity agreement registrant donald e mattson ross mulholland1116 1013 amendment loan documents dated october 12 2001 registrant silicon valley bank12 1014 amendment loan documents exim program dated october 12 2001 registrant silicon valley bank12 1015 director retainer agreement dated august 1 2001 registrant louis turpen12 1016 director retainer agreement dated may 30 2001 registrant stephen blum12 1017 warrant purchase common stock registrant dated september 26 2001 donald co securities inc12 1018 letter contract registrant tsa dated february 19 20021317 1019 delivery order 2 tsa1317 1020 delivery order 3 tsa1317 1021 amendment loan documents dated march 4 2002 registrant silicon valley bank13 1022 amendment loan documents exim program dated march 4 2002 registrant silicon valley bank13 1023 amended delivery order 2 tsa1417 1024 amended delivery order 3 tsa1417 1025 delivery order 4 tsa1417 1026 amendment delivery order 214 1027 amendment delivery order 314 1028 agreement products services registrant coorstek inc dated june 10 20021417 1029 first amendment lease agreement dated december 10 1997 registrant whlnf real estate limited partnership14 1030 second amendment lease agreement dated july 1 2002 registrant dmv sub 4 llc14 1031 change control equity acceleration plan1516 1032 senior management key employee agreement dated september 20 2002 registrant sergio magistri1516 1033 senior management key employee agreement dated september 20 2002 registrant david pillor1516 1034 senior management key employee agreement dated september 29 2002 registrant ross mulholland1516 1035 senior management key employee agreement dated september 20 2002 registrant mattson1516 1036 amendment loan documents dated july 19 2002 registrant silicon valley bank15 1037 amendment loan documents exim program dated july 19 2002 registrant silicon valley bank15 1038 delivery order do5 tsa1517 1039 delivery order do6 tsa1517 1040 singletenant net lease agreement executed october 4 2002 carmel mountain 8 associates lp quantum magnetics inc 1041 revision 1 agreement products services dated january 24 2003 registrant coorstek inc17 1042 support maintenance agreement executed january 24 2003 registrant siemens explosivedetection field services llc17 211 subsidiaries registrant 231 consent deloitte touche llp independent auditors 991 certificate chief executive officer chief financial officer 1 filed exhibit registrant’s registration statement form s1 33305517 incorporated herein reference 2 filed exhibit registrant’s amendment 1 annual report form 10ka year ended december 31 2001 incorporated herein reference 3 filed exhibit registrant’s annual report form 10k year ended december 31 2001 incorporated herein reference 4 filed exhibit registrant’s registration statement form s1 333380 incorporated herein reference 5 filed exhibit registrant’s registration statement form s8 333103016 filed february 6 2003 incorporated herein reference 6 filed exhibit registrant’s registration statement form s8 33391154 filed june 25 2002 incorporated herein reference 7 filed exhibit registrant’s registration statement form s1 33323413 incorporated herein reference 8 filed exhibit registrant’s annual report form 10k year ended december 31 1999 incorporated herein reference 9 filed exhibit registrant’s registration statement form s8 33356340 filed february 28 2001 incorporated herein reference 10 filed exhibit registrant’s quarterly report form 10q quarterly period ended october 1 2000 incorporated herein reference 11 filed exhibit registrant’s quarterly report form 10q quarterly period ended april 1 2001 incorporated herein reference 12 filed exhibit registrant’s quarterly report form 10q quarterly period ended september 30 2001 incorporated herein reference 13 filed exhibit registrant’s quarterly report form 10q quarterly period ended march 31 2002 incorporated herein reference 14 filed exhibit registrant’s quarterly report form 10q quarterly period ended june 30 2002 incorporated herein reference 15 filed exhibit registrant’s quarterly report form 10q quarterly period ended september 29 2002 incorporated herein reference 16 items management contracts compensatory plans arrangements required filed exhibits pursuant item 15c form 10k 17 confidential treatment requested portions exhibit b reports form 8k file current reports form 8k quarter ended december 31 2002 c see exhibits listed item 15a3 financial statement schedules required item listed item 15a2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report form 10k signed behalf undersigned thereunto duly authorized 27th day march 2003 power attorney person whose signature appears constitutes appoints sergio magistri ross mulholland true lawful attorneyinfact agent acting alone full power substitution resubstitution name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneyinfact agent full power authority perform every act thing requisite necessary done premises fully intents purposes might could person hereby ratifying confirming said attorneyinfact agent substitute substitutes may lawfully cause done virtue hereof pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date sergio magistri president chief executive officer director principal executive officer march 27 2003 sergio magistri ross mulholland senior vice president chief financial officer principal financial accounting officer march 27 2003 ross mulholland david pillor senior vice president sales marketing director march 27 2003 david pillor chairman board directors giovanni lanzara stephen blum director march 27 2003 stephen blum douglas p boyd director march 27 2003 douglas p boyd bruno trezza director march 27 2003 bruno trezza louis turpen director march 27 2003 louis turpen morris busby director march 27 2003 morris busby certification sergio magistri certify 1 reviewed annual report form 10k invision technologies inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrant’s certifying officer responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrant’s disclosure controls procedures date within 90 days prior filing date annual report “evaluation date” c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrant’s certifying officer disclosed based recent evaluation registrant’s auditors audit committee registrant’s board directors persons performing equivalent functions significant deficiencies design operation internal controls could adversely affect registrant’s ability record process summarize report financial data identified registrant’s auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrant’s internal controls 6 registrant’s certifying officer indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses certification ross mulholland certify 1 reviewed annual report form 10k invision technologies inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrant’s certifying officer responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrant’s disclosure controls procedures date within 90 days prior filing date annual report “evaluation date” c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrant’s certifying officer disclosed based recent evaluation registrant’s auditors audit committee registrant’s board directors persons performing equivalent functions significant deficiencies design operation internal controls could adversely affect registrant’s ability record process summarize report financial data identified registrant’s auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrant’s internal controls 6 registrant’s certifying officer indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses exhibit index 31 amended restated certificate incorporation registrant1 32 bylaws registrant amended2 33 amendment amended restated certificate incorporation registrant3 41 reference made exhibits 31 33 101 technology license agreement dated september 11 1990 registrant imatron inc4 102 registrant’s 2000 equity incentive plan amended516 103 registrant’s 2002 employee stock purchase plan616 104 lease dated february 11 1997 registrant whlnf real estate lp7 105 purchase agreement dated december 24 1996 registrant us federal aviation administration7 106 amendment 1 technology license agreement registrant imatron inc dated july 12 19998 107 form indemnity agreement registrant sergio magistri david pillor giovanni lanzara bruno trezza douglas boyd morris busby816 108 registrant’s 1991 equity incentive plan916 109 registrant’s 2000 nonofficer equity incentive plan adopted february 14 20009 1010 loan security agreement dated november 8 2000 registrant silicon valley bank10 1011 loan security agreement exim program dated november 8 2000 registrant silicon valley bank10 1012 form indemnity agreement registrant donald e mattson ross mulholland1116 1013 amendment loan documents dated october 12 2001 registrant silicon valley bank12 1014 amendment loan documents exim program dated october 12 2001 registrant silicon valley bank12 1015 director retainer agreement dated august 1 2001 registrant louis turpen12 1016 director retainer agreement dated may 30 2001 registrant stephen blum12 1017 warrant purchase common stock registrant dated september 26 2001 donald co securities inc12 1018 letter contract registrant tsa dated february 19 20021317 1019 delivery order 2 tsa1317 1020 delivery order 3 tsa1317 1021 amendment loan documents dated march 4 2002 registrant silicon valley bank13 1022 amendment loan documents exim program dated march 4 2002 registrant silicon valley bank13 1023 amended delivery order 2 tsa1417 1024 amended delivery order 3 tsa1417 1025 delivery order 4 tsa1417 1026 amendment delivery order 214 1027 amendment delivery order 314 1028 agreement products services registrant coorstek inc dated june 10 20021417 1029 first amendment lease agreement dated december 10 1997 registrant whlnf real estate limited partnership14 1030 second amendment lease agreement dated july 1 2002 registrant dmv sub 4 llc14 1031 change control equity acceleration plan1516 1032 senior management key employee agreement dated september 20 2002 registrant sergio magistri1516 1033 senior management key employee agreement dated september 20 2002 registrant david pillor1516 1034 senior management key employee agreement dated september 29 2002 registrant ross mulholland1516 1035 senior management key employee agreement dated september 20 2002 registrant mattson1516 1036 amendment loan documents dated july 19 2002 registrant silicon valley bank15 1037 amendment loan documents exim program dated july 19 2002 registrant silicon valley bank15 1038 delivery order do5 tsa1517 1039 delivery order do6 tsa1517 1040 singletenant net lease agreement executed october 4 2002 carmel mountain 8 associates lp quantum magnetics inc 1041 revision 1 agreement products services dated january 24 2003 registrant coorstek inc17 1042 support maintenance agreement executed january 24 2003 registrant siemens explosivedetection field services llc17 211 subsidiaries registrant 231 consent deloitte touche llp independent auditors 991 certificate chief executive officer chief financial officer 1 filed exhibit registrant’s registration statement form s1 33305517 incorporated herein reference 2 filed exhibit registrant’s amendment 1 annual report form 10ka year ended december 31 2001 incorporated herein reference 3 filed exhibit registrant’s annual report form 10k year ended december 31 2001 incorporated herein reference 4 filed exhibit registrant’s registration statement form s1 333380 incorporated herein reference 5 filed exhibit registrant’s registration statement form s8 333103016 filed february 6 2003 incorporated herein reference 6 filed exhibit registrant’s registration statement form s8 33391154 filed june 25 2002 incorporated herein reference 7 filed exhibit registrant’s registration statement form s1 33323413 incorporated herein reference 8 filed exhibit registrant’s annual report form 10k year ended december 31 1999 incorporated herein reference 9 filed exhibit registrant’s registration statement form s8 33356340 filed february 28 2001 incorporated herein reference 10 filed exhibit registrant’s quarterly report form 10q quarterly period ended october 1 2000 incorporated herein reference 11 filed exhibit registrant’s quarterly report form 10q quarterly period ended april 1 2001 incorporated herein reference 12 filed exhibit registrant’s quarterly report form 10q quarterly period ended september 30 2001 incorporated herein reference 13 filed exhibit registrant’s quarterly report form 10q quarterly period ended march 31 2002 incorporated herein reference 14 filed exhibit registrant’s quarterly report form 10q quarterly period ended june 30 2002 incorporated herein reference 15 filed exhibit registrant’s quarterly report form 10q quarterly period ended september 29 2002 incorporated herein reference 16 items management contracts compensatory plans arrangements required filed exhibits pursuant item 15c form 10k 17 confidential treatment requested portions exhibit independent auditors’ report board directors stockholders invision technologies inc audited accompanying consolidated balance sheets invision technologies inc subsidiaries “company” december 31 2002 2001 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2002 audits also included financial statement schedule listed index item 15a2 financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position invision technologies inc subsidiaries december 31 2002 2001 results operations cash flows three years period ended december 31 2002 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 2 financial statements 2002 company changed method accounting goodwill intangible assets conform statement financial accounting standards 142 “goodwill intangible assets” invision technologies inc consolidated balance sheets thousands except share data accompanying notes integral part consolidated financial statements invision technologies inc consolidated statements operations thousands except per share data accompanying notes integral part consolidated financial statements invision technologies inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements invision technologies inc consolidated statements stockholders’ equity thousands accompanying notes integral part consolidated financial statements invision technologies inc notes consolidated financial statements note 1 description business invision technologies inc “company” incorporated delaware 1990 principal business manufacture computed tomography ct based detection products used aviation industry screen baggage company’s headquarters principal manufacturing facilities located newark california 1997 company acquired quantum magnetics inc “quantum” whollyowned subsidiary quantum california corporation headquarters manufacturing facilities located san diego california 2000 company acquired inovec inc “inovec” whollyowned subsidiary inovec delaware corporation headquarters manufacturing facilities located eugene oregon company organized three segments eds company designs manufactures markets ctbased detection products used aviation industry screen baggage explosives company’s products first automated explosives detection systems “eds” certified federal aviation authority “faa” company sold 779 systems faa following formation transportation security administration “tsa” tsa foreign aviation security agencies domestic foreign airports airlines quantum develops commercialization patented proprietary technology inspection detection analysis explosives materials quantum’s products based passive magnetic sensing technology quadrupole resonance “qr” technology form magnetic resonance quantum receives grants variety us government agencies research development military humanitarian landmine detection carryon luggage screening concealed weapon detection drug detection inprocess materials inspection wood february 2000 company announced formation woodvision division “woodvision” develop company’s ct technology increase value harvested timber previous studies indicated ct technology applied scan log sawn determine optimal cut connection formation woodvision company acquired inovec accounted purchase effective january 1 2000 see note 3 inovec manufactures markets supports yield enhancement equipment sawmills based laser scanning technologies since inception inovec installed 633 laser scanners optimization systems 300 sawmills worldwide note 2 summary significant accounting policies basis presentation consolidated financial statements include financial statements company whollyowned subsidiaries intercompany accounts transactions eliminated consolidation financial statement estimates company’s preparation consolidated financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period estimates include inventory valuation allowances potentially uncollectible accounts receivable accrued warranty certain accrued liabilities valuation allowances deferred tax assets total estimated costs completion contracts accounted using percentageofcompletion method goodwill impairment actual results could differ estimates reclassifications certain prior year amounts reclassified conform current year presentation reclassifications change previously reported total assets liabilities stockholders’ equity operating income loss net income loss cash equivalents company considers highly liquid investments purchased original maturity three months less cash equivalents shortterm investments shortterm investments consist primarily commercial paper original maturities beyond three months less 12 months classified availableforsale shortterm investments carried cost approximates fair market value concentration credit risk financial instruments potentially subject company significant concentrations credit risk consist primarily cash equivalents shortterm investments accounts receivable company limits amount credit exposure cash balances shortterm investments maintaining accounts high credit quality financial institutions respect accounts receivable company regularly performs evaluations customers’ financial condition credit worthiness inventories stated lower cost market cost determined firstin firstout basis includes materials labor overhead years ended december 31 2002 2001 2000 company recorded excess obsolete inventory write expenses 45 million 429000 293000 respectively property equipment property equipment recorded cost depreciation amortization computed using straightline method based upon estimated useful lives assets range two seven years lease term respective assets less useful life intangible assets company patents licenses developed technologies covenant compete amortized estimated useful lives straightline basis ranging three five years effective january 1 2002 company adopted statement financial accounting standards 142 “sfas 142” “goodwill intangible assets” sfas 142 addresses initial recognition measurement intangible assets acquired outside business combination accounting goodwill intangible assets subsequent acquisition sfas 142 provides intangible assets finite useful lives amortized goodwill intangible assets indefinite lives amortized rather tested least annually impairment loss recorded net book value reporting unit exceeds estimated fair value company determines fair value using discounted future cash flows method upon adoption sfas 142 company ceased amortization carrying values goodwill 25 million acquired workforce 331000 reclassified net carrying amount acquired workforce goodwill adoption sfas 142 resulted reduction annual amortization expense 426000 fourth quarter 2002 company performed annual impairment test required standard recorded 21 million impairment goodwill relating inovec reporting unit following reconciles reported net income net income per share adjusted net income net income per share company followed amortization provisions sfas 142 periods presented thousands except per share data impairment longlived assets effective january 1 2002 company adopted statement financial accounting standards 144 “sfas 144” “accounting impairment disposal longlived assets” sfas 144 removes goodwill scope retained requirements sfas 121 “accounting impairment longlived assets longlived assets disposed of” 1 recognize impairment loss carrying amount longlived asset recoverable undiscounted cash flows 2 measure impairment loss difference carrying amount fair value asset company evaluates longlived assets impairment whenever events changes circumstances indicate carrying amount asset may recoverable adoption statement material impact consolidated financial statements accrued warranty estimated warranty costs recorded product revenues adjusted periodically based historical anticipated experience company accrues estimated cost product warranties time revenues recognized although company engages extensive product quality programs processes including actively monitoring evaluating quality component suppliers warranty obligation affected actual warranty costs including usage material labor service delivery costs incurred correcting product failure following reconciliation changes accrued warranty years ended december 31 2002 2001 2000 revenue recognition revenues recognized persuasive evidence arrangement exists delivery occurred services rendered price fixed determinable collectibility reasonably assured sales eds products faa tsa domestic customers demonstrated meet product specifications prior shipment product revenues recognized shipment portion revenues relating installation training deferred services performed accepted customer deferred installation training revenues based fair value services performed separately customers installation generally complex completed within relatively short period time typically less one week company consistent history completing routine installations obtaining customer acceptance domestic international sales certain airport installations require involved integration baggage handling systems essential functionality machine take longer routine installations integration services separately priced products sales agreements company recognizes service revenues agreements services performed sales eds products services customers foreign countries varying contractual terms governed part regulations foreign jurisdictions accordingly revenue recognized based specific facts circumstances surrounding transaction foreign sales eds products demonstrated meet product specifications prior shipment customers title risk loss pass customer shipment company either enforceable claim balance sheet date remaining unbilled amounts ability invoice customer unbilled amounts fixed period time regardless whether installation completed product revenue recognized shipment fair value installation training revenue deferred recognized services performed sales eds products certain foreign customers title risk loss eds products pass upon completion installation product service revenues recognized completion installation acceptance customer certain sales eds products foreign customers portion contract price withheld installation completed company believe enforceable claim balance sheet date realize withheld amount greater portion contract price fair value installation training deferred recognized revenue completion installation acceptance customer deferred revenues eds product sales arise advance payments received customers systems yet delivered revenues separate eds service maintenance contracts recognized ratably term agreements services service revenues recognized services performed deferred revenue eds services arises advance payments received customers services yet performed revenues quantum government contracts inovec product sales automation control systems recognized using percentageofcompletion method based costs incurred date percentage total estimated costs completion provisions estimated losses accrued contracts anticipated result losses completion contract deferred revenue recorded advance payments received work yet performed research development costs research development costs charged operations incurred contractually reimbursable costs certain research development activities reflected reduction research development expense period related costs incurred stockbased compensation company grants stock options fixed number shares employees exercise price equal fair value shares date grant company accounts employee stockbased compensation accordance accounting principles board opinion 25 “apb 25” “accounting stock issued employees” company accounts stockbased awards nonemployees accordance statement financial accounting standards 123 “sfas 123” “accounting stockbased compensation” emerging issues task force issue 9618 “accounting equity instruments issued employees acquiring conjunction selling goods services” company’s disclosures accordance statement financial accounting standards 148 “sfas 148” “accounting stockbased compensation disclosurean amendment fasb statement 123” compensation cost options granted shares issued 2002 2001 2000 company’s stock option plans “equity plans” employee stock purchase plans “purchase plans” determined based fair value grant issue dates prescribed sfas 123 sfas 148 company’s net income loss pro forma net income loss per share would follows thousands except per share data fair value option grant share granted estimated date grant using blackscholes option pricing model following assumptions used grants applicable period income taxes company accounts income taxes accordance statement financial accounting standards 109 “accounting income taxes” prescribes use asset liability method whereby deferred tax asset liability account balances calculated balance sheet date using current tax laws rates effect valuation allowances established necessary reduce deferred tax assets likely portion deferred tax assets realized certain significant risks uncertainties company operates dynamic highly competitive industry accordingly affected variety factors example management company believes changes following areas could significant negative effect company terms future financial position results operations cash flows dependence upon limited number suppliers component parts risks associated budget processes governmental agencies could limit product demand legislative actions ability airports integrate company’s eds units baggage handling systems unforeseen problems relating ability company’s eds products sustain increased usage management expansion company’s operations growth service organization risks associated integration acquired businesses product liability related claims products fail limited number customers exercise royaltybearing license granted tsa limitations company’s intellectual property rights lengthy sales cycle could result able obtain sales orders risks associated international sales including limited political instability changes regulatory requirements foreign currency risk tariffs barriers negative tax consequences company’s relationships international customers may damaged required fulfill tsa orders expense international orders selection another company provide postwarranty service company’s ctx systems company’s future products product modifications fail obtain tsa certification inability adapt rapid technological change competition industry retaining key management personnel employees natural disasters risks associated special contracting requirements governmental agencies failure properly protect company’s intellectual property enforce defend claims intellectual property infringement availability future government funding product development comprehensive income statement financial accounting standards 130 “reporting comprehensive income” establishes standards reporting displaying comprehensive income components revenues expenses gains losses full set generalpurpose financial statements items may include foreign currency translation adjustments unrealized gainslosses investing hedging activities transactions segment information statement financial accounting standards 131 “disclosures segments enterprise related information” requires disclosures segment information “management” approach discussed note 1 company three reportable segments based financial information regularly reviewed company’s chief operating decision maker deciding allocate resources assess performance fair value financial instruments company’s financial instruments include cash equivalents shortterm investments accounts receivable accounts payable accrued liabilities shortterm debt longterm debt carrying values cash equivalents shortterm investments accounts receivable approximate fair values based quoted market values due shortterm maturities carrying values shortterm debt longterm debt approximate fair value due variable interest rates approximate market rates net income loss per share basic net income loss per share computed dividing income loss available common stockholders weightedaverage shares common stock outstanding period diluted net income loss per share reflects weightedaverage shares common stock outstanding plus potential effect dilutive securities contracts convertible shares common stock options warrants convertible debt preferred stock using treasury stock method shares issuable future periods except cases effect would antidilutive derivative instruments hedging activities january 1 2001 company adopted statement financial accounting standards 133 “sfas 133” “accounting derivative instruments hedging activities” sfas 133 requires every derivative instrument including certain derivative instruments embedded contracts recorded balance sheet fair value changes fair value derivatives recorded period current earnings comprehensive income depending whether derivative designated part hedge transaction type hedge transaction sfas 133 requires company formally document designate assess effectiveness transactions receive hedge accounting company adopted sfas 133 january 1 2001 elect hedge accounting defined sfas 133 adoption statement material impact company’s financial position results operations year ended december 31 2002 company’s derivatives consisted foreign exchange forward contracts may 2002 company designated certain foreign currency forward contracts cash flow hedges foreign exchange risk international sales contracts began applying hedge accounting defined sfas 133 accordingly december 31 2002 company recorded 1783000 comprehensive loss net income taxes 1227000 representing net change fair value foreign currency forward contracts designated qualified hedge accounting amounts deferred comprehensive loss reclassified earnings upon recognition hedged revenue year ended december 31 2002 company also recorded 272000 ineffectiveness hedge accounting december 31 2002 changes fair value certain forward contracts offset measurement associated accounts receivable amounts maturity foreign exchange forward contracts december 31 2002 consistent contractual expected timing transactions hedged principally receipt customer payments foreign exchange forward contracts mature within twelve months december 31 2002 company anticipates reclassifying full amount included within comprehensive loss earnings within next twelve months company enter market risk sensitive instruments trading purposes company aggregate foreign currency forward contracts notional amounts 347 million 169 million december 31 2002 2001 respectively fair value instruments included consolidated balance sheets liability balance 49 million asset balance 47000 december 31 2002 2001 respectively recently issued accounting standards accounting costs associated exit disposal activities june 2002 financial accounting standards board issued statement financial accounting standards 146 “sfas 146” “accounting costs associated exit disposal activities” addresses accounting restructuring similar costs sfas 146 supersedes previous accounting guidance principally emerging issues task force issue 943 company adopt provisions sfas 146 restructuring activities initiated december 31 2002 sfas 146 requires liability costs associated exit disposal activity recognized liability incurred issue 943 liability exit costs recognized date company’s commitment exit plan sfas 146 also establishes liability initially measured recorded fair value accordingly sfas 146 may affect timing recognizing future restructuring costs well amounts recognized accounting stockbased compensation december 2002 financial accounting standards board issued statement financial accounting standards 148 “sfas 148” “accounting stockbased compensation transition disclosure amendment fasb statement 123” provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation addition statement amends disclosure requirements sfas 123 require prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method used reported results amended disclosure requirements sfas 123 effective years ending december 15 2002 accounting disclosure requirements guarantees november 2002 financial accounting standards board issued fasb interpretation 45 “fin 45” “guarantor’s accounting disclosure requirement guarantees including indirect guarantees indebtedness others” fin 45 requires upon issuance guarantee guarantor must recognize liability fair value obligation assumes guarantee disclosure provisions fin 45 effective financial statements interim annual periods end december 15 2002 provisions initial recognition measurement effective prospective basis guarantees issued modified december 31 2002 irrespective guarantor’s yearend company yet determined impact adoption recognition provisions fin 45 company’s results operations financial position revenue arrangements multiple deliverables november 2002 eitf reached consensus issue 0021 “eitf 0021 “revenue arrangements multiple deliverables” eitf 0021 addresses certain aspects accounting vendor arrangements vendor perform multiple revenue generating activities eitf 0021 effective fiscal periods beginning june 15 2003 company yet determined impact adoption eitf 0021 company’s results operations financial position note 3 acquisition inovec inc company acquired inovec manufacturer yield enhancement equipment sawmills initial purchase price 52 million cash stock payable twoyear period acquisition inovec accounted purchase effective january 1 2000 company paid purchase price 24 million cash 28 million issuance 506000 shares common stock former shareholders inovec addition company contingently liable purchase agreement event inovec achieved certain operating milestones years ended december 31 2001 2000 inovec achieved certain milestones additional 366000 533000 recorded additional goodwill december 31 2001 2000 respectively result company paid 267000 cash 266000 issuance 91000 shares common stock 2001 remaining obligation 366000 paid 183000 cash 183000 issuance 5000 shares common stock april 2002 transaction accounted purchase accordingly results operations inovec included consolidated financial statements years ended december 31 2002 2001 2000 company allocated purchase price based fair value assets acquired liabilities assumed portions purchase price including intangible assets identified independent appraisers utilizing accepted valuation procedures techniques intangible assets included approximately 15 million developed technologies 662000 acquired workforce 50000 covenants compete remaining 29 million goodwill intangibles amortized estimated useful lives ranging three ten years adoption sfas 142 company longer amortizes carrying values goodwill 25 million acquired workforce 331000 january 1 2002 resulting reduction annual amortization expense 426000 fourth quarter 2002 company performed annual impairment tests required standard recorded 21 million impairment goodwill note 4 government contracts grants company awarded various research development contracts grants faa tsa government agencies share costs developing enhancing company’s products 2002 2001 2000 company entitled reimbursements 886000 83 million 17 million respectively research development contracts grants reimbursements direct costs overhead general administrative expenses reflected reduction research development expense selling general administrative expense manufacturing customer support overhead pools period presented billings research development contracts grants submitted faa tsa government agencies monthly basis actual costs incurred december 31 2002 2001 related receivable balances contracts grants 0 33 million respectively addition letter contract dated february 19 2002 subsequent delivery order faa following formation tsa agreed reimburse company certain ramp costs incurred meet tsa’s product order demand 2002 ramp costs consist consulting expenses vendor expedite charges subcontract manufacturing set costs company invoiced 93 million reimbursable expenses tsa 2002 december 31 2002 related receivable balance 65 million company approximately 16 million classified current assets expected invoiced 2003 amounts reimbursable elements ramp costs would expensed note 5 debt lines credit effective july 2002 company amended two line credit agreements silicon valley bank first agreement provides maximum borrowings amount 250 million second agreement partially guaranteed exportimport bank exim united states provides maximum borrowings amount lower sum 70 90 eligible eds export accounts receivable plus lower 1 70 eligible raw materials workinprocess inventory designated export customers 2 60 outstanding loans agreement b 100 million company expects increase 150 million 2003 following approval increase guarantee exim borrowings agreements bear interest bank’s prime rate minus 05 375 december 31 2002 agreements expire july 2004 require eds segment maintain certain levels tangible net worth company may use proceeds loans lines credit general corporate purposes december 31 2002 company borrowings outstanding agreements however december 31 2002 company outstanding guarantees customers issuance letters credit partial reserve 20 million secured lines credit foreign exchange contracts 10 reserve 35 million secured lines credit company remaining available borrowing capacity lines credit 295 million december 31 2002 based eligible eds accounts receivable inventories date december 31 2002 company letters credit totaling 67 million guarantees primarily customers performance delivery commitments bid bonds allowing company participate solicitation sales addition company one guarantee insurance carrier premium payment commitments guarantees range one thirteen months december 31 2002 expiration august 2002 inovec renewed line credit agreement pacific continental bank agreement provides 15 million working capital line credit secured assets inovec agreement bears interest bank’s prime rate plus 10 interest rate floor 575 agreement expires august 2003 requires inovec maintain certain levels tangible net worth debtworth ratios inovec may use proceeds loans line credit general corporate purposes operations december 31 2002 inovec borrowings outstanding agreement shortterm debt company previously borrowed committed equipment line credit agreement silicon valley bank converted term loan draw borrowings secured assets purchased financed december 31 2002 company outstanding 67000 term loan due june 2003 term loan bears interest bank’s prime rate plus 10 525 december 31 2002 note 6 stockholders’ equity february 28 2002 company’s stockholders approved increase number authorized shares common stock previously approved board directors 20000000 shares 60000000 shares company filed amendment certificate incorporation effecting increase march 27 2002 company filed amended form s3 registration statement securities act 1933 announced public offering 3000000 shares common stock public price 3650 per share offering closed april 2 2002 company sold 2500000 shares received proceeds 846 million net issuance costs selling stockholder sold another 500000 shares common stock offering certain selling stockholders sold 450000 shares underwriters exercised overallotment option company receive proceeds sale shares selling stockholders september 2001 company entered agreement donald co investment advisory financing related services president donald co member board directors agreement donald co received 50000 cash retainer fullyvested warrant purchase 100000 shares company’s common stock price 995 per share closing price company’s common stock day prior date issuance warrant expires five years date issuance fair value warrant 650000 estimated date grant using blackscholes option pricing model following assumptions dividends riskfree interest rate 394 volatility 78 contractual life five years september 2002 company issued 100000 shares common stock warrant however lieu paying cash shares 34153 shares valued 2913 per share returned company settle transaction shares recorded treasury stock onehalf cash retainer warrant related ongoing investment financial advisory services recorded current assets amortized oneyear term agreement company recorded amortization expense 262000 88000 2002 2001 respectively remaining balance 350000 related services provided connection company’s followon offering april 2002 netted proceeds offering october 2001 company issued nonqualified stock option consultant purchase 15000 shares common stock price 1406 per share option oneyear cliff vesting term expires ten years date issuance fair value option end oneyear cliff vesting term october 27 2002 456000 estimated october 27 2002 using blackscholes option pricing model following assumptions dividends riskfree interest rate 411 volatility 86 contractual life nine years company recorded compensation expense vesting period option fair value adjusted changes fair value common stock subsequent periods years ended december 31 2002 2001 company recorded compensation expense 389000 67000 respectively 2000 2002 terms agreement relating acquisition inovec company issued 602000 shares common stock former shareholders inovec september 1997 terms agreement relating acquisition quantum 777000 shares common stock either issued quantum shareholders exchange quantum capital stock outstanding reserved issuance connection quantum common stock options outstanding prior acquisition converted options purchase invision common stock december 31 2002 company reserved shares common stock issuance follows note 7 employee stock benefit plans equity incentive plans company several equity plans officers employees consultants directors company equity plans provide granting incentive nonqualified stock options stock bonus awards rights purchase restricted stock appreciation rights together “stock awards” purchase aggregate 6616726 shares company’s common stock officers employees consultants directors company board directors responsible administration equity plans also determines terms stock award options granted equity plans generally vest fouryear period event change control transaction stock awards outstanding shall continued assumed surviving entity similar awards shall substituted therefor surviving entity refuses vesting rate lapse repurchase rights stock awards shall accelerate full date immediately prior effective date change control transaction respect senior vice presidents even surviving entity continues assumes substitutes stock awards vesting rate lapse repurchase rights stock awards shall accelerate full following effective date change control transaction respect vice presidents even surviving entity continues assumes substitutes stock awards vesting rate lapse repurchase rights stock awards shall accelerate full upon involuntary termination without “cause” “constructive termination” terms defined company’s change control equity acceleration plan within year following effective date change control transaction nonqualified stock options may granted exercise price per share less 85 fair value per share common stock date grant incentive stock options may granted exercise price per share less 100 fair value per share common stock date grant less 110 fair value case holders 10 company’s voting stock options granted equity plans generally expire ten years date grant five years incentive stock options granted holders 10 company’s voting stock options granted generally vest 25 one year issuance 148th month thereafter three years activity equity plans follows thousands except per share data information relating stock options outstanding equity plans december 31 2002 follows share data thousands employee stock purchase plans company reserved total 849944 shares common stock issuance purchase plans december 31 2002 622387 shares issued purchase plans employee 401k plan invision technologies inc 401k plan “401k plan” established 1992 provide retirement incidental benefits employees allowed section 401k internal revenue code 401k plan provides taxdeferred salary deductions eligible employees may contribute 20 annual compensation 401k plan limited maximum amount set periodically internal revenue service beginning july 1997 company began matching employee contributions rate 050 dollar maximum 6 employee’s gross compensation matching contributions vest immediately company matching contributions 401k plan totaled 707000 524000 395000 2002 2001 2000 respectively note 8 commitments company leases facilities equipment noncancelable leases expiring various times 2012 existing facilities lease corporate facility newark california includes option renew additional five years 2012 future minimum lease payments leases december 31 2002 follows thousands rent expense facilities located newark california san diego california eugene oregon france united kingdom 1903000 1646000 1529000 years ended december 31 2002 2001 2000 respectively leases corporate offices manufacturing facilities newark california san diego california include scheduled base rent increases term leases total amount base rent payments charged expense straightline method term leases addition base rent payment company pays monthly allocation building’s operating expenses december 31 2002 2001 company recorded deferred rent 576000 584000 respectively reflect excess rent expense cash payments since inception lease longterm liability note 9 net income loss per share following reconciliation components basic diluted net income loss per share calculations periods presented thousands except per share data computation diluted net loss per share year ended december 31 2000 include shares issuable upon exercise options 1046222 issuance common stock related acquisition inovec payable april 2001 2002 based average share prices prior scheduled payment dates effect would antidilutive note 10 income taxes provision benefit income taxes 2002 2001 2000 consists following thousands company’s effective tax rate 2002 2001 2000 differs us federal statutory income tax rate follows deferred tax assets liabilities december 31 2002 2001 2000 consist following thousands december 31 2002 company federal state net operating loss carryforwards approximately 18 million 321000 respectively available reduce future federal state taxable income company’s federal net operating loss carryforwards begin expire 2010 state net operating loss carryforwards expire 2011 tax benefit net operating loss carryforwards may limited due impact tax reform act 1986 events may cause tax benefit limited include limited cumulative stock ownership change 50 threeyear period timing utilization various tax benefits carried forward company’s income taxes payable reduced income tax benefits associated employee stock transactions benefits credited directly stockholders’ equity amounted 92 million 2002 22 million 2001 note 11 industry segments major customers geographic information provisions statement financial accounting standards 131 “disclosures segments enterprise related information” company three reportable segments based financial information regularly reviewed company’s management deciding allocate resources assess performance financial information business segment follows thousands december 31 2002 company accounts receivable customers located united states europe middle east asia pacific areas 1295 million 160 million 272000 331000 145000 respectively december 31 2002 one customer accounted 834 total accounts receivable customer accounted 10 total accounts receivable 2002 december 31 2001 one customer accounted 375 total accounts receivable second customer accounted 155 total accounts receivable customer represented 10 total revenues faatsa 82 29 42 2002 2001 2000 respectively company markets products domestically internationally total revenues geographic region based location customer placing order follows thousands substantially company’s longlived assets located united states note 12 related party transactions 2002 2001 2000 company recorded professional consulting fees 210000 284000 188000 respectively compensation company’s directors services provided members board directors well consulting services rendered company connection services directors september 2001 company entered agreement donald co investment advisory financing related services president donald co member board directors agreement donald co received 50000 cash retainer fullyvested warrant purchase 100000 shares company’s common stock price 995 per share closing price company’s common stock day prior date issuance warrant expires five years date issuance fair value warrant 650000 estimated date grant using blackscholes option pricing model following assumptions dividends riskfree interest rate 394 volatility 78 contractual life five years september 2002 company issued 100000 shares common stock warrant however lieu paying cash shares 34153 shares valued 2913 per share returned company settle transaction shares recorded treasury stock onehalf cash retainer warrant related ongoing investment financial advisory services recorded current assets amortized oneyear term agreement company recorded amortization expense 262000 88000 2002 2001 respectively remaining balance 350000 related services provided connection company’s followon offering april 2002 netted proceeds offering august 1996 january 1997 january 1999 company entered consulting agreements bgi inc “bgi” virginiabased international consulting firm engaged assist company marketing company’s eds products us government march 1998 morris busby president controlling shareholder bgi elected company’s board directors company paid consulting fees bgi consulting services 120000 2000 recorded additional consulting expenses 108000 pursuant agreement issue common stock agreement expired december 31 2000 note 13 license agreements connection formation company obtained exclusive worldwide fullypaid license imatron inc regarding patents knowhow related 1 scanners inspection mail freight parcels baggage wood products 2 compact medical scanners military field applications license allows company develop manufacture sell systems based different type ct technology currently incorporated company’s ctx series company exchange granted imatron exclusive worldwide fully paid license company’s existing future patents knowhow permit imatron utilize technology medical scanners compact medical scanners military field applications license expires 2009 royalties paid license company granted tsa twoyear royaltybearing license commencing march 2002 enable manufacturers build eds products based company’s technology tsa exercised license date april 1999 quantum entered technology license agreement international business machines corporation “ibm” agreement tenyear nonexclusive nontransferable worldwide license certain detection technology onetime license fee paid ibm quantum subject royalty payments based upon net sales price certain products sold otherwise transferred ibm minimum royalty payment royalties paid license june 1997 quantum entered joint venture perform research development related certain detection technologies exchange 38 ownership interest joint venture quantum granted nonexclusive royalty free perpetual transferable sublicense superconductor technology agreed joint venture sole source fabrication testing products developed joint venture agreed guarantee onehalf 200000 working capital loan joint venture connection formation joint venture quantum sold equipment joint venture exchange elevenyear note receivable 100000 bearing interest 67 per annum january 1999 quantum sold sufficient shares reduce ownership joint venture 10 released obligation guarantee onehalf working capital loan joint venture march 1995 quantum executed tenyear exclusive license agreement third party quantum subject royalty payments based percentage net sales price certain products made used sold minimum annual royalties 20000 due beginning calendar year 1997 remaining term agreement quantum incur royalty expense agreement 1995 1996 paid minimum royalty 20000 1997 1998 january 1999 quantum licensor agreed modify license expanding field use increasing minimum annual royalty 70000 extending term january 2009 quantum paid onetime fee 50000 obtain modification extension made minimum annual royalty 70000 years 1999 2002 recognition development costs incurred quantum design inc “qd” prior acquisition quantum agreed pay qd royalty rate 4 net sales certain products whether sold quantum licensee period six years effective date agreement april 15 1994 agreement also established minimum royalty payments 50000 years 1997 1998 applied royalties become due qd respective fiscal years agreement expired 2000 note 14 contingencies company may involved time litigation relating claims arising operations normal course business company currently party legal proceedings adverse outcome management’s opinion individually aggregate would material adverse effect company’s business financial condition results operations cash flows note 15 balance sheet components unbilled receivables comprised amounts billable customers upon satisfaction certain activities installation final acceptance amounts percentageofcompletion contracts yet billed balance sheet date amounts yet billed due timing invoice preparation selfconstructed assets manufactured company use system testing support include cost parts materials overhead allocation company depreciates selfconstructed assets respective estimated useful lives range three five years ended december 31 2002 2001 2000 company recorded amortization expense intangible assets 324000 794000 682000 respectively carrying value goodwill december 31 2002 adjusted 681000 reflect impairment write 21 million include 331000 balance previously classified acquired workforce expected future amortization expense intangibles balances december 31 2002 follows december 31 2002 2001 company 366000 256000 respectively capitalized lease equipment related accumulated amortization 250000 183000 respectively delivery orders received faa tsa beginning april 2002 governed letter contract dated february 19 2002 contract specifies product prices reduced amount equal 75 actual bill material savings contract yet definitized company accrued liability estimated amount material cost savings shared tsa estimate determined quantity product shipments tsa contract extended model 75 net decrease bill materials production units shipped estimated liability 83 million december 31 2002 recorded reduction revenues year contract definitized liability adjusted reflect agreed upon payments tsa company anticipates contract definitized end second quarter 2003 note 16 subsequent event february 21 2003 company entered definitive agreement acquire yxlon international holding gmbh 386 million euros transaction would funded cash expected close end march 2003 company would required make additional payment 100 million euros yxlon’s xes 3000 xes 3500 xray diffraction product certified explosives detection tsa december 31 2003 selected quarterly financial data unaudited invision technologies inc schedule iivaluation qualifying accounts years ended december 31 2002 2001 2000 thousandsitem 15 exhibits financial statement schedules reports form 8k a1 financial statements consolidated financial statements required item submitted separate section beginning page immediately following signature page annual report incorporated reference herein deloitte touche llp independent auditors’ report consolidated balance sheets december 31 2003 2002 consolidated statements operations years ended december 31 2003 2002 2001 consolidated statements cash flows years ended december 31 2003 2002 2001 consolidated statements stockholders’ equity years ended december 31 2003 2002 2001 notes consolidated financial statements a2 financial statement schedule iivaluation qualifying accounts schedule listed set forth immediately following consolidated financial statements following signature page annual report incorporated reference herein schedules listed omitted applicable required information shown consolidated financial statements notes thereto a3 exhibits b reports form 8k february 11 2004 filed current report form 8k pursuant item 12 thereof furnishing copy press release titled “invision technologies reports fourth quarter yearend 2003 results” dated february 11 2004 c see exhibits listed item 15a3 financial statement schedules required item listed item 15a2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused annual report signed behalf undersigned thereunto duly authorized power attorney person whose signature appears constitutes appoints sergio magistri ross mulholland true lawful attorneyinfact agent acting alone full power substitution resubstitution name place stead capacities sign amendments annual report form 10k file exhibits thereto documents connection therewith securities exchange commission granting unto said attorneyinfact agent full power authority perform every act thing requisite necessary done premises fully intents purposes might could person hereby ratifying confirming said attorneyinfact agent substitute substitutes may lawfully cause done virtue hereof pursuant requirements securities exchange act 1934 annual report signed following persons behalf registrant capacities dates indicated independent auditors’ report board directors stockholders invision technologies inc audited accompanying consolidated balance sheets invision technologies inc subsidiaries “company” december 31 2003 2002 related consolidated statements operations stockholders’ equity cash flows three years period ended december 31 2003 audits also included financial statement schedule listed company’s annual report form 10k fiscal year ended december 31 2003 item 15a2 financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements present fairly material respects financial position invision technologies inc subsidiaries december 31 2003 2002 results operations cash flows three years period ended december 31 2003 conformity accounting principles generally accepted united states america also opinion financial statement schedule considered relation basic consolidated financial statements taken whole presents fairly material respects information set forth therein discussed note 2 financial statements 2002 company changed method accounting goodwill intangible assets conform statement financial accounting standards 142 “goodwill intangible assets” discussed note 16 financial statements march 15 2004 company entered agreement plan merger acquired deloitte touche llp san jose california march 15 2004 invision technologies inc consolidated balance sheets thousands except share data accompanying notes integral part consolidated financial statements invision technologies inc consolidated statements operations thousands except per share data accompanying notes integral part consolidated financial statements invision technologies inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements invision technologies inc consolidated statements stockholders’ equity thousands accompanying notes integral part consolidated financial statements invision technologies inc notes consolidated financial statements note 1 description business invision technologies inc “company” incorporated delaware 1990 principal business manufacture computed tomography ct based detection products used aviation industry screen baggage company’s headquarters principal manufacturing facilities located newark california 1997 company acquired quantum magnetics inc “quantum” whollyowned subsidiary quantum california corporation headquarters manufacturing facilities located san diego california 2000 company acquired inovec inc “inovec” whollyowned subsidiary inovec delaware corporation headquarters manufacturing facilities located eugene oregon 2003 company acquired yxlon international holding gmbh “yxlon” whollyowned subsidiary yxlon company organized laws germany headquarters manufacturing facilities located hamburg germany first quarter 2003 company presented segment information based three reportable segments explosives detection systems “eds” quantum wood result acquisition yxlon company two reportable segments eds nondestructive testing “ndt” “eds” segment comprised business unit engaged development manufacturing marketing support explosives detection systems based advanced computed tomography technology “ndt” segment comprised yxlon business unit engaged development manufacturing marketing support nondestructive testing systems wide range industrial applications segments including quantum wood xrd aggregated form “all other” category meet threshold reportable segment note 2 summary significant accounting policies basis presentation consolidated financial statements include financial statements company whollyowned subsidiaries intercompany accounts transactions eliminated consolidation financial statement estimates company’s preparation consolidated financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period estimates include inventory valuation allowances potentially uncollectible accounts receivable accrued warranty certain accrued liabilities valuation allowances deferred tax assets total estimated costs completion contracts accounted using percentageofcompletion method goodwill impairment actual results could differ estimates cash equivalents company considers highly liquid investments purchased original maturity three months less cash equivalents shortterm investments shortterm investments consist primarily us government corporate notes bonds classified availableforsale shortterm investments carried fair value unrealized gains losses reported separate component accumulated comprehensive income loss net tax following table summarizes company’s shortterm investments december 31 2003 thousands following table summarizes maturities company’s notes bond investments december 31 2003 thousands concentration credit risk financial instruments potentially subject company significant concentrations credit risk consist primarily cash equivalents shortterm investments accounts receivable company limits amount credit exposure cash balances shortterm investments maintaining accounts high credit quality financial institutions respect accounts receivable company regularly performs evaluations customers’ financial condition credit worthiness inventories stated lower cost market cost determined firstin firstout basis includes materials labor overhead years ended december 31 2003 2002 2001 company recorded excess obsolete inventory write expenses 13 million 45 million 429000 respectively property equipment property equipment recorded cost depreciation amortization computed using straightline method based upon estimated useful lives assets range two seven years lease term respective assets less useful life intangible assets company patents licenses developed technologies covenant compete amortized estimated useful lives straightline basis ranging three seven years effective january 1 2002 company adopted statement financial accounting standards 142 “goodwill intangible assets” “sfas 142” sfas 142 addresses initial recognition measurement intangible assets acquired outside business combination accounting goodwill intangible assets subsequent acquisition sfas 142 provides intangible assets finite useful lives amortized goodwill intangible assets indefinite lives amortized rather tested least annually impairment loss recorded net book value reporting unit exceeds estimated fair value company determines fair value using discounted future cash flows method upon adoption sfas 142 company ceased amortization carrying values goodwill 25 million acquired workforce 331000 reclassified net carrying amount acquired workforce goodwill adoption sfas 142 resulted reduction annual amortization expense 426000 fourth quarter 2002 company performed annual impairment test required standard recorded 21 million impairment goodwill relating inovec reporting unit following reconciles reported net income net income per share adjusted net income net income per share company followed amortization provisions sfas 142 periods presented thousands except per share data impairment longlived assets effective january 1 2002 company adopted statement financial accounting standards 144 “accounting impairment disposal longlived assets” “sfas 144” sfas 144 removes goodwill scope retained requirements sfas 121 “accounting impairment longlived assets longlived assets disposed of” 1 recognize impairment loss carrying amount longlived asset recoverable undiscounted cash flows 2 measure impairment loss difference carrying amount fair value asset company evaluates longlived assets impairment whenever events changes circumstances indicate carrying amount asset may recoverable adoption statement material impact consolidated financial statements accrued warranty estimated warranty costs recorded product revenues adjusted periodically based historical anticipated experience company accrues estimated cost product warranties time revenues recognized although company engages extensive product quality programs processes including actively monitoring evaluating quality component suppliers warranty obligation affected actual warranty costs including usage material labor service delivery costs incurred correcting product failure following reconciliation changes accrued warranty years ended december 31 2003 2002 2001 revenue recognition revenues recognized persuasive evidence arrangement exists delivery occurred services rendered price fixed determinable collectibility reasonably assured sales eds products faa tsa domestic customers demonstrated meet product specifications prior shipment product revenues recognized shipment portion revenues relating installation training deferred services performed accepted customer deferred installation training revenues based fair value services performed separately customers installation generally complex completed within relatively short period time typically less one week company consistent history completing routine installations obtaining customer acceptance domestic international sales certain airport installations require involved integration baggage handling systems take longer routine installations integration services separately priced products sales agreements company recognizes service revenues agreements services performed sales eds ndt products services customers foreign countries varying contractual terms governed part regulations foreign jurisdictions accordingly revenue recognized based specific facts circumstances surrounding transaction foreign sales eds ndt products demonstrated meet product specifications prior shipment customers title risk loss pass customer shipment company either enforceable claim balance sheet date remaining unbilled amounts ability invoice customer unbilled amounts fixed period time regardless whether installation completed product revenue recognized shipment fair value installation training revenue deferred recognized services performed sales eds ndt products foreign customers title risk loss products pass upon completion installation product service revenues recognized completion installation acceptance customer sales eds ndt products foreign customers portion contract price withheld installation completed company believe enforceable claim balance sheet date realize withheld amount greater portion contract price fair value installation training deferred recognized revenue completion installation acceptance customer deferred revenues eds product sales arise advance payments received customers systems yet delivered revenues separate eds service maintenance contracts recognized ratably term agreements services service revenues recognized services performed deferred revenue eds services arises advance payments received customers services yet performed revenues quantum contract research development inovec product sales automation control systems recognized using percentageofcompletion method based costs incurred date percentage total estimated costs completion provisions estimated losses accrued contracts anticipated result losses completion contract deferred revenue recorded advance payments received work yet performed research development costs research development costs charged operations incurred contractually reimbursable costs certain research development activities reflected reduction research development expense period related costs incurred stockbased compensation company grants stock options fixed number shares employees exercise price equal fair value shares date grant company accounts employee stockbased compensation accordance accounting principles board opinion 25 “accounting stock issued employees” “apb 25” company accounts stockbased awards nonemployees accordance statement financial accounting standards 123 “accounting stockbased compensation” “sfas 123” emerging issues task force issue 9618 “accounting equity instruments issued employees acquiring conjunction selling goods services” company’s disclosures accordance statement financial accounting standards 148 “accounting stockbased compensation disclosure amendment fasb statement 123” “sfas 148” compensation cost options granted shares issued 2003 2002 2001 company’s stock option plans “equity plans” employee stock purchase plans “purchase plans” determined based fair value grant issue dates prescribed sfas 123 sfas 148 company’s net income pro forma net income per share would follows thousands except per share data fair value option grant share granted estimated date grant using blackscholes option pricing model following assumptions used grants applicable period income taxes company accounts income taxes accordance statement financial accounting standards 109 “accounting income taxes” prescribes use asset liability method whereby deferred tax asset liability account balances calculated balance sheet date using current tax laws rates effect valuation allowances established necessary reduce deferred tax assets likely portion deferred tax assets realized certain significant risks uncertainties company operates dynamic highly competitive industry accordingly affected variety factors example management company believes changes following areas could significant negative effect company terms future financial position results operations cash flows dependence upon limited number suppliers component parts risks associated budget processes governmental agencies could limit product demand legislative actions ability airports integrate company’s eds units baggage handling systems unforeseen problems relating ability company’s eds products sustain increased usage management expansion company’s operations growth service organization risks associated integration acquired businesses product liability related claims products fail limited number customers exercise royaltybearing license granted tsa limitations company’s intellectual property rights lengthy sales cycle could result able obtain sales orders risks associated international sales including limited political instability changes regulatory requirements foreign currency risk tariffs barriers negative tax consequences company’s relationships international customers may damaged required fulfill tsa orders expense international orders selection another company provide postwarranty service company’s ctx products company’s future products product modifications fail obtain tsa certification inability adapt rapid technological change competition industry retaining key management personnel employees natural disasters risks associated special contracting requirements governmental agencies failure properly protect company’s intellectual property enforce defend claims intellectual property infringement availability future government funding product development comprehensive income statement financial accounting standards 130 “reporting comprehensive income” establishes standards reporting displaying comprehensive income components revenues expenses gains losses full set generalpurpose financial statements items may include foreign currency translation adjustments unrealized gainslosses investing hedging activities transactions segment information statement financial accounting standards 131 “disclosures segments enterprise related information” requires disclosures segment information “management” approach discussed note 1 company two reportable segments based financial information regularly reviewed company’s chief operating decision makers deciding assess performance allocate resources fair value financial instruments company’s financial instruments include cash equivalents shortterm investments accounts receivable accounts payable accrued liabilities shortterm debt longterm debt carrying values cash equivalents shortterm investments accounts receivable approximate fair values based quoted market values due shortterm maturities carrying values shortterm debt longterm debt approximate fair value due variable interest rates approximate market rates net income per share basic net income per share computed dividing income available common stockholders weightedaverage shares common stock outstanding period diluted net income per share reflects weightedaverage shares common stock outstanding plus potential effect dilutive securities contracts convertible shares common stock options warrants convertible debt company’s convertible senior notes due 2023 preferred stock using treasury stock method shares issuable future periods except cases effect would antidilutive shares common stock company’s convertible senior notes due 2023 convert included calculation diluted net income per share fiscal quarter company’s closing stock price equals exceeds 3520 least 20 days last 30 trading days fiscal quarter derivative instruments hedging activities january 1 2001 company adopted statement financial accounting standards 133 “accounting derivative instruments hedging activities” “sfas 133” sfas 133 requires every derivative instrument including certain derivative instruments embedded contracts recorded balance sheet fair value changes fair value derivatives recorded period current earnings comprehensive income depending whether derivative designated part hedge transaction type hedge transaction sfas 133 requires company formally document designate assess effectiveness transactions receive hedge accounting company adopted sfas 133 january 1 2001 elect hedge accounting defined sfas 133 adoption statement material impact company’s financial position results operations year ended december 31 2003 company’s derivatives consisted foreign exchange forward contracts may 2002 company designated certain foreign exchange forward contracts cash flow hedges foreign exchange risk international sales contracts began applying hedge accounting defined sfas 133 accordingly december 31 2003 company recorded 1940000 comprehensive loss net income taxes 1428000 representing net change fair value foreign exchange forward contracts designated qualified hedge accounting amounts deferred comprehensive loss reclassified earnings upon recognition hedged revenue year ended december 31 2003 company also recorded 34395 ineffectiveness hedge accounting december 31 2003 changes fair value certain forward contracts offset measurement associated accounts receivable amounts maturity foreign exchange forward contracts december 31 2003 consistent contractual expected timing transactions hedged principally receipt customer payments foreign exchange forward contracts mature within twelve months december 31 2003 company anticipates reclassifying full amount included within comprehensive loss earnings within next twelve months company enter market risk sensitive instruments trading purposes company aggregate foreign exchange forward contracts notional amounts 207 million 347 million december 31 2003 2002 respectively fair value instruments included consolidated balance sheets net liability balance 11 million 49 million december 31 2003 2002 respectively recently issued accounting standards revenue arrangements multiple deliverables november 2002 emerging issues task force “eitf” reached consensus issue 0021 “revenue arrangements multiple deliverables” “eitf 0021” eitf 0021 addresses certain aspects accounting vendor arrangements vendor perform multiple revenue generating activities eitf 0021 effective fiscal periods beginning june 15 2003 impact adoption eitf 0021 company’s consolidated financial statements accounting disclosure requirements guarantees december 2002 company adopted financial accounting standards board “fasb” interpretation 45 “guarantor’s accounting disclosure requirement guarantees including indirect guarantees indebtedness others” “fin 45” fin 45 requires upon issuance guarantee guarantor must recognize liability fair value obligation assumes guarantee provisions initial recognition measurement effective prospective basis guarantees issued modified december 31 2002 irrespective guarantor’s yearend company adopted disclosure requirements fin 45 fourth quarter 2002 adoption fin 45 materially impact company’s consolidated financial statements accounting costs associated exit disposal activities january 1 2003 company adopted sfas 146 “accounting costs associated exit disposal activities” “sfas 146” addresses accounting restructuring similar costs sfas 146 supersedes previous accounting guidance principally eitf issue 943 “eitf 943” sfas 146 requires liability costs associated exit disposal activity recognized liability incurred eitf 943 liability exit costs recognized date company’s commitment exit plan sfas 146 also establishes liability initially measured recorded fair value accordingly sfas 146 may affect timing recognizing future restructuring costs well amounts recognized effect company’s consolidated financial statements adoption sfas 146 consolidation variable interest entities fasb issued interpretation 46 “consolidation variable interest entities” “fin 46” january 2003 revised interpretation fin 46 “fin 46r” december 2003 fin 46 requires certain variable interest entities “vies” consolidated primary beneficiary entity equity investors entity characteristics controlling financial interest sufficient equity risk entity finance activities without additional subordinated financial support parties provisions fin 46 effective immediately arrangements entered january 31 2003 since january 31 2003 company invested entities believes variable interest entities company primary beneficiary arrangements entered january 31 2003 company required continue apply fin 46 end first quarter fiscal 2004 company required adopt provisions fin 46r arrangements second quarter fiscal 2004 arrangements entered prior february 1 2003 company required adopt provisions fin 46r second quarter fiscal 2004 company expect adoption fin 46r impact company’s consolidated financial statements accounting derivative instruments hedging activities april 2003 fasb issued sfas 149 “amendment statement 133 derivative instruments hedging activities” “sfas 149” sfas 149 amends clarifies accounting derivative instruments including certain derivative instruments embedded contracts hedging activities sfas 133 sfas 149 generally effective contracts entered modified june 30 2003 hedging relationships designated june 30 2003 impact adoption sfas 149 company’s consolidated financial statements accounting financial instruments characteristics liabilities equity may 2003 fasb issued sfas 150 “accounting certain financial instruments characteristics liabilities equity” “sfas 150” requires certain financial instruments presented liabilities previously presented equity temporary equity instruments include mandatory redeemable preferred common stock certain options warrants sfas 150 effective financial instruments entered modified may 31 2003 effective beginning first interim period beginning june 15 2003 november 2003 fasb issued fasb staff position 1503 “effective date disclosures transition mandatorily redeemable financial instruments certain nonpublic entities certain mandatorily redeemable noncontrolling interests sfas 150” “fsp 1503” defers effective date various provisions sfas 150 adoption sfas 150 modified fsp 1503 material impact company’s consolidated financial statements revenue recognition december 2003 sec staff issued staff accounting bulletin 104 “revenue recognition corrected copy” “sab 104” revises rescinds portions revenue recognition interpretive guidance included staff accounting bulletin codification make consistent current authoritative accounting auditing guidance sec rules regulations principal revisions relate revenue recognition guidance longer necessary due developments us gaap sab 104 also rescinds frequently asked questions answers document issued conjunction release staff accounting bulletin 101 adoption sab 104 materially impact company’s consolidated financial statements note 3 business combinations accordance statement financial accounting standards 141 “business combinations” “sfas 141” company allocates purchase price acquisitions tangible assets liabilities intangible assets acquired well inprocess research development based estimated fair values excess purchase price fair values recorded goodwill fair value assigned intangible assets acquired based valuations prepared independent third party appraisal firms using estimates assumptions provided management accordance sfas 142 goodwill purchased intangibles indefinite lives acquired june 30 2001 amortized reviewed periodically impairment purchased intangibles finite lives amortized straightline basis estimated useful lives yxlon international holding gmbh march 31 2003 company completed acquisition yxlon company based hamburg germany yxlon develops manufactures markets supports xray based nondestructive testing “ndt” systems wide range industrial applications systems use xray based diffraction “xrd” technology explosives detection company acquired yxlon 386 million cash 417 million incurred additional acquisition costs 21 million paid subsequent purchase price adjustment 483000 december 2003 total purchase price 443 million company required make additional payment 50 million yxlon’s xrd system certified explosives detection transportation security administration “tsa” june 30 2004 xrd system certified explosives detection tsa company would record additional consideration intangible assets independent valuation determine allocation fair value net assets acquired completed september 2003 total purchase price 443 million allocated follows thousands amortizable intangible assets total purchase price approximately 102 million allocated amortizable intangible assets including maintenance contracts renewals contract backlog direct customer relationships supplier agreements developed core technology maintenance contracts renewals represent value assigned revenue stream estimated existing maintenance contracts acquisition date assumed renewal rate contract backlog represents gross contract backlog recognized twelvemonth period following close acquisition direct customer relationships represent sale products services yxlon’s internal sales marketing force supplier agreements represent value material supplier agreements yxlon receives market rates inventory component purchases company amortizing fair value assets straightline basis estimated useful lives ranging twelve months six years developed core technology consists products reached technological feasibility includes yxlon’s xrd system ndt system products company amortizing fair value developed core technology straightline basis estimated useful life seven years intangible assets indefinite lives estimated fair value intangible assets indefinite lives 187 million goodwill 28 million yxlon trade name intangible assets amortized assets indefinite useful lives based many factors considerations including length time yxlon name use yxlon brand awareness market position plans continued use yxlon brand within portion company’s overall product portfolio inprocess research development total purchase price 43 million allocated inprocess research development “iprd” expensed second quarter fiscal 2003 two projects expected completed 2004 2007 projects qualify iprd represent yet reached technological viability technological viability defined equivalent betaphase working prototype lower remaining risk relating development value assigned iprd determined considering importance project overall development plan estimating costs develop purchased iprd commercially viable products estimating resulting net cash flows projects completed discounting net cash flows present value revenue estimates used value purchased iprd based estimates relevant market sizes growth factors expected trends technology nature expected timing new product introductions yxlon rates utilized discount net cash flows present values based yxlon’s weighted average cost capital 25 weighted average cost capital adjusted reflect difficulties uncertainties completing project thereby achieving technological feasibility percentage completion project anticipated market acceptance penetration market growth rates risks related impact potential changes future target markets pro forma results unaudited pro forma financial information presented combine actual results operations company historical results operations yxlon respective periods acquisition yxlon occurred beginning periods presented adjustments 285000 62 million made combined results operations twelvemonth periods ended december 31 2003 december 31 2002 respectively reflecting amortization purchased intangibles net tax timing acquisitionrelated inprocess research development expense recognition bank settlement fees debt result acquisition net tax acquisition occurred beginning periods presented unaudited pro forma financial information intended represent indicative consolidated results operations financial condition company would reported acquisition completed dates presented taken representative future consolidated results operations financial condition company hattinger pruf und entwicklungs gmbh effective august 1 2003 yxlon international xray gmbh indirect wholly owned subsidiary company acquired hattinger pruf und entwicklungs gmbh “hapeg” private engineering systems company provides industrial testing evaluation solutions utilizing computed tomography approximately 29 million 34 million acquisition accounted using purchase method accounting excess purchase price fair value underlying net assets 23 million allocated goodwill intangible assets property based upon independent valuation fair values amortization expense 122000 recorded fiscal year ended 2003 unaudited pro forma results provided deemed material inovec inc company acquired inovec manufacturer yield enhancement equipment sawmills initial purchase price 52 million cash stock payable twoyear period acquisition inovec accounted purchase effective january 1 2000 company paid purchase price 24 million cash 28 million issuance 506000 shares common stock former shareholders inovec addition company contingently liable purchase agreement event inovec achieved certain operating milestones years ended december 31 2001 2000 inovec achieved certain milestones additional 366000 533000 recorded additional goodwill december 31 2001 2000 respectively result company paid 267000 cash 266000 issuance 91000 shares common stock 2001 remaining obligation 366000 paid 183000 cash 183000 issuance 5000 shares common stock april 2002 transaction accounted purchase accordingly results operations inovec included consolidated financial statements years ended december 31 2002 2001 2000 company allocated purchase price based fair value assets acquired liabilities assumed portions purchase price including intangible assets identified independent appraisers utilizing accepted valuation procedures techniques intangible assets included approximately 15 million developed technologies 662000 acquired workforce 50000 covenants compete remaining 29 million goodwill intangibles amortized estimated useful lives ranging three ten years adoption sfas 142 company longer amortizes carrying values goodwill 25 million acquired workforce 331000 january 1 2002 resulting reduction annual amortization expense 426000 fourth quarter 2002 company performed annual impairment tests required standard recorded 21 million impairment goodwill note 4 government contracts grants company awarded various research development contracts grants faa tsa government agencies share costs developing enhancing company’s products 2003 2002 2001 company recorded reimbursements 31 million 886000 83 million respectively research development contracts grants reimbursements direct costs overhead general administrative expenses reflected reduction research development expense selling general administrative expense manufacturing customer support overhead pools period presented billings research development contracts grants submitted faa tsa government agencies monthly basis actual costs incurred december 31 2003 2002 related receivable balances contracts grants 11 million 0 respectively addition letter contract dated february 19 2002 subsequent delivery order faa following formation tsa agreed reimburse company certain ramp costs incurred meet tsa’s product order demand 2002 ramp costs consist consulting expenses vendor expedite charges subcontract manufacturing set costs company recorded 10 million 2003 93 million 2002 reimbursable expenses december 31 2003 outstanding balance future invoicing ramp related costs note 5 financing arrangements september 19 2003 company completed private offering 1250 million aggregate principal amount 3 convertible senior notes due 2023 notes convertible company’s common stock certain circumstances initial conversion rate 3125 shares per 1000 principal amount notes subject adjustment initial conversion rate notes convertible common stock conversion price 3200 per share notes redeemable cash company’s option beginning october 1 2008 holders notes option require company purchase notes cash whole part october 1 2008 2013 2018 holders notes also ability require company purchase notes event company undergoes change control case redemption purchase price would 100 principal amount notes plus accrued unpaid interest excluding redemption purchase date case may connection issuance notes company incurred 45 million debt issuance costs amortized term notes effective december 2003 company line credit agreement us operations provides maximum borrowings amount 300 million borrowings agreements bear interest bank’s prime rate minus 05 35 december 31 2003 agreement expires july 2005 requires eds segment maintain certain levels tangible net worth company may use proceeds loans line credit general corporate purposes december 31 2003 company borrowings outstanding agreements however december 31 2003 company outstanding guarantees customers issuance letters credit partial reserve 170 million secured lines credit foreign exchange contracts 10 reserve 17 million secured lines credit company remaining available borrowing capacity lines credit 113 million december 31 2003 december 31 2003 company letters credit totaling 170 million guarantees primarily customers performance delivery commitments foreign creditors subsidiary entities addition company one guarantee insurance carrier premium payment commitments guarantees range two months nine years december 31 2003 expiration december 31 2003 company two primary sources financing german banks yxlon first agreement line credit provides maximum borrowings amount 66 million approximately 83 million december 31 2003 second agreement also line credit provides maximum borrowings amount 52 million approximately 66 million december 31 2003 expiration date agreements march 2004 borrowings agreements bear interest 575 december 31 2003 company debt balances 53 million outstanding agreements addition december 31 2003 outstanding guarantees customers issuance letters credit reserve 39 million secured lines credit therefore remaining available borrowing capacity lines credit approximately 45 million 57 million december 31 2003 note 6 stockholders’ equity connection issuance 1250 million aggregate principal amount 3 convertible senior notes due 2023 discussed note 5 company repurchased 452000 shares common stock price 2765 per share aggregate price 125 million march 2003 july 2003 company issued nonqualified stock options two consultants purchase 10000 shares common stock price 2187 2459 per share respectively options vest 25 one year monthly thereafter next 3 years options expire ten years date issuance company recorded compensation expense vesting period option fair value adjusted changes fair value common stock subsequent periods 2003 company recorded compensation expense 193000 estimated december 31 2003 using blackscholes option pricing model following assumptions dividends riskfree interest rate 245 volatility 85 contractual life ten years february 28 2002 company’s stockholders approved increase number authorized shares common stock previously approved board directors 20000000 shares 60000000 shares company filed amendment certificate incorporation effecting increase march 27 2002 company filed amended form s3 registration statement securities act 1933 announced public offering 3000000 shares common stock public price 3650 per share offering closed april 2 2002 company sold 2500000 shares received proceeds 846 million net issuance costs selling stockholder sold another 500000 shares common stock offering certain selling stockholders sold 450000 shares underwriters exercised overallotment option company receive proceeds sale shares selling stockholders september 2001 company entered agreement donald co investment advisory financing related services steven blum one members company’s board directors president donald co time agreement donald co received 50000 cash retainer fullyvested warrant purchase 100000 shares company’s common stock price 995 per share closing price company’s common stock day prior date issuance warrant expires five years date issuance fair value warrant 650000 estimated date grant using blackscholes option pricing model following assumptions dividends riskfree interest rate 394 volatility 78 contractual life five years september 2002 company issued 100000 shares common stock warrant however lieu paying cash shares 34153 shares valued 2913 per share returned company settle transaction shares recorded treasury stock onehalf cash retainer warrant related ongoing investment financial advisory services recorded current assets amortized oneyear term agreement company recorded amortization expense 262000 88000 2002 2001 respectively remaining balance 350000 related services provided connection company’s followon offering april 2002 netted proceeds offering october 2001 company issued nonqualified stock option consultant purchase 15000 shares common stock price 1406 per share option oneyear cliff vesting term expires ten years date issuance fair value option end oneyear cliff vesting term october 27 2002 456000 estimated october 27 2002 using blackscholes option pricing model following assumptions dividends riskfree interest rate 411 volatility 86 contractual life nine years company recorded compensation expense vesting period option fair value adjusted changes fair value common stock subsequent periods years ended december 31 2002 2001 company recorded compensation expense 389000 67000 respectively 2000 2002 terms agreement relating acquisition inovec company issued 602000 shares common stock former shareholders inovec september 1997 terms agreement relating acquisition quantum 777000 shares common stock either issued quantum shareholders exchange quantum capital stock outstanding reserved issuance connection quantum common stock options outstanding prior acquisition converted options purchase invision common stock december 31 2003 company reserved shares common stock issuance follows note 7 employee stock benefit plans equity incentive plans equity plans provide granting officers employees consultants directors company subsidiaries incentive nonqualified stock options stock bonus awards rights purchase restricted stock appreciation rights together “stock awards” purchase aggregate 7520635 shares company’s common stock officers employees consultants directors company subsidiaries board directors responsible administration equity plans also determines terms stock award options granted equity plans generally vest fouryear period event change control transaction stock awards outstanding shall continued assumed surviving entity similar awards shall substituted therefor surviving entity refuses vesting rate lapse repurchase rights stock awards shall accelerate full date immediately prior effective date change control transaction respect senior vice presidents specified vice presidents even surviving entity continues assumes substitutes stock awards vesting rate lapse repurchase rights stock awards shall accelerate full following effective date change control transaction respect specified vice presidents even surviving entity continues assumes substitutes stock awards vesting rate lapse repurchase rights stock awards shall accelerate full upon involuntary termination without “cause” “constructive termination” terms defined company’s change control equity acceleration plan within year following effective date change control transaction nonqualified stock options may granted exercise price per share less 85 fair value per share common stock date grant incentive stock options may granted exercise price per share less 100 fair value per share common stock date grant less 110 fair value case holders 10 company’s voting stock options granted equity plans generally expire ten years date grant five years incentive stock options granted holders 10 company’s voting stock options granted generally vest 25 one year issuance 148th month thereafter three years activity equity plans follows thousands except per share data information relating stock options outstanding equity plans december 31 2002 follows share data thousands employee stock purchase plans company reserved total 850000 shares common stock issuance purchase plans december 31 2003 753107 shares issued purchase plans employee 401k plan invision technologies inc 401k plan “401k plan” established 1992 provide retirement incidental benefits employees allowed section 401k internal revenue code 401k plan provides taxdeferred salary deductions eligible employees may contribute 20 annual compensation 401k plan limited maximum amount set periodically internal revenue service beginning july 1997 company began matching employee contributions rate 050 dollar maximum 6 employee’s gross compensation matching contributions vest immediately company matching contributions 401k plan totaled 11 million 707000 524000 2003 2002 2001 respectively note 8 commitments company leases facilities equipment noncancelable leases expiring various times 2012 existing facilities lease corporate facility newark california includes option renew additional five years 2012 future minimum lease payments leases december 31 2003 follows thousands rent expense facilities located newark california san diego california eugene oregon akron ohio france united kingdom germany denmark japan 4106000 1903000 1646000 years ended december 31 2003 2002 2001 respectively leases corporate offices manufacturing facilities newark california san diego california include scheduled base rent increases term leases total amount base rent payments charged expense straightline method term leases addition base rent payment company pays monthly allocation building’s operating expenses december 31 2003 2002 company recorded deferred rent 535000 576000 respectively reflect excess rent expense cash payments since inception lease longterm liability note 9 net income per share following reconciliation components basic diluted net income per share calculations periods presented thousands except per share data note 10 income taxes provision benefit income taxes 2003 2002 2001 consists following thousands company’s effective tax rate 2003 2002 2001 differs us federal statutory income tax rate follows deferred tax assets december 31 2003 2002 consist following thousands valuation allowance required management concludes likely deferred tax asset realized december 31 2003 company valuation allowance 1621000 reducing net deferred income taxes 14080000 realization tax loss carryforwards dependent generating sufficient taxable income certain tax jurisdictions prior expiration loss carryforwards december 31 2003 management determined estimates future taxable income certain foreign jurisdictions make likely foreign tax loss carryforwards may realized december 31 2003 company federal state foreign net operating loss carryforwards approximately 12 million 321000 158 million respectively available reduce future federal state foreign taxable income company’s federal net operating loss carryforwards begin expire 2010 state net operating loss carryforwards expire 2011 foreign net operating loss carryovers may carried indefinitely expire tax benefit federal state net operating loss carryforwards may limited due impact tax reform act 1986 events may cause tax benefit limited include limited cumulative stock ownership change 50 threeyear period timing utilization various tax benefits carried forward company’s income taxes payable reduced income tax benefits associated employee stock transactions benefits credited directly stockholders’ equity amounted 29 million 2003 92 million 2002 note 11 industry segments major customers geographic information company determines segments based chief executive officer chief operating officer assess performance allocate resources first quarter 2003 company presented segment information based three reportable segments eds quantum wood result acquisition yxlon outset second fiscal quarter 2003 company two reportable segments eds ndt “eds” segment comprised business unit engaged development manufacturing marketing support explosives detection systems based advanced computed tomography technology “ndt” segment comprised yxlon business unit engaged development manufacturing marketing support nondestructive testing systems wide range industrial applications segments including quantum wood xrd aggregated form “all other” category meet threshold reportable segment financial data years ended december 31 2002 2001 restated reflect change reportable segments second quarter 2003 reportable segment line item also changed net income loss income loss operations financial information segment follows thousands december 31 2003 company accounts receivable customers located united states europe middle east asia pacific areas 244 million 276 million 559000 39 million 415000 respectively customer represented 10 total revenues faatsa 57 82 29 2003 2002 2001 respectively company markets products domestically internationally total revenues geographic region based location customer placing order follows thousands substantially company’s longlived assets located united states note 12 related party transactions connection messrs blum turpen joining company’s board directors 2001 directors received grant purchase 20000 shares company’s common stock grants vested fouryear period february 2002 board directors amended grants cause vest oneyear period either mr blum mr turpen ceases director prior four years original date grant required take compensation charge equal difference fair market value common stock date amendment exercise price option multiplied number vested shares would vested option amended late september 2001 company entered agreement donald co investment advisory services related potential acquisition fundraising activities company considered alternatives chose donald co provide services time essence able react quickly meet company’s business requirements based familiarity company’s business steven blum one members company’s board directors president donald co time board approved agreement mr blum abstaining agreement donald co received 50000 cash retainer fullyvested warrant purchase 100000 shares company’s common stock price 995 per share closing price company’s common stock day prior date issuance board considered fee comparable alternatives given circumstances engagement warrant expires five years date issuance fair value warrant 650000 estimated date grant using blackscholes option pricing model following assumptions dividends riskfree interest rate 394 volatility 78 contractual life five years september 2002 company issued 100000 shares common stock warrant however lieu paying cash shares 34153 shares valued 2913 per share returned company settle transaction shares recorded treasury stock company allocated onehalf cash retainer warrant ongoing investment financial advisory services originally recorded current assets amortized oneyear term agreement company recorded amortization expense 262000 2002 88000 2001 company allocated remaining balance 350000 services provided connection company’s followon offering april 2002 netted proceeds offering august 1996 january 1997 january 1999 company entered consulting agreements bgi inc virginiabased international consulting firm assist marketing eds products us government agreements company agreed pay annual retainer bgi success fee payable 25 stock options november 2000 bgi agreed convert accrued stock portion accumulated success fees agreed cancel option purchase 6586 shares common stock consideration agreement company issue 20468 shares common stock bgi 2000 company recorded consulting expenses 108000 common stock company issued 9552 shares common stock 2001 remaining 10916 shares common stock 2002 march 1998 morris busby president controlling shareholder bgi elected company’s board directors following ambassador busby’s election company continued arrangement felt bgi continued provide needed services comparable market rates company paid consulting fees bgi 120000 2000 arrangement expired december 31 2000 note 13 license agreements connection formation company obtained exclusive worldwide fullypaid license imatron inc regarding patents knowhow related 1 scanners inspection mail freight parcels baggage wood products 2 compact medical scanners military field applications license allows company develop manufacture sell systems based different type ct technology currently incorporated company’s ctx series company exchange granted imatron exclusive worldwide fully paid license company’s existing future patents knowhow permit imatron utilize technology medical scanners compact medical scanners military field applications license expires 2009 royalties paid license april 1998 yxlon entered licontribution contract philips gmbh “philips” agreement nonexclusive worldwide license coherent scatter xray technology yxlon subject royalty payments based upon net sales price certain products sold yxlon minimum royalty payment since acquisition yxlon march 31 2003 yxlon paid 149169 license april 1999 quantum entered technology license agreement international business machines corporation “ibm” agreement tenyear nonexclusive nontransferable worldwide license certain detection technology onetime license fee paid ibm quantum subject royalty payments based upon net sales price certain products sold otherwise transferred ibm minimum royalty payment royalties paid license june 1997 quantum entered joint venture perform research development related certain detection technologies exchange 38 ownership interest joint venture quantum granted nonexclusive royalty free perpetual transferable sublicense superconductor technology agreed joint venture sole source fabrication testing products developed joint venture agreed guarantee onehalf 200000 working capital loan joint venture connection formation joint venture quantum sold equipment joint venture exchange elevenyear note receivable 100000 bearing interest 67 per annum january 1999 quantum sold sufficient shares reduce ownership joint venture 10 released obligation guarantee onehalf working capital loan joint venture march 1995 quantum executed tenyear exclusive license agreement third party quantum subject royalty payments based percentage net sales price certain products made used sold minimum annual royalties 20000 due beginning calendar year 1997 remaining term agreement quantum incur royalty expense agreement 1995 1996 paid minimum royalty 20000 1997 1998 january 1999 quantum licensor agreed modify license expanding field use increasing minimum annual royalty 70000 extending term january 2009 quantum paid onetime fee 50000 obtain modification extension made minimum annual royalty 70000 years 1999 2003 note 14 contingencies invision subsidiary quantum magnetics together many entities named defendants number lawsuits approximately 110 products liability lawsuits individual plaintiffs seeking damages wrongful death relating terrorist acts september 11 2001 litigation connection terrorist acts september 11 2001 consolidated september 11 litigation 21 mc 97 akh lopez et al v united airlines et al 102cv458 united states district court southern district new york invision quantum magnetics served 39 complaints remain active complaints company served alleges defendants breached duty airplane passengers others failing properly screen passengers carryon baggage dangerous weapons company believes plaintiffs’ claims lack merit especially light fact company september 11 2001 passenger carryon baggage screening equipment security checkpoints airports hijacked airplanes departed company recently advised plaintiffs executive committee invision quantum magnetics dismissed defendants active complaints march 31 2004 plaintiffs deadline file serve amended master complaints invision quantum magnetics dismissed company must answer otherwise respond amended master complaints listed defendants april 30 2004 must answer otherwise respond plaintiffs individual complaints may 15 2004 company intends vigorously defend lawsuits invision quantum magnetics continue named defendants company involved legal proceedings claims litigation arising ordinary course business outcome matters currently determinable company’s management believe ultimate cost resolve matters material adverse effect company’s consolidated financial condition results operations cash flows note 15 balance sheet components thousands unbilled receivables comprised amounts billable customers upon satisfaction certain activities installation final acceptance amounts percentageofcompletion contracts yet billed balance sheet date amounts yet billed due timing invoice preparation selfconstructed assets manufactured company use system testing support include cost parts materials overhead allocation company depreciates selfconstructed assets respective estimated useful lives range three five years ended december 31 2003 2002 2001 company recorded amortization expense intangible assets 1959000 324000 794000 respectively expected future amortization expense intangibles balances december 31 2003 follows december 31 2003 2002 company 882000 366000 respectively capitalized lease equipment related accumulated amortization 326000 250000 respectively note 16 subsequent events product delivery order march 12 2004 tsa issued delivery order company ctx 9000 dsi systems integration baggage handling systems certain airports united states delivery order new systems valued 1080 million delivery order made new three year agreement tsa announced company august 12 2003 includes 32 million reliability improvements measured next twelve months tsa obligation place additional delivery orders purchase additional engineering installation support agreement change control arrangement march 15 2004 company entered agreement plan merger “merger agreement” ge jet acquisition sub inc wholly owned subsidiary ge “merger sub” pursuant subject conditions contained merger agreement ge would acquire company merger sub company “merger” ii effective time merger outstanding share company’s common stock would converted right receive 5000 cash merger subject customary closing conditions including approval company’s stockholders expiration termination waiting periods us applicable foreign antitrust laws selected quarterly financial data unaudited invision technologies inc schedule ii valuation qualifying accounts years ended december 31 2003 2002 2001 thousands exhibit indexnannannan