SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
Commission File Number: 0-11518
PPT VISION, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1413345
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10321 West 70th Street
Eden Prairie, MN 55344
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(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (612) 995-9500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock ($.10
par value)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
As of January 4, 1999, assuming as market value the closing sale price of $5.00
as reported by the Nasdaq System on that date, the aggregate market value of
shares of Common Stock held by non-affiliates was approximately $21 million.
As of January 4, 1999, 5,396,359 shares of common stock, $.10 par value were
outstanding.
Documents Incorporated by Reference: The Company's Proxy Statement for its
Annual Meeting of Shareholders to be held March 11, 1999 is incorporated by
reference into Part III of this Form 10-K.
Page 2
TABLE OF CONTENTS
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PART I Page
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Item 1. Business.............................................. 3
Important Factors Regarding
Forward-Looking Statements...................... 14
Executive Officers of the Company.................. 17
Item 2. Properties............................................ 18
Item 3. Legal Proceedings..................................... 18
Item 4. Submission of Matters for a
Vote of Security Holders........................... 18
PART II
Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters............. 19
Item 6. Selected Financial Data............................... 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 22
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk........................................ 26
Item 8. Financial Statements and Supplementary Data........... 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 26
PART III
Item 10. Directors and Executive Officers of the Registrant.... 27
Item 11. Executive Compensation................................ 27
Item 12. Security Ownership of Certain
Beneficial Owners and Management................... 27
Item 13. Certain Relationships and Related Transactions........ 27
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K........................................ 28
Signatures...................................................... 30
Page 3
BUSINESS
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OVERVIEW
PPT Vision, Inc. ("PPT Vision" or the "Company") is a leading designer,
manufacturer, marketer and integrator of a complete family of machine vision
systems for end user manufacturers, system integrators and machine builders. The
Company's machine vision systems consist of a combination of proprietary
computer software and hardware, cameras and lighting, working together to
capture and analyze images of moving parts to determine the quality of
manufactured parts and control manufacturing processes. PPT Vision's systems
enable manufacturers to achieve 100% on-line inspection, thus achieving zero
defect production, in situations where previously only random sampling or less
precise human inspection was used as a means of monitoring quality. In addition
to functioning as a quality control tool, PPT Vision systems provide
manufacturers a window on their manufacturing processes by producing real-time
statistical process control feedback. This allows manufacturers to take earlier
corrective action to improve their manufacturing process.
The Company's machine vision systems are used for a broad range of
manufacturing applications, including electronic and mechanical assembly
verification, verification of printed characters, packaging integrity, surface
flaw detection and gauging and measurement tasks. The Company's vision systems
are sold throughout the Americas, Europe and Asia to a broad range of industry
categories, including automotive, electronic and semiconductor components,
consumer goods, medical devices, pharmaceuticals and plastics. Major
manufacturing end users of PPT Vision systems include AMP, Abbott Labs, Berg
Electronics, Chrysler, the Delphi Electronic Division of General Motors,
Imation, Johnson & Johnson, Kemet, Micron Technology, Molex, Philip Morris,
Siemens, 3M and United Technologies.
PPT Vision believes that it has a leadership position as the most vertically
integrated developer of machine vision systems and solutions for a wide range
of manufacturing applications. Through this approach, PPT Vision can rapidly
and cost-effectively provide machine vision system solutions to a wide variety
of manufacturing end users while enabling them to concentrate their engineering
and manufacturing expertise on the products they manufacture. PPT Vision's
library of machine vision software tools enables end users to implement machine
vision solutions to a growing number of manufacturing applications quickly and
cost effectively.
BACKGROUND
A machine vision system consists of computer software and hardware working
together with cameras and lighting to perform image analysis and image
processing for automated inspection, measurement and identification functions
in the manufacturing process. Commercial use of machine vision technology for
manufacturing quality control began to emerge in the early 1980s. However,
machine vision systems at that time were complex to program and maintain,
difficult to install, limited in performance and not cost effective. Through
advances in microprocessor and software technologies, these barriers have been
removed, enabling machine vision to emerge as a powerful process control
technology that allows manufacturers to improve quality and increase
productivity.
The machine vision market is large and highly fragmented. The Automated
Imaging Association ("AIA") estimates that the North American market for machine
vision systems in 1997 was approximately $1.2 billion, with worldwide levels
estimated at approximately $4.0 billion. The AIA expects this market to grow at
approximately 16% per year through the year 2002. According to the AIA, the
majority of the estimated 200 companies in the North American machine vision
market have less than $5 million in annual revenues. Demand for machine vision
systems comes from end user manufacturers who apply these systems as an integral
part of their manufacturing process, original equipment manufacturers ("OEMs")
who incorporate machine vision systems into their products, systems integrators
and machine builders. The AIA estimates that a substantial majority of the North
American market for machine vision systems consists of sales to end user
manufacturers.
A key factor in the expansion of the machine vision market is the growth in
the demand for machine vision systems in the semiconductor and electronics
industries. The growth in demand for personal computers, cellular
communications and other electronic devices, as well as the increase in
electronic components inside other products such as consumer appliances and
automobiles, is stimulating demand for electronic and semiconductor components.
In an effort to rapidly ramp up manufacturing capability while at the same time
introducing innovative new designs and improving quality, manufacturers of
these components are increasingly turning to machine vision as a vital part of
their manufacturing process.
The growth of the end user machine vision market is also being driven by
global competitive trends, which have led manufacturers worldwide to
dramatically redesign manufacturing processes in order to reduce cost and
increase productivity and quality. In order to meet today's manufacturing
quality requirements, statistical sampling methods are insufficient and 100%
on-line inspection is required. To accomplish these objectives, manufacturers
are increasingly adopting machine vision solutions.
Manufacturers are demanding expanded capabilities from machine vision
systems, including faster processing capabilities and greater ease of use.
Manufacturers are also demanding more comprehensive services from machine
vision providers, including application engineering, technical support and
training. Furthermore, manufacturers are seeking the ability to monitor trends,
to better comprehend the manufacturing process and to identify problems. In
addition, manufacturers are being challenged to maintain high production levels
that require rapid set up times, flexibility and seamless networking with the
host manufacturing control system to provide comprehensive diagnostic and
process control feedback.
THE PPT VISION SOLUTION
The Company's machine vision systems are primarily targeted at providing
manufacturers with 100% on-line inspection in high speed discrete part
manufacturing applications. This typically replaces older off-line random
sampling techniques or human vision inspection techniques as a means of
monitoring quality, thus enabling manufacturers to achieve zero defect
production.
PPT Vision's family of machine vision systems, which include its proprietary
Vision Program Manager ("VPM") graphical programming software, provide
significant performance advantages that meet manufacturers' critical
requirements. These requirements include high speed, flexibility, ease-of-use,
networkability and statistical feedback, all without sacrificing performance.
All PPT Vision systems are supported by the Company's focus on providing its
customers with complete solutions, not just components, and a major commitment
to providing its customers with value-added application engineering services.
PPT Vision has developed products that have specific advantages in terms of
speed and ease-of-use. Many of the Company's machine vision systems are capable
of operating speeds of over 12,000 parts per minute performing 100% on-line
inspection. This speed can be critical to successfully employing machine vision
in many applications. PPT Vision also pioneered the use of an icon-based visual
programming system (i.e. VPM) operating in the Microsoft(R) Windows(TM)
environment. Users are able to program the Company's systems by creating a
flowchart of icons linked together rather than having to write a computer
program in a programming language such as C or using a complex, pull-down menu-
based system. This results in lower cost and time for implementation.
The Company is pursuing what it believes is the most fully vertically
integrated business model in the machine vision industry. PPT Vision develops
its own image acquisition and processing hardware, image analysis software,
application specific software tools and general purpose graphical user
interface. The Company also provides lighting solutions and value-added
application engineering services on a direct basis to manufacturers. These
capabilities enable PPT Vision to provide its customers with (i) application
specific software tools such as the Connector Tool used for inspection of fully
assembled electronic connectors, (ii) complete application specific products
such as the PPT8600 in-tray inspection system which provides high speed two-
dimensional ("2D") inspection and three-dimensional ("3D") scanning of ball-grid
array ("BGA") and leaded components, and (iii) complete custom solutions. This
strategy enables PPT Vision to leverage its investment in core software and
hardware architectures while providing improved service for the end user
manufacturing customers. In addition, PPT Vision markets its vision systems to
manufacturing system integrators and machine builders who address the end user
market with unique expertise in specific vertical markets. Many system
integrators and machine builders prefer to use the Company's complete vision
systems, which enable them to reduce programming development time, save money
and concentrate their expertise on material handling and integration issues. The
Company believes that this business model gives it a decisive competitive
advantage in providing cost effective, complete solutions to the end user
machine vision market.
PPT VISION STRATEGY
The Company's objective is to be a worldwide leader in the design,
manufacture, marketing and integration of machine vision systems for automated
manufacturing applications in the end user machine vision market. Through the
successful integration of the Company's five core competencies, including
image acquisition, image processing, application development software, optics
and illumination and vision system integration, the Company believes it will
be able to meet its objective and successfully implement its strategy.
Key elements of the Company's strategy include:
* Provide Complete Solutions to End Users: The Company focuses on providing
complete machine vision solutions to end user manufacturers, system
integrators and machine builders. PPT Vision is pursuing what it believes
to be the most fully vertically integrated business model in the
industry, including the design, manufacturing, marketing and integration
of complete machine vision solutions. The Company believes this provides
it with a competitive advantage in delivering cost effective complete
vision solutions.
* Extend Technology Leadership in Speed and Ease-of-Use: The Company is
continuing to aggressively invest in next generation software and
hardware architectures that will expand its lead in speed, ease-of-use
and the ability to deliver cost effective complete solutions to its
customers.
* Target Expanding Markets Through Continued Development of Application
Specific Software Tools and Hardware Products: The Company's application
specific software tools are a proven solution for a wide variety of
electronic component inspection applications. In response to the worldwide
expansion of the semiconductor and electronics industries, the Company is
developing additional software tools and hardware products for electronic
component, electronics and semiconductor applications.
* Provide a Superior Level of Value-Added Application Engineering Support:
The Company delivers a high level of value-added application engineering
support to its end user customers through its own in-house applications
engineering resources. Manufacturing end users increasingly want to
concentrate their engineering expertise on the products they manufacture,
not on engineering machine vision systems. They are seeking complete
machine vision solutions with the associated application engineering
support on an on-going basis.
* Increase International Market Presence: The Company is aggressively focusing
on increasing its market share in the worldwide machine vision market. The
Company believes international markets represent a significant opportunity
and intends to capture a significant share of this market through investment
and expansion in its international sales distribution and support
infrastructure.
PRODUCTS
PPT Vision's systems consist of proprietary software and hardware working
together with cameras and lighting to capture and analyze images of parts on-
line. The four key process steps in the PPT Vision solution are lighting and
optics, image acquisition, image processing and outputs. In the lighting and
optics step, cameras, lenses and lighting options are configured to capture a
high-definition image of each part as it passes the camera. Image acquisition
involves capturing an image at an extremely high rate of speed and preparing the
image for further processing. In image processing, the machine vision system
measures critical part features and compares algorithmically the digital image
to a preset standard that has been programmed into the system. The output
function typically involves sending the results of the inspection process to the
production line controller or the host manufacturing control system, as well as
providing real-time process control data which can be used to improve the
production process over time.
Software Operating System and Tools. All PPT Vision systems run on proprietary
software in a Microsoft(R) Windows(TM) environment using the Company's VPM user
interface. VPM is an icon-based, graphical language that is extremely flexible
and easy to use. It allows the Company's customers to create complete inspection
solutions without the need for knowledge of computer programming languages.
Instead of writing a computer program in a programming language such as C or
using a complex, pull-down menu-based system, the vision system is set up by
creating visual flowcharts. Clicking a trackball, the user graphically grabs
icons (representing machine vision functions) out of system toolboxes and
arranges them in the workspace on the system monitor. The icons are then
connected with different colored lines to indicate execution and data flow
throughout the inspection routine.
Machine vision functions are performed by the Company's extensive set of
software tools. PPT Vision has developed a library of over 40 vision tools
contained in four toolboxes covering imaging, input/output ("I/O"), utility
and control functions. The Company's imaging toolbox contains all system tools
directly associated with image acquisition, processing and analysis. These
tools provide access to all of the Company's vision algorithms, which are the
vital core of all inspections performed by its vision systems. The I/O toolbox
holds all the tools which permit an inspection developer to control vision
system input and output options. These tools allow for system networking, data
collection and application control. The tools in the utility and control
toolboxes access functions such as counters, reset and display functions, math
and logical operations, data collection and screen controls. These toolboxes
also provide control of data flow to a variety of peripherals such as disk
drives, serial ports and Microsoft(R) Visual Basic(TM) programs.
Hardware Architecture. PPT Vision's machine vision processor includes the
Company's proprietary high performance board set with a DSP (digital signal
processor) and high speed pipeline architecture along with an integrated PC for
inspection set-up and networking and fully integrated I/O capability. All PPT
Vision systems are capable of capturing full framed video images at a rate of up
to 3,600 images per minute, in both strobed and shuttered modes. Most
competitors are limited to capturing full frame images at 1,800 images per
minute, which is the industry standard. Much higher inspection rates are
achieved through the use of the Company's exclusive partial scanning technology
and split-screen imaging, which enables speeds of over 12,000 parts per minute.
PPT Vision Product Family. The Company's newest machine vision systems are the
Passport(R) DSL(TM) and Scout(R) DSL(TM) (Digital Serial Link). The DSL systems
are the world's first completely digital machine vision systems and network.
DSL-based systems are an integrated network of cameras, lighting, image
processors and hubs, which together form a complete machine vision system. The
Passport DSL and Scout DSL systems are completely digital, which results in much
greater accuracy and repeatability than traditional analog systems. The Passport
DSL is housed in an industrially rugged enclosure while the Scout DSL is
packaged in a non-industrial style enclosure. To complement the new DSL family,
the Company has also developed the DSL6000 digital camera.
The Company also offers the Passport 440, Passport 240, and Scout machine
vision systems. The Passport 440 is designed to operate with up to four
asynchronously functioning cameras for multiple inspection views and complex
imaging tasks. The Passport 240 has all of the basic capabilities of the
Passport 440 in a two-camera model. Both systems are housed in industrially
rugged enclosures and are capable of operating at speeds of over 12,000
inspections per minute. The Scout is a cost-effective machine vision system
designed for industrial applications that do not require rugged enclosures. It
is packaged in a non-industrial style enclosure and is capable of running two
cameras with similar speed and power to the Passport 240.
In addition, the Company sells a broad range of peripheral services and
components, including applications engineering, installation and training
services, custom lighting solutions, fixturing, cameras, cabling and various
software options.
MARKETS AND CUSTOMERS
The Company sells its products to a broad range of industries, including
manufacturers of electronic and semiconductor components, pharmaceuticals,
medical devices, automotive components, consumer products and plastics. As of
October 31, 1998, the Company had sold 2,564 machine vision systems to over 250
customers since inception.
In each of the past several years, the Company has had one or more customers
that have accounted for ten percent or more of the Company's net revenues.
During the fiscal year ended October 31, 1998, sales to one customer, Simac
Masic B.V., a European distributor for the Company, represented 16% of net
revenues. The loss of, or significant curtailment of purchases by, any of the
Company's principal customers could have a material adverse effect on the
Company's results of operations.
SALES, MARKETING AND CUSTOMER SUPPORT
The Company sells its products primarily on a direct basis in the United
States to end users, system integrators, machine builders and OEMs. Outside the
United States, the Company sells primarily through a network of distributors
covering Europe, Asia and South America. The Company markets its products
through appearances at industry trade shows, advertising in industry journals,
articles published in industry and technical journals and through direct-selling
in specific vertical markets. In addition, the Company's strong customer
relationships serve as valuable references.
The Company focuses on delivering a high level of value-added applications
engineering support to its end user customers through its own in-house
applications engineering resources. The Company also provides extensive
training opportunities for its customers, either at the Company's facilities or
on-site at the customer's facilities.
The Company's sales and applications engineering departments are structured
along a team concept, with each team having dedicated sales and applications
engineering resources. The Company believes this team approach provides it with
increased flexibility in responding to customers' needs.
In September of 1997 the Company created a new corporate group, the
Microelectronics Product Group ("MPG"), to develop and market high-speed
inspection equipment for the electronics and semiconductor industries. The first
product offering from the group is the PPT8600 3D and 2D in-tray inspection
system for BGA and leaded components, including semiconductor packages and
electronic connectors.
The following table sets forth the percentage of the Company's net revenues
(including sales delivered through international distributors) by geographic
location during the past three years:
YEAR ENDED
OCTOBER 31,
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1998 1997 1996
---- ---- ----
North America.............................. 62% 78% 73%
Europe..................................... 18% 14% 14%
Far East................................... 18% 8% 13%
South America.............................. 2% -- --
Substantially all of the Company's export sales are negotiated, invoiced and
paid in United States dollars.
BACKLOG
The Company does not believe backlog is a key indicator of future revenues in
the end user machine vision market. PPT Vision products are typically shipped
within 30 days after receipt of an order. The Company believes that maintaining
as short a time as practical for delivery is a competitive advantage in the end
user machine vision market. The nature of the end user machine vision market is
that customers do not normally place orders for large multiples of units with
scheduled deliveries over many months. Rather, end user machine vision
addresses a specific application or problem at a specific manufacturing site.
RESEARCH AND PRODUCT DEVELOPMENT
PPT Vision's products are distinguished by the Company's proprietary
technology and its significant commitment to research and product development
efforts. The Company's research and product development efforts are focused on
its five core competencies, including image acquisition, imaging processing,
application development software, optics and illumination and vision system
integration. The Company believes that the integration of these core
competencies is essential to achieving long term success in the machine vision
market. The Company's five core competencies can be described as follows:
Image Acquisition. This refers to the means and methods by which an image
is captured, stored, and then made available for subsequent processing and
display. Image acquisition combines the disciplines of photo-optics and
electrical engineering.
Imaging Processing. This refers to the means and methods whereby an image
is analyzed or enhanced to produce some desired information, measurements
or results. Image processing combines the disciplines of software
engineering, mathematics, algorithm development and electrical engineering
to implement efficient solutions to computationally complex problems.
Typical image processing tasks include real-time inspection, guidance,
gauging and recognition.
Application Development Software. This refers to the means and methods
whereby a machine vision system is configured and controlled. The
development and support of applications development software requires
expertise in the disciplines of object-oriented programming, graphical
programming environments, man-machine interfaces, device drivers and
general software engineering.
Optics and Illumination. This refers to the means and methods by which a
scene is illuminated and optically presented to an input device such as a
video camera. Special optics and illumination techniques are often used to
reveal features in an image which would otherwise go undetected or to
optimize an image for subsequent processing. Strobed illumination is often
used to "freeze" the motion of continuously moving parts. Optics and
illumination draw on skills from the disciplines of physics, mechanical
engineering and electrical engineering.
Vision System Integration. This refers to the means and methods whereby a
machine vision system is interfaced to and combined with other factory
automation equipment for purposes of creating a complete solution for the
customer. This may include the development of application specific solutions
for certain vertical market applications along with mechanical fixturing for
mounting camera and lighting components, networking and programmable
controllers for process control, and reject mechanisms for ejection of
defective parts.
Various configurations of the Company's products include proprietary design
work performed by the Company's employees in each of these five areas.
PPT Vision believes that continued and timely development of new products and
enhancements to existing product characteristics is essential to maintaining its
competitive position. The Company has committed and expects to continue to
commit substantial resources to its research and development effort, which plays
a significant role in maintaining and advancing its position as a leading
provider of complete machine vision systems. The Company's current research and
development efforts are directed to increasing performance in image acquisition,
image processing and application development software, which could produce
systems with greater speed and accuracy while also providing customers with more
expanded software tools. These efforts include the Company's traditional two-
dimensional ("2D") machine vision systems as well as three- and one-dimensional
("3D" and "1D") sensor products. Key software products under development will
enable support for different hardware and user interfaces, as well as increasing
the development speed of application specific software tools. The Company also
intends to expand its offerings of application specific software and hardware
products for the industries it identifies as being poised to exhibit significant
growth in demand for machine vision solutions, which includes electronics and
semiconductors.
Research and development expenditures were $2.9 million, $2.3 million and $1.8
million in the fiscal years ended October 31, 1998, 1997, and 1996,
respectively.
MANUFACTURING
The Company assembles, configures and tests its products at its suburban
Minneapolis facility. The Company's printed circuit boards are custom built by
several manufacturers. Most of the components used in the Company's machine
vision systems are available off-the-shelf. However, some components are
available from only a single supplier or from a limited number of suppliers.
The Company typically purchases inventory and builds products in response to
quarterly sales forecasts, enabling it to ship products within 30 days after
receipt of an order.
Much of the Company's product manufacturing, consisting primarily of circuit
board manufacturing and assembly and machined parts production, is contracted
with outside vendors. Company personnel inspect incoming parts and perform
final assembly and testing of finished products. The Company believes that its
outsourcing strategy enables it to employ its resources on the key core
competency areas from which it derives its competitive advantages.
COMPETITION
The machine vision industry is highly fragmented. Recent data provided by the
AIA show that there were approximately 200 machine vision companies in North
America in 1997, of which the majority had revenues of less than $5 million.
Currently, no competitor holds a significant aggregate market share percentage,
although some dominate individual niches within the overall machine vision
industry. The Company believes that over the next several years, the industry
will experience a continuing trend toward consolidation. However, given the
application specific nature of the industry, the Company also believes that the
machine vision industry will continue to have a relatively large number of
competitors.
The Company believes the major competitive factors in the industry are
performance, quality, support and price. Although the Company believes that its
products are unique, competitors offer technologies and systems that are capable
of certain of the functions performed by the Company's products. The Company
faces competition from a number of companies in the machine vision market, some
of which have greater manufacturing and marketing capabilities and greater
financial, technological and personnel resources. Certain competitors in this
market include the RVSI Acuity CiMatrix division of Robotic Vision Systems, Inc.
and Cognex Corporation.
Although the Company believes that its current products offer several
advantages in terms of speed and ease-of-use and although the Company has
attempted to protect the proprietary nature of such products, it is possible
that any of the Company's products could be duplicated by other companies in
the same general market. There can be no assurances that the Company would be
able to compete with similar products produced by a competitor.
PATENTS AND PROPRIETARY RIGHTS
The Company relies on a combination of patent, copyright, trademark and trade
secret laws to establish its proprietary rights in its products. The Company has
applied for foreign and domestic patents which are now pending with respect to
several key technologies. The Company owns several issued and pending United
States and international patents for various inventions used in machine-vision,
automated inspection and illumination systems. The Company believes that the
patents it owns may have been useful in protecting the Company's proprietary
products and may be useful in protecting potential future products. The Company
also believes its ability to efficiently develop and sell high performance, cost
effective vision systems on a timely basis, whether patented or not, is crucial
to the Company's future success. The Company requires each of its employees to
enter into standard agreements pursuant to which the employee agrees to keep
confidential all proprietary information of the Company and to assign to the
Company all rights in any proprietary information or technology made or
contributed by the employee during his or her employment or made thereafter as a
result of any inventions conceived or work done during such employment. Despite
these precautions, it may be possible for a third party to copy or otherwise
obtain and use the Company's products or technology without authorization or to
develop similar technology independently. In addition, effective patent,
copyright, trademark and trade secret protection may be unavailable or limited
in certain foreign countries.
A number of users of machine-vision technology have received notice of alleged
patent infringement from, and/or have been sued by, the Lemelson Medical,
Education and Research Foundation Limited Partnership ("Lemelson Foundation")
alleging that their use of machine-vision technology in their production
processes infringes certain patents issued to Jerome H. Lemelson. Certain of
these users have notified the Company that, in the event it is subsequently
determined that their use of the Company's products in their production
processes infringes any of Mr. Lemelson's patents, they may seek indemnification
from the Company for damages or expenses resulting from this matter. The Company
believes that it has defenses to such indemnification claims. To date, the
Company has received no actual claims for indemnification. The Company cannot
predict the outcomes from the claims of alleged infringement made by the
Lemelson Foundation or the effect of such outcomes on the operating results of
the Company.
The Company has obtained United States federal registration for its "PPT",
"PPT Vision", "Passport" and "Scout" trademarks. The Company intends to file for
federal registration of additional trademarks in the future. Although no
assurance can be given as to the strength or scope of the Company's trademarks,
the Company believes that its trademarks have been and will be useful in
developing and protecting market recognition for its products.
EMPLOYEES
As of January 5, 1999, the Company had 98 employees, including 38 employees
in research and development, 35 in sales and marketing, 19 in manufacturing and
6 in finance and administration. To date, the Company has been successful in
attracting and retaining qualified technical personnel, although there can be no
assurance that this success will continue. None of the Company's employees are
covered by collective bargaining agreements or are members of a union. The
Company has never experienced a work stoppage and believes that its relations
with its employees are excellent.
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
Various forward-looking statements have been made in this Annual Report on
Form 10-K. Forward-looking statements may also be made in the Company's other
reports filed under the Securities Exchange Act of 1934, in its press releases
and in other documents. In addition, from time to time, the Company through its
management may make oral forward-looking statements.
Forward-looking statements are subject to risks and uncertainties, including
those identified below, which could cause actual results to differ materially
from such statements. The words "anticipate", "believe", "expect", "intend",
"optimistic", "will" or similar expressions are intended to identify forward-
looking statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date on which they are
made. The Company undertakes no obligation to update publicly or revise any
forward-looking statements.
Important factors that could cause actual results to differ materially from
the Company's forward-looking statements, as well as affect the Company's
ability to achieve its financial and other goals, include, but are not limited
to, the following:
Technological Change and New Product Development. The market for the Company's
products is characterized by rapidly changing technology. The Company's future
success will continue to depend upon its ability to enhance its current products
and to develop and introduce new products that keep pace with technological
developments and evolving industry standards, respond to changes in customer
requirements and achieve market acceptance. Any failure by the Company to
anticipate or respond adequately to technological developments and customer
requirements, or any significant delays in product development or introduction,
could have a material adverse effect on the Company's business, results of
operations, financial condition and liquidity. In addition, there can be no
assurance the new products and services or product and service enhancements, if
any, developed by the Company will achieve market acceptance.
Dependence Upon Principal Customers. In each of the past several years, the
Company has had one or more customers that have accounted for ten percent or
more of the Company's net revenues. During the fiscal year ended October 31,
1998, sales to one customer, Simac Masic B.V., a European distributor for the
Company, represented 16% of net revenues. The loss of, or significant
curtailment of purchases by, any of the Company's principal customers could have
a material adverse effect on the Company's results of operations.
Cyclicality of Capital Spending by Customers. A significant portion of the
Company's revenues are derived from sales to various segments of the electronic
component industry, such as metal stamping, electronic connectors and passive
components. The markets for these segments, and for the electronic component
industry in general, can be cyclical, resulting in varying amounts of capital
spending. Any significant downturn in capital spending in these markets, or in
any other markets served by the Company's products, could have a material
adverse effect on the Company's business and results of operations.
Management of Growth. The Company's revenues have increased at an average
annual rate of 18% over the past five years. The Company's future success will
depend on the ability of its officers and key employees to manage growth
successfully through maintenance of appropriate operational, financial and
management information systems and to attract, retain, motivate and effectively
manage its employees. If the Company's management is unable to manage growth
effectively, the Company's business, results of operations, financial condition
and liquidity could be materially and adversely affected.
Proprietary Technology. The Company relies heavily on its image acquisition
and image processing hardware designs, along with proprietary software
technology. Although the Company has been issued patents, or obtained licenses
to patents, in the past on certain technology and has patents pending on new
technologies, it currently relies most heavily on protecting its proprietary
information as trade secrets. There can be no assurance that the steps taken by
the Company will be adequate to prevent misappropriation of its technology by
third parties or will be adequate under the laws of some foreign countries,
which may not protect the Company's proprietary rights to the same extent as do
laws of the United States. In addition, the possibility exists that others may
"reverse engineer" the Company's products in order to determine their method of
operation and then introduce competing products. Further, many high technology
markets, including segments of the machine vision industry, are characterized by
the existence of a large number of patents and frequent litigation for financial
gain that is based on patents with broad, and often questionable, application.
As the number of the Company's products increases, the markets in which its
products are sold expands and the functionality of those products grows and
overlaps with products offered by competitors. As a result, the Company believes
that it may become increasingly subject to infringement claims in the future.
Although the Company is not aware that any of its products or proprietary rights
infringe upon the valid rights of third parties, there can be no assurance that
infringement claims will not be asserted against the Company in the future or
that any such claims will not require the Company to enter into royalty
arrangements or result in costly litigation.
Quarterly Fluctuations. The Company has experienced quarterly fluctuations in
operating results and anticipates that these fluctuations will continue. These
fluctuations have been caused by various factors, including the order flow of
its principal customers, the timing and acceptance of new product introductions
and enhancements and the timing of product shipments and marketing. Future
operating results may fluctuate as a result of these and other factors,
including the Company's ability to continue to develop innovative products, the
announcement or introduction of new products by the Company's competitors, the
Company's product and customer mix, the level of competition and overall trends
in the economy.
Dependence on Outside Contractors and Suppliers. The Company currently
contracts with third party assembly houses for a substantial portion of its
components and assembly needs. Although the Company endeavors to inspect and
internally test most components prior to final assembly, reliance on outside
contractors reduces its control over quality and delivery schedules. The
failure by one or more of these subcontractors to deliver quality components in
a timely manner could have a material adverse effect on the Company's results of
operations. In addition, a number of the components integral to the functioning
of the Company's products are available from only a single supplier or from a
limited number of suppliers. Any interruption in or termination of supply of
these components, or a material change in the purchase terms, including pricing,
of any of these components, or a reduction in their quality or reliability,
could have a material adverse effect on the Company's business or results of
operations.
International Revenue. In the years ended October 31, 1998, 1997 and 1996,
sales of the Company's products to customers outside North America accounted for
approximately 38%, 22% and 27%, respectively, of the Company's net revenues. The
Company anticipates that international revenue will continue to account for a
significant portion of its net revenues. The Company's operating results are
subject to the risks inherent in international sales, including various
regulatory requirements, political and economic changes and disruptions,
transportation delays and difficulties in staffing and managing foreign sales
operations and distributor relationships. In addition, fluctuations in exchange
rates may render the Company's products less price competitive relative to local
product offerings. There can be no assurance that these factors will not have a
material adverse effect on the Company's future international sales and,
consequently, on the Company's operating results.
Competition. The Company competes with other vendors of machine vision
systems, some of which may have greater financial and other resources than the
Company. There can be no assurance that the Company will be able to compete
successfully in the future or that the Company will not be required to incur
significant costs in connection with its engineering research, development,
marketing and customer service efforts to remain competitive. Competitive
pressures may result in price erosion or other factors which will adversely
affect the Company's financial performance.
Dependence on Key Personnel. The Company's success depends in large part upon
the continued services of many of its highly skilled personnel involved in
management, research and product development and sales, and upon its ability to
attract and retain additional highly qualified employees. The loss of services
of these key personnel could have a material adverse effect on the Company. The
Company does not have key-person life insurance on any of its employees.
Utilization of Net Operating Loss. The utilization of the net operating loss
carryforward is dependent upon the Company's ability to generate sufficient
taxable income during the carryforward period. Management does not believe that
a valuation allowance is currently considered necessary based on an analysis of
likely future taxable income. If the establishment of a valuation allowance
should be determined to be necessary in the future, there would be an adverse
impact on the reported earnings of the Company.
Year 2000. As noted below in Item 6, Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000 Readiness, the Company
believes it has addressed the Year 2000 issue.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
NAME AGE POSITION
- ----- --- --------
Joseph C. Christenson.......... 40 President, Director
Thomas R. Northenscold......... 40 Chief Financial Officer,
Assistant Secretary
Larry G. Paulson............... 47 Vice President of Research and Development,
Director
Arye Malek..................... 42 Vice President of Marketing
Joseph C. Christenson has been President of the Company since January 1989
and a director since December 1987. Prior to being elected President of the
Company, he had been its Chief Operating Officer and Chief Financial Officer
from December 1987 to December 1988, General Manager and Chief Financial
Officer from August 1986 to November 1987, and financial analyst and marketing
manager since joining the Company in May 1985. Mr. Christenson has a Masters in
Business Administration from the University of Michigan and a Bachelor of Arts
degree from St. Olaf College.
Thomas R. Northenscold has been Chief Financial Officer of the Company since
February 1995. Prior to that, he had been the Senior Vice President of
Operations in the City Directory Division of R.L. Polk and Company, a directory
publishing company, from April 1992 to April 1994. Mr. Northenscold was
previously employed at Cardiac Pacemakers, Inc., a medical device company, in
several finance and operations positions from June 1985 to April 1992. He has a
Masters in Business Administration in finance from the University of Michigan
and a Bachelor of Science degree from Mankato State University.
Larry G. Paulson was a co-founder of the Company and has been Vice President
of Research and Development and a director of the Company since December 1981.
Mr. Paulson is also a Registered Professional Engineer and holds Bachelors and
Masters Degrees in Science from the University of Minnesota.
Arye Malek has been the Vice President of Marketing of the Company since May
1996. He joined the Company in May 1990 as a Senior Account Manager and became
Director of International Operations in November 1992. Mr. Malek holds a
Bachelor of Science Degree from the University of Minnesota.
Item 2. PROPERTIES
- -------------------
The Company leases approximately 28,400 square feet of office and
manufacturing space in suburban Minneapolis pursuant to a seven-year lease
beginning in March 1994. Rent payments for its facilities commenced at $7,093
per month during the first year of the lease and increase over the term of the
lease to $16,551 during the final twelve months of the lease. In July of 1998
the Company entered into a new ten-year lease agreement for office and
manufacturing space in a facility in suburban Minneapolis (see Exhibit 10.8).
The Company is in negotiation to assign the lease on its current facility and
anticipates executing such an assignment prior to the commencement of the new
lease. The incremental costs of this assignment are not expected to be
substantial. Under the terms of the new lease, the Company will take occupancy
of approximately 59,000 square feet of space in March of 1999. At some time
during months 42 to 60 of this lease, the Company will take occupancy of the
remaining space in the building, which is approximately 21,000 square feet. Rent
payments for the new facility will be $50,310 per month during the period in
which the Company occupies the initial 59,000 square feet (no less than 41
months and no more than 59 months). During the remainder of the lease, rental
payments for the entire facility will range between $69,227 and $72,604 per
month. The Company also leases space for its regional sales and support offices
in Massachusetts, Michigan and North Carolina.
Item 3. LEGAL PROCEEDINGS
- -------------------------
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
None.
PART II
-------
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
PRICE RANGE OF COMMON STOCK
The Company's Common Stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol "PPTV." The following table sets forth the
high and low sales prices of the Company's Common Stock on the Nasdaq National
Market as reported by Nasdaq.
HIGH LOW
------ -----
FISCAL YEAR ENDED OCTOBER 31, 1997
First Quarter............................................. $ 9.75 $6.50
Second Quarter............................................ 9.00 5.56
Third Quarter............................................. 8.62 6.25
Fourth Quarter............................................ 10.38 7.62
FISCAL YEAR ENDING OCTOBER 31, 1998
First Quarter............................................. $ 9.12 $6.62
Second Quarter............................................ 9.88 6.88
Third Quarter............................................. 9.50 6.38
Fourth Quarter............................................ 8.00 4.75
The Company estimates that there were approximately 3,100 beneficial holders
of the Company's Common Stock at January 5, 1999.
DIVIDEND POLICY
The Company has never declared or paid any dividends on its Common Stock. The
Company currently intends to retain any earnings for use in its operations and
expansion of its business and therefore does not anticipate paying any cash
dividends in the foreseeable future.
Item 6. SELECTED FINANCIAL DATA
- --------------------------------
<TABLE>
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues.................. $13,512,000 $12,055,000 $12,693,000 $9,750,000 $6,587,000
Cost of sales................. 5,666,000 4,894,000 5,044,000 4,442,000 3,026,000
----------- ----------- ----------- ---------- ----------
Gross profit................. 7,846,000 7,161,000 7,649,000 5,308,000 3,561,000
Selling expenses.............. 4,857,000 3,727,000 2,897,000 2,279,000 1,970,000
General and administrative
expenses..................... 1,294,000 1,177,000 976,000 851,000 711,000
Research and development
expenses..................... 2,879,000 2,339,000 1,827,000 1,299,000 1,133,000
----------- ----------- ----------- ----------- ----------
Income (loss) from
operations.................. (1,184,000) (82,000) 1,949,000 879,000 (253,000)
Other income
(expense), net.............. 1,009,000 1,147,000 453,000 61,000 40,000
----------- ----------- ----------- ----------- ----------
Income (loss) before taxes... (175,000) 1,065,000 2,402,000 940,000 (213,000)
Income tax benefit (expense).. 278,000 (405,000) 1,309,000 407,000 --
----------- ----------- ----------- ----------- ----------
Net income (loss)............ $ 103,000 $ 660,000 $ 3,711,000 $1,347,000 $ (213,000)
=========== =========== =========== ========== ==========
Diluted earnings (loss) per
share........................ $ 0.02 $ 0.12 $ 0.84 $ 0.37 $ (0.06)
=========== =========== =========== ========== ==========
Common and common equivalent
shares outstanding........... 5,511,000 5,495,000 4,410,000 3,650,000 3,455,000
=========== =========== =========== ========== ==========
</TABLE>
<TABLE>
OCTOBER 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................... $20,495,000 $22,887,000 $24,083,000 $4,131,000 $3,253,000
Total assets...................... 29,575,000 29,986,000 28,056,000 6,098,000 4,449,000
Shareholders' equity.............. 27,871,000 27,535,000 26,809,000 5,145,000 3,719,000
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of Year Ended October 31, 1998 to Year Ended October 31, 1997
- ------------------------------------------------------------------------
Net Revenues: Net revenues increased 12% to $13,512,000 in fiscal 1998,
compared to net revenues of $12,055,000 in fiscal 1997. Unit sales of the
Company's machine vision systems increased to 510 in fiscal 1998 versus 482 in
fiscal 1997. Net revenues increased primarily due to strong sales outside of
North America. Gross revenues in fiscal 1998 decreased 11% in North America and
increased 95% outside North America. The decline in revenues in North America
was primarily due to lower sales in the electronics segment. The increase in
revenues outside North America is primarily due to strength in the Asia/Pacific
region. Sales to customers outside North America represented 38% of gross
revenues in fiscal 1998, compared to 22% in fiscal 1997.
Gross Profit: Gross profit increased 10 percent to $7,846,000 in fiscal 1998,
compared to $7,161,000 in fiscal 1997. Gross profit as a percentage of net
revenues for fiscal 1998 decreased to 58%, compared with 59% in fiscal 1997. The
increase in gross profit in 1998 is primarily due to the increase in sales. The
decrease in gross profit as a percentage of net sales is primarily related to
the increase in international sales, which are primarily through distributors
and therefore are generally at a lower gross margin. The Company anticipates
that the gross profit as a percentage of net revenues may fluctuate from quarter
to quarter during fiscal 1999, but should remain at or near the levels achieved
in fiscal 1998.
Selling Expenses: Selling expenses increased 30% to $4,857,000 in fiscal 1998,
compared to $3,727,000 in fiscal 1997. As a percentage of net revenues, fiscal
1998 selling expenses increased to 36%, compared with 31% in fiscal 1997. The
increase in expenditures is primarily the result of investments required to
launch the Microelectronics Product Group ("MPG") as well as the opening of
sales and support offices in Michigan and North Carolina. Although the Company
will limit the rate of growth in selling expenses, it is anticipated that
selling expenses may increase somewhat in fiscal 1999 as the Company makes the
necessary investments to support strategic initiatives. However, the Company
believes that for the whole of fiscal 1999, selling expenses will not increase
substantially as a percentage of net revenues compared to fiscal 1998, depending
on the level of sales growth.
General and Administrative Expenses: General and administrative expenses
increased 10% to $1,294,000 in fiscal 1998, compared to $1,177,000 in fiscal
1997. As a percentage of net revenues, general and administrative expenses
remained relatively constant at 10% for fiscal 1998, compared to fiscal 1997.
The increase in expenditures is primarily attributable to increased expenses
associated with operating the Company as it prepares for continued growth. The
Company believes that during fiscal 1999, general and administrative expenses
may increase somewhat as the Company makes the necessary investments to support
strategic initiatives. However, the Company believes that during fiscal 1999,
general and administrative expenses will not increase substantially as a
percentage of net revenues compared to fiscal 1998, depending on the level of
sales growth.
Research and Development Expenses: Research and development expenses increased
23% to $2,879,000 in fiscal 1998, compared to $2,339,000 in fiscal 1997.
Research and development expenses as a percentage of net revenues for fiscal
1998 increased to 21%, compared to 19% for fiscal 1997. The increase in
expenditures is mainly due to resource commitments required to support new
product development programs. The Company believes that during fiscal 1999,
research and development expenses may increase as the Company commits the
resources necessary to support strategic initiatives. However, the Company
believes that during fiscal 1999, research and development expenses will not
increase substantially as a percentage of net revenues compared to fiscal 1998,
depending on the level of sales growth.
Interest income decreased 11% to $998,000 in fiscal 1998, compared to
$1,124,000 in fiscal 1997. The decrease in interest income is primarily due to
the decline in balances of cash, cash equivalents and investments.
Income Tax Benefit: In fiscal 1998, an income tax benefit of $278,000 was
recorded. This income tax benefit primarily resulted from the recording of
$210,000 of tax credits which were mainly associated with research & development
activities. Income tax expense was $405,000 in fiscal 1997.
Comparison of Year Ended October 31, 1997 to Year Ended October 31, 1996
- ------------------------------------------------------------------------
Net Revenues: Net revenues decreased 5% to $12,055,000 in fiscal 1997,
compared to net revenues of $12,693,000 in fiscal 1996, although unit sales of
the Company's machine vision systems increased to 481 in fiscal 1997 versus 465
in fiscal 1996. Net revenues decreased primarily because of lower average
selling prices per system due to changes in product mix. Net revenues in fiscal
1997 were also affected by slowdowns in deliveries to customers in the
electronics segment, which mainly occurred during the first half of fiscal 1997.
Much of this slowdown was experienced in markets outside of North America.
Gross revenues in fiscal 1997 increased 1% in North America and decreased 24%
outside North America. Sales to customers outside North America represented 22%
of gross revenues in fiscal 1997, compared to 27% in fiscal 1996.
Gross Profit: Gross profit decreased 6 percent to $7,161,000 in fiscal 1997,
compared to $7,649,000 in fiscal 1996. Gross profit as a percentage of net
revenues for fiscal 1997 decreased to 59%, compared with 60% in fiscal 1996. The
decrease in gross profit in 1997 is primarily due to the decline in sales.
Selling Expenses: Selling expenses increased 29% to $3,727,000 in fiscal 1997,
compared to $2,897,000 in fiscal 1996. As a percentage of net revenues, fiscal
1997 selling expenses increased to 31%, compared with 23% in fiscal 1996. The
increase in expenditures is primarily the result of the addition of several
application engineers and sales people in the latter part of fiscal 1996.
General and Administrative Expenses: General and administrative expenses
increased 21% to $1,177,000 in fiscal 1997, compared to $976,000 in fiscal 1996.
As a percentage of net revenues, general and administrative expenses increased
to 10% for fiscal 1997, compared to 8% for fiscal 1996. The increase in
expenditures is primarily attributable to increased expenses associated with
operating the Company as it prepares for continued growth. In addition, the
Company incurred a one-time charge during the third quarter of fiscal 1997 due
to the write-off of a receivable involving a bankruptcy. The increase as a
percentage of net revenues is mainly related to the decline in sales.
Research and Development Expenses: Research and development expenses increased
28% to $2,339,000 in fiscal 1997, compared to $1,827,000 in fiscal 1996.
Research and development expenses as a percentage of net revenues for fiscal
1997 increased to 19%, compared to 14% for fiscal 1996. The increase in
expenditures is mainly due to new product development programs and increased
permanent staffing and contract personnel to support these efforts.
Interest income increased 154% to $1,124,000 in fiscal 1997, compared to
$442,000 in fiscal 1996. The increase in interest income is primarily due to a
full year of interest on the proceeds of a public stock offering completed in
June of 1996.
Income Tax Benefit: Income tax expense was $405,000 in fiscal 1998. In fiscal
1997, an income tax benefit of $1,309,000 was recorded to fully recognize the
potential future tax benefits of loss carry forwards and net deductible
temporary differences available to offset taxable income in future periods. As a
result of this full recognition, in fiscal 1997 the Company began reporting
earnings on a fully-taxed basis.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Working capital decreased to $20,495,000 at October 31, 1998 from $22,887,000
at October 31, 1997. The Company financed its operations in fiscal 1998 through
internally generated cash flow and existing cash and cash equivalents. Net cash
provided from operating activities in fiscal 1998 was $865,000. Accounts
receivable decreased $852,000 due to improvement in collections as well as a
decrease in sales in the fourth quarter of fiscal 1998 compared to the same
period in fiscal 1997. Inventories increased $266,000 in fiscal 1998 primarily
due to raw material purchases to support new products.
In September of 1997 the Company entered into a license agreement with Medar,
Inc. ("Medar") under which it acquired the exclusive worldwide rights to use of
Medar's patented 3D scanning technology (United States Patent No. 5,646,733) for
applications in the electronics and semiconductor industries ("1997 Medar
Agreement"). Under the terms of the agreement, the Company agreed to pay Medar
an initial license fee of $1,500,000 based on the achievement of certain
developmental milestones plus a royalty based on sales. The first $500,000 due
under this license agreement was paid upon execution of the agreement. An
additional $500,000 was paid to Medar under this license agreement during the
second quarter of fiscal 1998.
In May of 1998 the Company entered into an Agreement to Assign and License
Patent with Medar ("1998 Medar Agreement") under which it acquired ownership of
United States Patent No. 5,646,733 ("Scanning Phase Measurement Method and
System for an Object at a Vision Station"). The 1998 Medar Agreement terminated
the previous 1997 Medar Agreement. Under the terms of the 1998 Medar Agreement,
the Company paid Medar a fee of $1,500,000 in May of 1998. The Company also
agreed to pay Medar the final $500,000 fee based on the achievement of certain
developmental milestones.
The Company used $3,081,000 of cash for investing activities, primarily for
the purchase of fixed assets and investment in other long-term assets. The
Company used $1,344,000 of cash for the purchase of fixed assets, mainly
consisting of computer, lab and manufacturing equipment. The Company used
$2,442,000 of cash for investment in other long-term assets, mainly consisting
of a payments made to Medar under the terms of the previously mentioned
agreements. Investments consist of short-term investment grade securities. In
addition, the Company generated $175,000 in cash flow from its financing
activities, primarily as a result of issuances of its Common Stock through the
employee stock purchase plan and upon exercise of stock options. In September
of 1998 the Board of Directors of PPT Vision, Inc. authorized the Company to
repurchase up to 750,000 shares of its Common Stock. The Company used $92,000
of cash to repurchase 17,800 shares of its Common Stock in fiscal 1998.
Current assets decreased to $22,097,000 at October 31, 1998 from $25,202,000
at October 31, 1997. Investments decreased to $15,009,000 at October 31, 1998
from $15,515,000 at October 31, 1997. Cash and cash equivalents decreased to
$1,986,000 at October 31, 1998 from $4,027,000 at October 31, 1997. These
decreases were primarily related to the payments made to Medar.
The Company's current liabilities decreased to $1,602,000 at October 31, 1998
from $2,315,000 at October 31, 1997. The current liabilities at October 31, 1997
included a $1,000,000 short-term liability related to the 1997 Medar Agreement.
During fiscal 1998, one payment of $500,000 was made against this short-term
liability prior to the termination of the 1997 Medar Agreement. The remaining
developmental milestone from the 1997 Medar Agreement was incorporated into the
1998 Medar Agreement along with the associated $500,000 fee, which remained as a
short-term liability. During fiscal 1998, $200,000 was paid against this short-
term liability, leaving a balance of $300,000 at October 31, 1998.
The Company expects that its capital expenditures for fiscal 1999 may increase
slightly from the $1.3 million in fiscal 1998, primarily for computer, lab and
manufacturing equipment. At October 31, 1998, the Company had commitments for
approximately $315,000 of capital equipment. The Company is also obligated to
pay an additional $300,000 under the terms of the Agreement to Assign and
License Patent with Medar, subject to the achievement by Medar of certain
developmental milestones. The Company believes that its cash flow from
operations, existing cash and cash equivalents, and investments at October 31,
1998 will be adequate for its working capital and capital resource needs during
fiscal 1999.
YEAR 2000 READINESS
- -------------------
The Company has analyzed the potential impact of the year 2000 issue on both
the Company's products and on critical business systems and development systems
used in the Company's internal operations. In response to the year 2000 issue,
the Company upgraded its current enterprise resource planning ("ERP") system to
the most recent revision level, which is year 2000 compliant. The cost of this
upgrade was included in the normal annual maintenance fee that the Company pays
to the provider of the software. Regarding its own product offerings, the
Company has tested the software and hardware included in its products and
believes that all current products are year 2000 compliant. To date, the
incremental costs to the Company associated with the year 2000 issue have been
minimal. The Company believes that the costs of addressing any remaining year
2000 issues will not have a material adverse impact on the Company's financial
position. Based on the Company's review of its own products and critical
business systems and development systems, the Company has not felt it necessary
to put in place formal contingency plans. However, the Company will take
appropriate and timely action to resolve any significant year 2000 issues that
become apparent.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Not applicable.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
See Item 14 for a list of the financial statements included in this Form 10-K.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- ------------------------------------------------------------------------
Not applicable.
PART III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
Information required under this item with respect to directors is contained
in the section "Election of Directors" in the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held in March 1999 (the "1999 Proxy
Statement"), a definitive copy of which will be filed with the Commission within
120 days of the close of the past fiscal year, and is incorporated herein by
reference.
Information concerning executive officers is set forth in the Section
entitled "Executive Officers of the Company" in Part I of this Form 10-K
pursuant to Instruction 3 to paragraph (b) of Item 401 of Regulation S-K.
Item 11. EXECUTIVE COMPENSATION
- --------------------------------
Information required under this item is contained in the sections entitled
"Executive Compensation," "Employment Agreements" and "Stock Option Plan" in the
Company's 1999 Proxy Statement and is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Information required under this item is contained in the section entitled
"Shareholdings of Principal Shareholders, Directors and Officers" in the
Company's 1999 Proxy Statement and is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Information required under this item is contained in the section entitled
"Certain Transactions" in the Company's 1999 Proxy Statement which is
incorporated herein by reference.
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a) Documents filed as Part of this Report
(1) FINANCIAL STATEMENTS. The following financial statements of the
Company are hereby included in this Form 10-K.
Page
----
Report of Independent Accountants..................... 32
Income Statements for the three years ended
October 31, 1998, 1997 and 1996.................. 33
Balance Sheets as of October 31, 1998 and 1997........ 34
Statements of Cash Flows for the Years
ended October 31, 1998, 1997 and 1996............ 35
Statements of Shareholders' Equity for the Years
ended October 31, 1998, 1997 and 1996............ 36
Notes to Financial Statements......................... 37
(2) FINANCIAL STATEMENT SCHEDULES FOR THE THREE YEARS
ENDED OCTOBER 31, 1998
VIII. Valuation and Qualifying Accounts.............. 47
All other schedules are omitted because they are not
applicable or the required information is shown in the
Financial Statements or the notes thereto.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the
quarter ended October 31, 1998.
(c) Listing of Exhibits
-------------------
Exhibit
No. Description Page
- ------- ---------------------------------------------------------- ----
3.1..... Restated Articles of Incorporation of Registrant
(incorporated by reference to Exhibit 3.1 of 1996 Form 10-K)
3.2..... By-Laws of Registrant
(incorporated by reference to Exhibit 3.2 of 1996 Form 10-K)
10.1.... Lease Agreement dated February 11, 1993 for facilities at
10321 West 70th Street, Eden Prairie, Minnesota
(incorporated by reference to Exhibit 10.3 of 1993 Form 10-K)
10.2.... Employment Agreement with Joseph C. Christenson dated as of
May 7, 1984 (incorporated by reference from Exhibit 10.4 to
May 15, 1996 Form S-2)
10.3.... Employment Agreement with Larry G. Paulson dated as of
February 1, 1984 (incorporated by reference from
Exhibit 10.5 to May 15, 1996 Form S-2)
10.4.... Employment Agreement with Tom Northenscold dated as of
February 27, 1995 (incorporated by reference from
Exhibit 10.6 to May 15, 1996 Form S-2)
10.5.... Employment Agreement with Arye Malek dated as of
May 1, 1990 (incorporated by reference from
Exhibit 10.7 to May 15, 1996 Form S-2)
10.6*... PPT Vision, Inc. 1988 Stock Option Plan, as amended
(incorporated by reference to Exhibit 10.6 of 1997 Form 10-K)
10.7*... PPT Vision, Inc. 1997 Stock Option Plan
(incorporated by reference to Exhibit 10.7 of 1997 Form 10-K)
10.8.... Lease Agreement dated July 17, 1998 for facilities at...... 48
the Prairie Crossroads Corporate Center,
Eden Prairie, Minnesota
21...... The Company has no subsidiaries
23...... Consent of PricewaterhouseCoopers LLP...................... 72
27...... Financial Data Schedule.................................... 73
*Indicates compensatory plan
SIGNATURES
----------
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
PPT VISION, INC.
Date: January 29, 1999 By:/s/Joseph C. Christenson
----------------------------
Joseph C. Christenson
(Principal Executive Officer)
Date: January 29, 1999 By:/s/Thomas R. Northenscold
----------------------------
Thomas R. Northenscold
(Principal Accounting Officer)
Chief Financial Officer
Signatures and Power of Attorney
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant, in
the capacities, and on the dates, indicated. Each person whose signature
appears below constitutes and appoints Joseph C. Christenson and Thomas R.
Northenscold as his true and lawful attorneys-in-fact and agents, each acting
alone, with full power of substitution and resubstitution, for him and in his
name, place, and stead, in any and all capacities, to sign any or all amendments
to this Annual Report on Form 10-K and to file the same, with the exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission.
Date Signature and Title
---- -------------------
January 29, 1999 /s/Joseph C. Christenson
----------------------------
Joseph C. Christenson
President, Director
(Principal Executive Officer)
January 29, 1999 /s/Thomas R. Northenscold
----------------------------
Thomas R. Northenscold
(Principal Accounting Officer)
Chief Financial Officer
January 29, 1999 /s/Larry G. Paulson
----------------------------
Larry G. Paulson
Vice President of Research
and Development, Director
January 29, 1999 /s/Bruce C. Huber
----------------------------
Bruce C. Huber, Director
January 29, 1999 /s/David C. Malmberg
----------------------------
David C. Malmberg, Director
January 29, 1999 /s/Peter R. Peterson
----------------------------
Peter R. Peterson, Director
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of PPT Vision, Inc.
In our opinion, the financial statements listed in the index appearing under
Item 14(a)(1) and (2) present fairly, in all material respects, the financial
position of PPT Vision, Inc. at October 31, 1998 and 1997, and the results of
its operations and cash flows for each of the three fiscal years in the period
ended October 31, 1998 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/PricewaterhouseCoopers LLP
- -----------------------------
PricewaterhouseCoopers LLP
Minneapolis, MN
November 20, 1998
PPT VISION, INC.
INCOME STATEMENTS
YEAR ENDED OCTOBER 31,
-----------------------------------
1998 1997 1996
----------- ----------- -----------
Net revenues............................ $13,512,000 $12,055,000 $12,693,000
Cost of sales........................... 5,666,000 4,894,000 5,044,000
----------- ----------- -----------
Gross profit........................ 7,846,000 7,161,000 7,649,000
----------- ----------- -----------
Expenses:
Selling............................... 4,857,000 3,727,000 2,897,000
General and administrative............ 1,294,000 1,177,000 976,000
Research and development.............. 2,879,000 2,339,000 1,827,000
----------- ----------- -----------
Total expenses...................... 9,030,000 7,243,000 5,700,000
----------- ----------- -----------
Income (loss) from operations........... (1,184,000) (82,000) 1,949,000
Interest income......................... 998,000 1,124,000 442,000
Other income............................ 11,000 23,000 11,000
----------- ----------- -----------
Income (loss) before taxes.............. (175,000) 1,065,000 2,402,000
Income tax benefit (expense)............ 278,000 (405,000) 1,309,000
----------- ----------- -----------
Net income.......................... $ 103,000 660,000 $ 3,711,000
=========== =========== ===========
Basic earnings per share.............. $ 0.02 $ 0.12 $ 0.88
=========== =========== ===========
Diluted earnings per share............ $ 0.02 $ 0.12 $ 0.84
=========== =========== ===========
Common shares outstanding............. 5,425,000 5,376,000 4,237,000
Common and common equivalent
shares outstanding.................. 5,511,000 5,495,000 4,410,000
=========== =========== ===========
The accompanying notes are an integral part of the financial statements
PPT VISION, INC.
BALANCE SHEETS
OCTOBER 31,
-------------------------
1998 1997
----------- -----------
ASSETS
Current assets
Cash and cash equivalents........................ $ 1,986,000 $ 4,027,000
Investments...................................... 15,009,000 15,515,000
Accounts receivable, net......................... 2,841,000 3,693,000
Inventories...................................... 2,007,000 1,741,000
Other current assets............................. 254,000 226,000
----------- -----------
Total current assets........................... 22,097,000 25,202,000
Fixed assets, net.................................. 2,254,000 1,546,000
Other assets, net.................................. 3,536,000 1,828,000
Deferred income taxes.............................. 1,688,000 1,410,000
----------- -----------
Total assets................................... $29,575,000 $29,986,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable................................. $ 943,000 $ 1,010,000
Accrued compensation............................. 39,000 60,000
Accrued expenses................................. 320,000 245,000
Other short-term liabilities..................... 300,000 1,000,000
----------- -----------
Total current liabilities...................... 1,602,000 2,315,000
Deferred rent...................................... 102,000 136,000
Commitments and contingencies (Note 8)
Shareholders' equity
Common Stock $.10 par value; authorized
10,000,000 shares;
issued and outstanding 5,440,583 and 5,387,355.. 544,000 539,000
Capital in excess of par value................... 29,725,000 29,555,000
Accumulated (deficit)............................ (2,407,000) (2,510,000)
Unrealized gain (loss), investments.............. 9,000 (49,000)
----------- -----------
Total shareholders' equity..................... 27,871,000 27,535,000
----------- -----------
Total liabilities and shareholders' equity..... $29,575,000 $29,986,000
=========== ===========
The accompanying notes are an integral part of the financial statements
PPT VISION, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED OCTOBER 31,
--------------------------------------
1998 1997 1996
------------ ------------ ------------
Net income...............................$ 103,000 $ 660,000 $ 3,711,000
Adjustment to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.......... 670,000 422,000 286,000
Deferred rent.......................... (34,000) (30,000) (6,000)
Deferred income tax benefit............ (278,000) 405,000 (1,408,000)
Accrued interest income................ (137,000) (322,000) (149,000)
Realized gain on sales of investments.. (4,000) (2,000) (4,000)
Change in assets and liabilities:
Accounts receivable.................... 852,000 758,000 (1,764,000)
Inventories............................ (266,000) (513,000) (285,000)
Other assets........................... (28,000) (55,000) (104,000)
Restricted cash........................ -- 135,000 78,000
Accounts payable....................... (67,000) 256,000 190,000
Accrued compensation................... (21,000) (2,000) 7,000
Accrued expenses....................... 75,000 (20,000) 103,000
------------ ------------ ------------
Total adjustments.................... 762,000 1,032,000 (3,056,000)
------------ ------------ ------------
Net cash provided by operating activities 865,000 1,692,000 655,000
Cash flows from investing activities:
Purchase of fixed assets............... (1,344,000) (1,095,000) (662,000)
Purchase of investments................ (23,148,000) (21,353,000) (17,007,000)
Sales and maturities of investments.... 23,853,000 21,248,000 2,025,000
Net investment in other
long-term assets..................... (2,442,000) (759,000) (20,000)
------------ ------------ ------------
Net cash used by investing activities.... (3,081,000) (1,959,000) (15,664,000)
Cash flows from financing activities:
Proceeds from issuance of common stock. 267,000 115,000 17,953,000
Repurchases of common stock............ (92,000) -- --
------------ ------------ ------------
Net cash provided by financing activities 175,000 115,000 17,953,000
------------ ------------ ------------
Net (decrease) increase in cash and
cash equivalents....................... (2,041,000) (152,000) 2,944,000
Cash and cash equivalents at beginning
of year................................ 4,027,000 4,179,000 1,235,000
------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,986,000 $ 4,027,000 $ 4,179,000
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income tax.............................$ 70,000 $ 3,000 $ 89,000
Interest............................... -- -- 1,000
The accompanying notes are an integral part of the financial statements
PPT VISION, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
CAPITAL IN
COMMON COMMON EXCESS OF ACCUMULATED
SHARES STOCK PAR VALUE (DEFICIT)
--------- --------- ----------- -----------
October 31, 1995................... 3,578,705 $358,000 $11,668,000 $(6,881,000)
Stock issued through public
offering (net of issue costs)... 1,600,000 160,000 17,459,000
Stock issued through the
exercise of stock options....... 94,526 9,000 123,000
Stock issued through the
employee stock purchase plan.... 35,691 4,000 74,000
Stock issued through the
exercise of warrants............ 49,500 5,000 119,000
Net income....................... 3,711,000
--------- --------- ----------- -----------
October 31, 1996................. 5,358,422 536,000 29,443,000 (3,170,000)
Stock issued through the
exercise of stock options....... 23,705 2,000 77,000
Stock issued through the
employee stock purchase plan.... 5,228 1,000 35,000
Net income....................... 660,000
--------- --------- ----------- -----------
October 31, 1997................. 5,387,355 539,000 29,555,000 (2,510,000)
Stock issued through the
exercise of stock options....... 48,005 5,000 134,000
Stock issued through the
employee stock purchase plan.... 25,648 2,000 147,000
Stock swapped to exercise
stock options................... (2,625) -- (21,000)
Stock repurchased................ (17,800) (2,000) (90,000)
Net income....................... 103,000
--------- --------- ----------- -----------
October 31, 1998................. 5,440,583 $544,000 $29,725,000 $(2,407,000)
========= ========= =========== ============
The accompanying notes are an integral part of the financial statements
PPT VISION, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND OPERATIONS
The Company designs, manufactures, markets and integrates machine vision
based automated inspection systems. The systems are used to improve
productivity and quality by automating inspection tasks in manufacturing
applications such as assembly verification, flaw detection, character
verification or measurement tasks.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTS RECEIVABLE
Accounts receivable are shown net of allowance for doubtful accounts of
$29,424 at October 31, 1998, and $30,026 at October 31, 1997.
INVENTORIES
Inventories are stated at the lower of cost or market, with costs determined
on a first-in, first-out ("FIFO") basis. As of October 31, 1998 and 1997
inventories consist of the following:
OCTOBER 31,
-----------------------
1998 1997
---------- ----------
Manufactured and purchased parts............ $1,648,000 $1,223,000
Work-in-process............................. 339,000 448,000
Finished goods.............................. 20,000 70,000
---------- ----------
Totals.................................. $2,007,000 $1,741,000
========== ==========
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
investments, short-term trade receivables and payables for which current
carrying amounts approximate fair market value.
OTHER ASSETS
Other assets at October 31, 1998 and 1997 consist of the following:
OCTOBER 31,
----------------------
1998 1997
---------- ----------
Patent and trademark............................. $3,340,000 $1,654,000
Investment in a related party.................... 53,000 53,000
Software development costs, net.................. 251,000 196,000
---------- ----------
3,644,000 1,903,000
Less accumulated amortization.................... (108,000) (75,000)
---------- ----------
Total other assets........................... $3,536,000 $1,828,000
========== ==========
The patent and trademark balance of $3,340,000 as of October 31, 1998 includes
$3,046,000 which represents the current value of United States Patent No.
5,646,733, ("Scanning Phase Measurement Method and System for an Object at a
Vision Station") which was purchased from Medar, Inc. in fiscal year 1998.
Patent and trademark costs are amortized over five to ten years.
The investment in a related party represents common stock the Company intends
to hold as an investment and is recorded at cost. During 1994, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" SFAS. No. 115
requires certain investments in debt and equity securities to be recorded at
fair market value. No adjustment to market value was recorded as of October 31,
1998 and 1997 as the difference was not material.
Software development costs are treated in accordance with SFAS No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed." Certain software development costs totaling $55,000 were capitalized
during the fiscal year ended October 31, 1998. No amortization expense has yet
been recorded related to these software development costs.
OTHER SHORT-TERM LIABILITIES
In May of 1998 the Company entered into an Agreement to Assign and License
Patent, with Medar, Inc. ("Medar") under which it acquired ownership of United
States Patent No. 5,646,733 ("Scanning Phase Measurement Method and System for
an Object at a Vision Station"). This 1998 agreement terminated a previous
agreement entered into by the Company and Medar in September of 1997. Under
the terms of the 1998 agreement, the Company agreed to pay Medar a fee of
$500,000 based on the achievement of certain developmental milestones. At
October 31, 1998, $300,000 of that $500,000 was not paid and comprised the
$300,000 short-term liability.
FIXED ASSETS
Fixed assets consist of furniture, fixtures and equipment and are stated at
cost net of accumulated depreciation. Depreciation is computed for book purposes
on a straight-line basis over the estimated useful life of the asset and for tax
purposes over five and ten years using accelerated and straight-line methods. At
October 31, 1998 and 1997 furniture, fixtures and equipment consisted of the
following:
OCTOBER 31,
-----------------------
1998 1997
---------- ----------
Equipment....................................... $4,536,000 $3,271,000
Furniture and fixtures.......................... 517,000 438,000
---------- ----------
5,053,000 3,709,000
Less accumulated depreciation................... (2,799,000) (2,163,000)
---------- ----------
Total fixed assets.......................... $2,254,000 $1,546,000
========== ==========
REVENUE RECOGNITION
The Company records sales revenue upon shipment to the customer.
RESEARCH AND DEVELOPMENT
Expenditures for research and development are expensed as incurred.
INCOME TAXES
Income taxes are provided on the liability method. Under the liability
method, deferred income taxes are provided on the difference in basis of assets
and liabilities between financial reporting and tax returns using expected tax
rates.
EARNINGS PER SHARE
In the quarter ended January 31, 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No.
128 simplifies the standards required under current accounting rules for
computing earnings per share and replaces the presentation of primary earnings
per share and fully diluted earnings per share with a presentation of basic
earnings per share ("basic EPS") and diluted earnings per share ("diluted EPS").
Basic EPS excludes dilution and is determined by dividing income available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted EPS reflects the potential dilution that could occur
if securities and other contracts to issue common stock were exercised or
converted into common stock. Diluted EPS is computed similarly to fully diluted
earnings per share under current accounting rules. The following information
presents the Company's computations of basic and diluted EPS for the periods
presented in the income statements.
Income Shares Per Share
(Numerator) (Denominator) Amount
---------- ------------ ------
Fiscal 1998:
Basic EPS................... $ 103,000 5,425,000 $0.02
Effect of dilutive employee
stock options.............. 86,000
---------------------------------------
Diluted EPS................. $ 103,000 5,511,000 $0.02
Fiscal 1997:
Basic EPS................... $ 660,000 5,375,000 $0.12
Effect of dilutive employee
stock options.............. 120,000
---------------------------------------
Diluted EPS................. $ 660,000 5,495,000 $0.12
Fiscal 1996:
Basic EPS................... $3,711,000 4,237,000 $0.88
Effect of dilutive employee
stock options.............. 173,000 (0.04)
---------------------------------------
Diluted EPS................. $3,711,000 4,410,000 $0.84
CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand and investments with original maturities of three months or less.
Non-cash transactions in fiscal years 1998, 1997 and 1996 consisted of $5,690,
$6,228 and $10,568, respectively, related to the transfer of long-term assets to
inventory.
ESTIMATES BY MANAGEMENT
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
STOCK SPLIT
On March 14, 1996, the Board of Directors approved a three-for-two stock split
in the form of a fifty percent (50%) stock dividend. The distribution of shares
was made on April 5, 1996 to shareholders of record as of March 25, 1996. All
historical share and per share data included in the financial statements have
been restated to reflect the stock split.
NOTE 3: CUSTOMER INFORMATION
SIGNIFICANT CUSTOMER INFORMATION
During 1998, 1997 and 1996, revenue from one customer accounted for 16%, 14%
and 14% of net revenues respectively. During 1997 and 1996, revenue from
another customer accounted for 14% and 12% of net revenues respectively.
CUSTOMER GEOGRAPHIC DATA
North American and export sales as a percentage of net revenues in 1998, 1997
and 1996 are as follows:
YEAR ENDED
OCTOBER 31,
----------------
1998 1997 1996
---- ---- ----
North America......... 62% 78% 73%
Europe................ 18% 14% 14%
Far East.............. 18% 8% 13%
South America......... 2% -- --
NOTE 4: ACCRUED EXPENSES
Accrued expenses at October 31, 1998 and 1997 include:
OCTOBER 31,
----------------
1998 1997
-------- --------
Vacation............................................... $ 19,000 $ 25,000
Employee stock purchase plan payroll deductions........ 82,000 78,000
Taxes payable.......................................... 110,000 78,000
Other.................................................. 109,000 64,000
-------- --------
Total.............................................. $320,000 $245,000
======== ========
NOTE 5: COMMON STOCK OPTIONS AND WARRANTS
Under the Company's 1988 Stock Option Plan and 1997 Stock Option Plan the
Company may issue options to purchase up to 1,100,000 shares of common stock to
employees and directors. Options are granted at prices equal to the average of
the high and low prices on the date of the grant. The granting of options and
their vesting is within the discretion of the Company's Board of Directors.
A summary of stock options issued and outstanding under these plans is as
follows:
NUMBER OF SHARES
-------------------------
EMPLOYEE WEIGHTED AVG
OPTIONS OPTION PRICE
----------- ------------
Balance at October 31, 1995........................... 275,786 $ 2.55
Granted............................................. 126,850 $11.81
Exercised........................................... (94,526) $ 1.41
Forfeited........................................... (350) $ 9.86
----------- ------------
Balance at October 31, 1996........................... 307,760 $ 6.70
Granted............................................. 364,200 $ 6.91
Exercised........................................... (23,705) $ 3.34
Forfeited........................................... (126,375) $11.68
----------- ------------
Balance at October 31, 1997........................... 521,880 $ 5.79
Granted............................................. 59,150 $ 6.81
Exercised........................................... (48,005) $ 2.89
Forfeited........................................... (9,075) $ 6.91
----------- ------------
Balance at October 31, 1998........................... 523,950 $ 6.15
=========== ============
As of October 31, 1998:
Price Range of Outstanding Options
Options...........................................$2.33-$12.00
Expiration dates.................................. 1998-2005
Options exercisable............................... 238,089
In May of 1997, 122,150 options granted in fiscal years 1996 and 1997 with
exercise prices ranging from $7.19 to $18.13 were repriced to $6.875 per share,
the market price at the time of the repricing. The repricing is reflected in
the table above as a grant cancellation and a new grant issuance.
The estimated weighted average grant-date fair value of stock options granted
is as follows: 1998--$3.39 and 1997--$4.23. The Company accounts for stock
options and other equity instruments in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Statement of Financial Accounting
Standards ("SFAS")No. 123, "Accounting for Stock-Based Compensation," was issued
in October 1995. SFAS No. 123 establishes a fair value based method of
accounting for employee stock based compensation plans and encourages companies
to adopt that method. However, it also allows companies to continue to apply
the intrinsic value based method currently prescribed under APB Opinion No. 25,
provided certain pro forma disclosures are made. Had the Company's stock option
plans and its stock purchase plans compensation costs been determined based on
the fair value at the option grant dates for awards consistent with the
accounting provision of SFAS No. 123 the Company's net income and earnings per
share for fiscal years 1998 and 1997 would have been adjusted to the pro forma
amount indicated below:
Fiscal Year Ended October 31, 1998 1997
----------------------------- ---------- ----------
Net income..................As reported... $ 103,000 $ 660,000
Pro forma..... $ (606,000) $ 197,000
Diluted earnings per share..As reported... $ 0.02 $ 0.12
Pro forma..... $ (0.11) $ 0.04
The following table summarizes stock options outstanding and exercisable at
October 31, 1998.
Outstanding Exercisable
- -------------------------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Exercise Contractual Average Average
Price Range Options Life Remaining Exercise Price Options Exercise Price
- --------------- ------- -------------- -------------- ------- --------------
$ 2.33 - $ 3.00 64,275 0.75 $ 2.89 64,275 $ 2.89
$ 3.17 - $ 6.84 52,975 1.51 $ 3.93 45,275 $ 3.67
$ 6.88 - $ 6.94 385,050 5.58 $ 6.88 119,714 $ 6.88
$ 7.00 - $12.00 21,650 5.70 $ 8.48 8,825 $ 9.74
------- -------------- -------------- ------- --------------
523,950 4.58 $ 6.15 238,089 $ 5.30
The fair value of options granted under the Company's fixed stock option plans
during fiscal 1998 and 1997 was estimated on the dates of grant using the Black-
Scholes options-pricing model. The assumptions for fiscal 1998 and 1997 were as
follows:
Fiscal Year Ended October 31, 1998 1997
--------------------------------- ----------- -----------
Risk free interest rates......... 4.7% - 5.1% 5.6% - 5.9%
Expected life.................... 6.0 6.9
Expected volatility.............. 44% - 53% 54%
Expected dividends............... 0% 0%
Pro forma compensation cost related to shares purchased under the Company's
Employee Stock Purchase Plan is measured based on the discount from market
value. The effects of applying SFAS No. 123 does not apply to awards prior to
fiscal 1996, and additional awards in future years are anticipated.
In September of 1997, the Company issued a warrant to purchase 25,000 shares
of common stock with an exercise price of $12.00 and an expiration date of
September of 2004.
NOTE 6: STOCK OFFERINGS
In June of 1996, the Company completed a public stock offering, issuing
1,600,000 shares of common stock at $12.00 per share, that raised $17.6 million
net of offering costs of $1.6 million.
NOTE 7: EMPLOYEE STOCK PURCHASE PLAN
In March 1995 shareholders approved the adoption of the 1995 Employee Stock
Purchase Plan to replace the 1990 Employee Stock Purchase Plan which expired in
1995. Under the terms of the 1995 Plan, 225,000 shares have been reserved for
issuance under the Plan.
The fourth phase of the 1995 Plan began on June 1, 1998 and employees were
granted the right to purchase 33,801 shares at $5.84 per share under the Plan.
The third phase of the 1995 Plan ended on May 31, 1998 and employees purchased
25,648 shares at $5.84 per share under the Plan.
The second phase of the 1995 Plan ended on May 31, 1997 and employees
purchased 5,228 shares at $6.69 per share under the Plan.
NOTE 8: COMMITMENTS & CONTINGENCIES
Rental expense under operating leases was $239,000, $188,000, and $170,987 in
1998, 1997, and 1996 respectively. Minimum future rental payments due under
noncancelable operating lease agreements are as follows:
1999............................ 687,000
2000............................ 899,000
2001............................ 699,000
2002............................ 604,000
2003............................ 604,000
Thereafter...................... 4,557,000
----------
Total....................... $8,050,000
==========
NOTE 9: EMPLOYEE SAVING PLAN
The Company provides a supplementary retirement savings plan which is
structured in accordance with Section 401(k) of the Internal Revenue Code.
Employees eligible for the Plan may contribute from one to fifteen percent of
their monthly earnings on a pre-tax basis subject to annual contribution
limitations. The Company makes matching contributions of one dollar for each
dollar contributed by each Plan participant up to a maximum of $2,000 annually.
The Company's contributions under this program were approximately $152,000,
$66,000, and $52,000 for the years ended October 31, 1998, 1997 and 1996
respectively.
NOTE 10: INCOME TAXES
The provision for income taxes differs from the statutory U.S. federal tax
rate of 34% applied to earnings before income taxes as follows:
YEAR ENDED OCTOBER 31,
----------------------
1998 1997
--------- ---------
Expected tax provision at statutory rate... $ (59,000) $ 362,000
State income tax provision, net of federal
Tax effect............................... (7,000) 42,000
Permanent differences...................... 5,000 11,000
Tax credits and other...................... (217,000) (10,000)
--------- ---------
Totals.................................... $(278,000) $ 405,000
========= =========
Deferred tax assets (liabilities) are comprised of the following at October 31:
YEAR ENDED OCTOBER 31,
----------------------
1998 1997
---------- ----------
Depreciation............................... $ 55,000 $ 93,000
Deferred rent.............................. 38,000 52,000
Other...................................... (147,000) (199,000)
---------- ----------
Net operating loss carryforwards........... 1,126,000 959,000
Credit carryforwards....................... 616,000 505,000
---------- ----------
Net deferred tax asset..................... $1,688,000 $1,410,000
========== ==========
At October 31, 1998, the Company has available net operating loss and tax credit
carryforwards for income tax purposes of approximately $3.3 million and
$715,000, respectively. These carryforwards expire in the years ending October
31, 2001 through October 31, 2018. No current income tax provision was recorded
in the fiscal year ended October 31, 1998 due to the current year taxable loss.
No current income tax provision was recorded in the fiscal year ended October
31, 1997 due to the utilization of net operating loss carryforwards. The entire
tax provisions for fiscal years 1998 and 1997 consist of deferred taxes.
The utilization of the net operating loss and tax credit carryforwards is
dependent upon the Company's ability to generate sufficient taxable income
during the carryforward period. Management does not believe that a valuation
allowance is currently considered necessary based on an analysis of likely
future taxable income.
SCHEDULE VIII
Valuation and Qualifying Accounts
Allowance for Doubtful Accounts:
Balance at Additions Deductions Balance at
Beginning Charged to and Write- End of
of Period Earnings offs Period
---------- ---------- ---------- ----------
Year Ended October 31, 1996 $35,000 $ 2,000 ($ 2,000) $35,000
Year Ended October 31, 1997 $35,000 $ 95,000 ($100,000) $30,000
Year Ended October 31, 1998 $30,000 $ 10,000 ($ 11,000) $29,000
EXHIBIT 10.8: LEASE
-------------------
ARTICLE 1. LEASE TERMS
1.1 LANDLORD AND TENANT. This lease ("Lease") is entered into this 17th day of
July, 1998 by and between CSM PROPERTIES, INC., a Minnesota corporation,
("Landlord") and PPT VISION, INC., a Minnesota corporation, ("Tenant").
1.2 PREMISES. Landlord hereby rents, leases, lets and demises to Tenant the
following described property ("Premises"), as illustrated on the site plan
attached hereto as EXHIBIT A: approximately 58,900 square feet of finished
space in the VALLEY VIEW BUSINESS CENTER located at the intersection of Valley
View Road and Prairie Center Drive in Eden Prairie, Minnesota, and consisting of
approximately 81,046 square feet ("Building"). Tenant's lease of the Premises
shall include the right to use, in common with others and subject to the other
provisions of this Lease, any common facilities included within the Building and
the property of which the Premises and the Building are a part, all without
additional charge hereunder, including parking spaces adjacent to the Premises.
During the term of this Lease, Landlord shall provide for use by Tenant, a
minimum of 3.5 parking spaces for 1,000 square feet of rentable area within the
Premises.
For the purposes of this Lease, the determination of the number of total square
feet in the Premises, and the number of rentable square feet in the Building
shall be made by measuring from the exterior face of exterior walls, and from
the midline or centerpoint of interior or party walls. "As-built" measurements
will be taken of the Building and Premises as soon as construction has
progressed to the point where such measurement is possible. Landlord will
certify such "as built" measurements to Tenant and thereafter, Landlord and
Tenant shall execute an addendum to this Lease in the form of attached EXHIBIT
B, confirming said measurements and establishing (i) the rentable area of the
Building; (ii) the rentable area of the Premises, which shall equal the area
established by the "as built" measurements, and a pro-rata share of the square
foot area of the building mechanical room; (iii) the Base Rent; and (iv)
Tenant's pro rata share, to reflect the actual total square foot area of the
Building and Premises; and such addendum shall thereupon be deemed attached
hereto, incorporated herein, and by this reference made a part of this Lease.
Landlord's calculation of the rentable area of the Premises and of the Building
shall be subject to confirmation by Tenant's space planner or architect, and if
Landlord or its architect or surveyor cannot reach agreement with Tenant's space
planner or its architect, the dispute will be submitted to a mutually selected
architect for final determination.
1.3 LEASE TERM. The term of this Lease shall commence on March 1, 1999
("Commencement Date") and shall terminate one hundred twenty (120) months
thereafter on February 28, 2009, ("Lease Term") unless sooner terminated as
hereinafter provided. In the event that Tenant does not vacate the Premises
upon the expiration or termination of this Lease, Tenant shall be a tenant at
will for the holdover period and all of the terms and provisions of this Lease
shall be applicable during that period, except that Tenant shall pay Landlord as
base rental for the period of such holdover an amount equal to one and one-half
(1.5) times the base rent which would have been payable by Tenant had the
holdover period been a part of the original term of this Lease, together with
all additional rent as provided in this Lease. After the expiration or earlier
termination of this Lease, Tenant agrees to vacate and deliver the Premises to
Landlord upon Tenant's receipt of notice from Landlord to vacate. The rental
payable during the holdover period shall be payable to Landlord on demand. No
holding over by Tenant, whether with or without the consent of Landlord, shall
operate to extend the term of this Lease.
1.4 BASE RENT. Base Rent is:
Per Rentable
Months Monthly Base Rent* Square Foot
------ ----------------- -----------
Initial Term: 1-60 $50,310.42 $10.25
60-120 $52,764.58 $10.75
Option Term: 121-180 market market
181-240 market market
* Subject to adjustement as provided in Section 1.2 above.
1.5 PERMITTED USE: Office, warehouse, light
manufacturing, training and marketing activities, as
well as ancillary uses consistent therewith.
1.6 SECURITY DEPOSIT: Fifty Thousand, Three Hundred Ten
and 42/100 Dollars ($50,310.42).
1.7 PRO-RATA SHARE: Seventy-Two and 67/100 percent
(72.67%), subject to
adjustment as provided in Section 1.2 and 2.2 hereof.
1.8 ADDRESSES.
LANDLORD'S ADDRESS: TENANT'S ADDRESS:
After Lease Commencement:
CSM PROPERTIES, INC. PPT VISION, INC.
2575 UNIVERSITY AVE. W. xxxx VALLEY VIEW ROAD
SUITE 150 EDEN PRAIRIE, MN
ST. PAUL, MN 55114-1024
(612) 646-1717 Prior to Lease Commencement:
PPT VISION, INC.
10321 W. 70TH ST.
EDEN PRAIRIE, MN 55344-3446
ARTICLE 2. RENT, OPERATING EXPENSES AND SECURITY DEPOSIT
2.1 BASE RENT. Tenant agrees to pay monthly as base rent during the term of
this Lease the sum of money set forth in Section 1.4 of this Lease, as amended
in the Addendum to this Lease (EXHIBIT B), which amount shall be payable to
Landlord at the address shown above. One monthly installment shall be due and
payable on or before the Commencement Date; provided, if the Commencement Date
should be a date other than the first day of a calendar month, the monthly
rental set forth above shall be prorated to the end of that calendar month, and
all succeeding installments of rent shall be due and payable on or before the
first day of each succeeding calendar month during the term of this Lease.
Tenant shall pay, as additional rent, all other sums due under this Lease.
Notwithstanding anything in this Lease to the contrary, if Landlord, for any
reason whatsoever (other than Tenant's default), cannot deliver possession of
the Premises to the Tenant on the Commencement Date, this Lease shall not be
void or voidable, nor shall Landlord be liable for any loss or damage resulting
therefrom, but all rent shall be abated until Landlord delivers possession,
which date of delivery shall be then deemed to be the Commencement Date, and the
expiration of the Lease Term shall be extended accordingly. Landlord agrees to
provide Tenant early occupancy of the Premises on February 15, 1999 for the
purpose of installing Tenant's fixtures, under the same terms and conditions
contained herein, exclusive of payment of rent and operating expenses, provided
that Tenant's work shall not and does not interfere with Landlord's completion
of its work. In the event that Landlord fails to substantially complete and
deliver the Premises to Tenant on or before June 1, 1999, unless such failure is
attributable to Tenant's default, Tenant shall have the option to terminate this
Lease, with no further obligation, by delivering written notice of termination
to Landlord on before June 5, 1999. Substantial completion shall exclude punch
list items in the interior of the Premises, exterior landscaping and parking lot
construction (except that Landlord shall provide Class 5 parking areas and drive
lanes to reasonably accommodate Tenant's truck traffic and car parking
requirements), which shall be completed by July 1, 1999.
2.2 OPERATING EXPENSES. Tenant shall also pay as additional rent Tenant's pro
rata share of the operating expenses of Landlord for the Building and common
elements and areas appurtenant to the Building. Landlord may invoice Tenant
monthly for Tenant's pro rata share of the estimated operating expenses for each
calendar year, which amount shall be adjusted from time-to-time by Landlord
based upon anticipated operating expenses. Within six (6) months following the
close of each calendar year, Landlord shall provide Tenant an accounting showing
in reasonable detail the computations of additional rent due under this Section.
In the event the accounting shows that the total of the monthly payments made by
Tenant exceeds the amount of additional rent due by Tenant under this Section,
the accounting shall be accompanied by evidence of a credit to Tenant's account.
In any event the accounting shows that the total of the monthly payments made by
Tenant is less than the amount of additional rent due by Tenant under this
Section, the accounting shall be accompanied by an invoice for the additional
rent. Notwithstanding any other provisions in this Lease, during the year in
which this Lease terminates, Landlord, prior to the termination date, shall have
the option to invoice Tenant for Tenant's pro rata share of the operating
expenses based upon the previous year's operating expenses. If this Lease shall
terminate on a day other than the last day of a calendar year, the amount of any
additional rent payable by Tenant applicable to the year in which the
termination shall occur shall be prorated on the ratio that the number of days
from the commencement of the calendar year to and including such termination
date bears to 365. Tenant agrees to pay any additional rent due under this
Section within thirty (30) days following receipt of the invoice or accounting
showing additional rent due. Tenant's pro rata share set forth in Section 1.7
shall, subject to adjustment as provided in Section 1.2, be equal to a
percentage based upon a fraction, the numerator of which is the net rentable
area of the Premises as set forth in Article 1 and the denominator of which
shall be the net rentable area of the Building, as the same may change from time
to time.
For a period of one hundred eighty (180) days following Tenant's receipt of the
operating expense reconciliation for the previous calendar year, Tenant shall
have the right to audit Landlord's books and records as they pertain to
operating expenses for the immediate preceding calendar year, in Landlord's
office and with reasonable notice. If Tenant does not conduct such audit within
said one hundred (180) day period, Tenant shall be deemed to automatically waive
and release its right to audit for such calendar year. The cost of said audit
shall be borne by Tenant unless the audit discloses that Tenant has overpaid its
proportionate share of operating expenses for the calendar year in question by
more than three percent (3%), in which case the reasonable expense of the audit
shall be borne by Landlord. If the audit reveals that Landlord's actual
statement was incorrect in any amount, the resulting excess or deficiency shall
be promptly paid by or reimbursed to Tenant as the case may be.
2.3 DEFINITION OF OPERATING EXPENSES. The term "operating expenses" includes
all expenses incurred by Landlord with respect to the maintenance and operation
of the Building, common elements and common areas, including, but not limited
to, the following: maintenance, repair and replacement costs; electricity,
fuel, water, sewer, gas and other common Building utility charges; equipment
used for maintenance and operation of the Building; operational expenses;
exterior window washing and janitorial services; trash and snow removal;
landscaping and pest control; management fees (not to exceed two and one-half
percent (2.5%) of gross rents), wages and benefits payable to employees of
Landlord whose duties are directly connected with the operation and maintenance
of the Building; all services, supplies, repairs, replacements or other expenses
for maintaining and operating the Building or project including parking and
common areas; improvements made to the Building which are required under any
governmental law or regulation that was not applicable to the Building at the
time it was constructed; installation of any device or other equipment which
improves the operating efficiency of any system within the Premises and thereby
reduces operating expenses; all other expenses which would generally be regarded
as operating, repair, replacement and maintenance expenses; all real property
taxes and installments of special assessments, including dues and assessments by
means of deed restrictions and/or owners' associations which accrue against the
Building during the term of this Lease and legal fees incurred in connection
with actions to reduce the same; and all insurance premiums Landlord is required
to pay or deems necessary to pay, including fire and extended coverage, and rent
loss and public liability insurance, with respect to the Building. When
reasonably possible, Landlord agrees to competitively bid all common area
maintenance components of operating expenses with respect to the Building.
The term "operating expenses" shall not include the following:
A. Capital expenditures; provided that such costs shall be
includable in operating expenses on an amortized basis, which
amortization shall occur over the useful life of the item of expense,
at an amortization rate as reasonably determined by Landlord;
B. Income or franchise taxes payable by Landlord except to the
extent` imposed in lieu of real or personal property taxes or
special assessments;
C. Tenant improvements, leasing commissions and advertising and
marketing costs for leasing of space;
D. Costs (including, without limitation, permit, license and
inspection fees) of any alterations, renovations, improvements or
decorations made for specific tenants of the Building;
E. Depreciation;
F. Principal or interest payments on any mortgages relating to the
Building or the property, lease rentals or expenses paid or payable on
any ground or underlying lease or any fees (including attorneys' fees)
and costs incurred in obtaining such mortgages or ground or underlying
leases;
G. Costs of formation and operation of Landlord as a legal entity
and defending Landlord's title to or interest in the Building,
including, without limitation, attorneys' fees;
H. Costs of the procurement, negotiation and enforcement of tenant
leases, including, without limitation, attorneys' fees and brokers'
commissions;
I. The cost of correcting latent defects in the initial construction
of the Building and the Premises, and the Building's elements and
equipment, to the extent such items are covered by contractor,
subcontractor or manufacturer's warranty.
J. Any advertising and promotional expenditures;
K. Executive salaries above the grade of general manager of the
Building and such portion of the salaries of off-site management
personnel to the extent that their duties include work on other
buildings;
L. Any interest, penalty charges or capital improvements incurred by
Landlord due to the violation of any law existing as of the
Commencement Date or failure to timely pay obligations of Landlord
other than interest on special assessments, amortization of capital
expenditures otherwise includable in operating expenses, and any
interest and penalties which result from Tenant's failure to pay when
due any rent which has not been abated under the terms of this Lease.
M. Expenses for which Landlord is reimbursed (net of cost of
collection), including without limitation, reimbursements from
insurance or from Tenant or other tenants (such as reimbursement for
repairs) or pursuant to contractors' or others' warranties or
condemnation, but excluding those expenses reimbursed by Tenant or by
other tenants in the form of payments of a share of actual operating
expenses;
N. Cost of repairs due to condemnation;
O. Expenses incurred in connection with services (including special
service from Landlord's employees) or other benefits of a type which
are not available to Tenant, but which are available to another tenant
of the Building;
P. Any rental of equipment which, if purchased, would not be
included in actual operating expenses, other than items such as
scaffolding which are used on an occasional or sporadic basis in
performing Building maintenance and repairs;
Q. Any amount paid to any affiliate of Landlord for any item or
service to the extent it would exceed the reasonably competitive cost
or rate for such item or service provided by unrelated parties
determined as of the time the contract or purchase order was made;
R. Any cost resulting from the negligence or intentional act of
Landlord, its agents or employees;
S. Bad debt loss, rent loss or reserves therefor, provided that
actual operating expenses will in any event include the cost of rental
and business interruption insurance;
T. Amounts required to be escrowed by Landlord as replacement,
repair or similar reserves by any lessor under any ground or
underlying lease or holder of a mortgage or deed of trust on the
Building or the property, but any amounts withdrawn from such escrow
will be included in actual operating expenses to the extent such
amounts would have been includable in operating expenses had they been
funded from other sources;
U. The costs (or any amortization thereof) of any alterations,
additions, changes, replacements, improvements, repairs or other items
which are properly capitalized under currently accepted accounting
principles, provided that such costs shall be includable in operating
expenses on an amortized basis, which amortization shall occur over
the useful life of the repair, replacement or improvement, at an
amortization rate equal to its useful life, as reasonably determined
by Landlord.
2.4 INCREASE IN INSURANCE PREMIUMS. If an increase in any insurance premiums
paid by Landlord for the Building is caused by Tenant's use of the Premises or
if Tenant vacates the Premises and causes an increase in such premiums, then
Tenant shall pay as additional rent the amount of such increase to Landlord.
2.5 SECURITY DEPOSIT. The security deposit set forth in Section 1.6 shall be
held by Landlord for the performance of Tenant's covenants and obligations under
this Lease, it being expressly understood that the security deposit shall not be
considered an advance payment of rental or a measure of Landlord's damage in
case of default by Tenant. Upon the occurrence of any event of default by
Tenant or breach by Tenant of Tenant's covenants under this Lease, Landlord may,
from time to time, without prejudice to any other remedy, after written notice
to Tenant, use the security deposit to the extent necessary to make good any
arrears of rent, or to repair any damage or injury, or pay any expense or
liability incurred by Landlord as a result of the event of default or breach of
covenant, and any remaining balance of the security deposit shall be returned by
Landlord to Tenant upon termination of this Lease. In the event that Tenant is
not in Default under Section 11 of this Lease, upon the termination of lease
month sixty (60), Landlord agrees to refund said security deposit to Tenant
within thirty (30) days of Tenant's written request. If any portion of the
security deposit is so used or applied, Tenant shall, upon ten (10) days written
notice from Landlord, deposit with Landlord by cash or cashier's check an amount
sufficient to restore the security deposit to its original amount within thirty
(30) days of written notice to Tenant.
ARTICLE 3. OCCUPANCY AND USE
3.1 USE. Tenant warrants and represents to Landlord that the Premises shall be
used and occupied only for the purpose as set forth in Section 1.5. Tenant
shall occupy the Premises, conduct its business and control its agents,
employees, invitees and visitors in such a manner as is lawful, reputable and
will not create a nuisance. Tenant shall not permit any operation which emits
any odor or matter which intrudes into other portions of the Building or
otherwise interferes with, annoys or disturbs any other lessee in its normal
business operations or Landlord in its management of the Building. Tenant shall
not permit any waste on the Premises to be used in any way which would, in the
opinion of Landlord, be extra hazardous on account of fire or which would, in
any way, increase or render void the fire insurance on the Building.
3.2 SIGNS. No sign of any type or description shall be erected, placed or
painted in or about the Premises or Building which are visible from the exterior
of the Premises, except those signs submitted to Landlord in writing, and which
signs are in conformance with Landlord's sign criteria attached hereto as
EXHIBIT C. Tenant shall have the option to install, at its sole cost and
expense, a sign on Landlord's monument sign for the project. Said sign shall be
subject to Landlord's approval and may occupy up to seventy-five percent (75%)
of the area of the sign devoted to tenant identification.
3.3 COMPLIANCE WITH LAWS, RULES AND REGULATIONS. Tenant, at Tenant's sole cost
and expense, shall comply with all laws, ordinances, orders, rules and
regulations of state, federal, municipal or other agencies or bodies having
jurisdiction over the use, condition or occupancy of the Premises, provided that
compliance is required because of Tenant's specific use of the Premises. Tenant
will comply with the reasonable rules and regulations of the Building adopted by
Landlord, so long as and to the extent consistent with the terms and conditions
of this Lease. Landlord shall have the right at all times to change and amend
the rules and regulations in any reasonable manner as may be deemed advisable
for the safety, care, cleanliness, preservation of good order and operation or
use of the Building or the Premises. All rules and regulations of the Building
will be sent by Landlord to Tenant in writing and shall thereafter be carried
out and observed by Tenant.
3.4 WARRANTY OF POSSESSION. Tenant, on paying rent and performing its
obligations under this Lease, shall peacefully and quietly have, hold and enjoy
the Premises during the term of this Lease. Landlord warrants that it has the
right and authority to execute this Lease. Except to the extent of its own
negligence or willful act or omission, Landlord shall not be responsible for the
acts or omissions of any other tenant of the Building who may interfere with
Tenant's use of the Premises.
3.5 RIGHT OF ACCESS. Landlord or its authorized agents shall, at any and all
reasonable times, have the right to enter the Premises to inspect the same, to
show the Premises to prospective purchasers, lessees, mortgagees, insurers or
other interested parties, and to alter, improve or repair the Premises or any
other portion of the Building. Tenant hereby waives any claim for damages for
injury or inconvenience to or interference with Tenant's business, any loss of
occupancy or use of the Premises, and any other loss occasioned thereby. Tenant
shall not change Landlord's lock system or in any other manner prohibit Landlord
from entering the Premises. Landlord shall have the right to use any and all
means which Landlord may deem proper to open any door in an emergency without
liability therefor. Tenant shall permit Landlord to erect, use, maintain and
repair pipes, cables, conduits, plumbing, vents and wires in, to and through the
Premises as often and to the extent that Landlord may now or hereafter deem to
be necessary or appropriate for the proper use, operation and maintenance of the
Building.
Notwithstanding the foregoing, Landlord, except in the event of an emergency,
shall supply Tenant with at least 24 hours advance notice of its intention to
enter the Premises and to identify those expected to accompany Landlord
therefor. In entering the Premises or carrying out any work under this section,
Landlord shall exercise reasonable efforts to minimize disruption of Tenant's
use of the Premises and operation of its business, and shall repair any damage
to the Premises caused by the work. Such entry or work shall not be construed
as an eviction of Tenant, work an abatement of rent or relieve Tenant from
fulfilling any obligation in this Lease. To the extent, however, the Premises
are rendered unusable by Tenant in its business by reason of the negligent or
willful acts or omissions of Landlord Base Rent and Tenant's share of operating
expenses and any operating expense adjustment therefor will be proportionately
reduced from three business days after notice from Tenant that the Premises are
unusable until the Premises are again rendered usable.
ARTICLE 4. UTILITIES AND ACTS OF OTHERS
4.1 BUILDING SERVICES. Tenant shall pay when due, all charges for utilities
furnished to or for the use or benefit of Tenant or the Premises. Tenant shall
have no claim for rebate of rent on account of any interruption in service.
Reduction, interruption or termination of any service provided by Landlord or
any other supplier because of necessary repairs, installation or improvements,
Landlord's failure to perform any service under this section, or any cause
beyond the reasonable control of Landlord, shall not be construed as an eviction
of Tenant, work an abatement of rent or relieve Tenant from fulfilling any
obligation of this Lease. To the extent, however, the Premises are rendered
unusable by Tenant in its business by reason of: (i) any event caused by the
negligent or willful act or omission of Landlord, Base Rent and that part of
Tenant's share of operating expenses and any operating expense adjustment will
be proportionately reduced from three (3) business days after notice from Tenant
to Landlord that the Premises are unusable, until the Premises are again
rendered usable; or (ii) any event not contributed to by Landlord, Base Rent and
that part of Tenant's share of operating expenses and any operating expense
adjustment will be proportionately reduced, from fifteen (15) business days
after notice from Tenant to Landlord that the Premises are unusable, until the
Premises are again rendered usable. If any of the equipment or machinery used
by Landlord in supplying the services breaks down or for any cause ceases to
function properly, Landlord shall use reasonable diligence to make the necessary
repair or replacement.
4.2 THEFT OR BURGLARY. Landlord shall not be liable to Tenant for losses to
Tenant's property or personal injury caused by criminal acts or entry by
unauthorized persons into the Premises or the Building, except to the extent
caused or attributable to the negligence or willful act or omission of Landlord.
ARTICLE 5. REPAIRS AND MAINTENANCE
5.1. LANDLORD REPAIRS. Landlord shall only be obligated to maintain the roof,
foundation, parking, driveway and other common areas, the structural soundness
and integrity of the exterior walls, doors, corridors and other structures
serving the Premises, including utility services. Landlord's cost of
maintaining, replacing and repairing the items set forth in this section may
qualify for inclusion in operating expenses to the extent specified in Sections
2.2 and 2.3 herein. Landlord shall perform its duties of maintenance and
repair as specified herein in a first class manner consistent with buildings of
similar age, construction and features in the market.
5.2 TENANT REPAIRS. Tenant shall, at all times throughout the term of this
Lease, including renewals and extensions, and at its sole expense, keep and
maintain the Premises in a clean, safe, sanitary and first class condition and
in compliance with all applicable laws, codes, ordinances, rules and
regulations. Tenant's obligations hereunder shall include, but not be limited
to, the maintenance, repair and replacement, if necessary, of all heating,
ventilation, air conditioning, lighting and plumbing fixtures and equipment,
fixtures, motors and machinery, all interior walls, partitions, doors and
windows, including the regular painting thereof, all exterior entrances,
windows, doors and docks and the replacement of all broken glass. When used in
this provision, the term "repairs" shall include replacements or renewals when
necessary, and all such repairs made by the Tenant shall be equal in quality and
class to the original work. The Tenant shall keep and maintain all portions of
the Premises and the sidewalk and areas adjoining the same in a clean and
orderly condition, free of accumulation of dirt, rubbish, snow and ice. If
Tenant fails, refuses or neglects to maintain or repair the Premises as required
in this Lease after notice shall have been given Tenant, in accordance with this
Lease, Landlord may make such repairs without liability to Tenant for any loss
or damage that may accrue to Tenant's merchandise, fixtures or other property or
to Tenant's business by reason thereof, and upon completion thereof, Tenant
shall pay to Landlord all costs plus fifteen percent (15%) for overhead incurred
by Landlord in making such repairs upon presentation to Tenant of bill therefor.
5.3. TENANT DAMAGES. Tenant shall not allow any damage to be committed on any
portion of the Premises or Building or common areas, and at the termination of
this Lease, by lapse of time or otherwise, Tenant shall deliver the Premises to
Landlord in as good condition as existed at the Commencement Date of this Lease,
ordinary wear and tear excepted. The cost and expense of repairs necessary to
restore the condition of the Premises shall be borne by Tenant.
ARTICLE 6. ALTERATIONS AND IMPROVEMENTS
6.1 SHELL IMPROVEMENTS. Landlord will complete the shell improvements to the
Building and Premises in accordance with the specifications attached hereto as
EXHIBIT D.
6.2 INTERIOR IMPROVEMENTS. At Landlord's sole cost and expense, Landlord will
complete the construction of the interior improvements to the Premises in
accordance with the approved floor plan depicted in EXHIBIT E, including
preparation of construction documents, and in accordance with the specifications
agreed upon by Tenant and Landlord, which specifications are attached hereto as
EXHIBIT F. Any changes or modifications to the approved plan and specifications
caused or requested by Tenant which result in an increase in the cost of the
interior improvements shall be at Tenant's sole cost and expense, shall be made
and accepted by written change orders or agreement signed by Landlord and
Tenant, and shall constitute an amendment to this Lease.
The interior improvements shall be substantially completed by February 15, 1999.
6.3 TENANT IMPROVEMENTS. Tenant shall not make or allow to be made any
structural alterations or physical additions, or non-structural alterations or
physical additions costing in excess of $15,000.00, in or to the Premises
without first obtaining the written consent of Landlord, which consent may not
be unreasonably denied. Any alterations, physical additions or improvements to
the Premises made by Tenant shall at once become the property of Landlord and
shall be surrendered to Landlord upon the termination of this Lease; provided,
however, Landlord, at its option, may require Tenant to remove any physical
additions and/or repair any alterations in order to restore the Premises to the
conditions existing at the time Tenant took possession, all costs of removal
and/or alterations to be borne by Tenant.
ARTICLE 7. CASUALTY AND INSURANCE
7.1 SUBSTANTIAL DESTRUCTION. If all or a substantial portion of the Premises
or the Building should be totally destroyed by fire or other casualty, or if the
Premises or the Building should be damaged so that rebuilding cannot reasonably
be completed within two hundred seventy (270) working days after the date of
written notification by Tenant to Landlord of the destruction, or if insurance
proceeds are not made available to Landlord, or are inadequate, for restoration,
this Lease shall terminate at the option of either Landlord or Tenant by written
notice to the other within sixty (60) days following the occurrence, and the
rent shall be abated for the unexpired portion of the Lease effective as of the
date of the occurrence.
7.2 PARTIAL DESTRUCTION. If the Premises should be partially damaged by fire
or other casualty, and rebuilding or repairs can reasonably be completed within
one hundred fifty (150) working days from the date of written notification by
Tenant to Landlord of the destruction, and insurance proceeds are adequate and
available to Landlord for restoration, this Lease shall not terminate, and
Landlord shall at its sole risk and expense proceed with reasonable diligence to
rebuild or repair the Building or other improvements to substantially the same
condition in which they existed prior to the damage. If the Premises are to be
rebuilt or repaired and are untenantable in whole or in part following the
damage, the rent payable under this Lease during the period for which the
Premises, in whole or in part, are untenantable shall be adjusted to such an
extent as may be fair and reasonable under the circumstances, provided that
under no circumstances shall Tenant be required to pay rent for any portion of
the Premises that is untenantable.
7.3 PROPERTY INSURANCE. Landlord shall not be obligated in any way or manner
to insure any personal property (including, but not limited to, any furniture,
machinery, goods or supplies) of Tenant upon or within the Premises, any
fixtures installed or paid for by Tenant upon or within the Premises, or any
improvements which Tenant may construct on the Premises. Tenant shall maintain
property insurance on its personal property and shall also maintain plate glass
insurance. Tenant shall have no right in or claim to the proceeds of any policy
of insurance maintained by Landlord even if the cost of such insurance is borne
by Tenant as set forth in Article 2. Landlord agrees to provide Tenant a
summary of its insurance coverages upon execution of this Lease by both parties.
7.4 WAIVER OF SUBROGATION. Anything in this Lease to the contrary
withstanding, Landlord and Tenant hereby waive and release each other of and
from any and all right of recovery, claim, action or cause of action, against
each other, their agents, officers and employees, for any loss or damage that
may occur to the Premises, the improvements of the Building or personal property
within the Building, by reason of fire or the elements, regardless of cause or
origin, including negligence of Landlord or Tenant and their agents, officers
and employees, provided that the claims released are subject to the insurance
coverages required to be procured by either party hereunder. Landlord and
Tenant agree immediately to give their respective insurance companies which have
issued policies of insurance covering all risk of direct physical loss, written
notice of the terms of the mutual waivers contained in this Section.
7.5 HOLD HARMLESS. Landlord shall not be liable to Tenant's employees, agents,
invitees, licensees or visitors, or to any other person, for an injury to person
or damage to property on or about the Premises caused by any act or omission of
Tenant, its agents, servants or employees, or of any other person entering upon
the Premises under express or implied invitation by Tenant, or caused by the
improvements located on the Premises becoming out of repair, the failure or
cessation of any service provided by Landlord (including security service and
devices), or caused by leakage of gas, oil, water or steam or by electricity
emanating from the Premises, provided that any of the same are not caused by the
negligence or willful act or omission of Landlord. Tenant agrees to indemnify
and hold harmless Landlord of and from any loss, attorney's fees, expenses or
claims arising out of any such damage or injury. Tenant shall not be liable to
Landlord or its employees, agents, invitees, licensees or visitors, or to any
other person, for an injury to person or damage to property in the Building or
common areas serving the Building caused by any act or omission of Landlord, its
agents, servants or employees. Landlord agrees to indemnify and hold harmless
Tenant of and from any loss, attorneys' fees, expenses or claims arising out of
any such damage or injury.
7.6 PUBLIC LIABILITY INSURANCE. Tenant shall, during the term hereof, keep in
full force and effect at its expense a policy or policies of public liability
insurance with respect to the Premises and the business of Tenant, on terms and
with companies approved in writing by Landlord, in which both Tenant and
Landlord shall be covered by being named as insured parties under reasonable
limits of liability not less than $1,000,000, or such greater coverage as
Landlord may reasonably require, combined single limit coverage for injury or
death. Such policy or policies shall provide that thirty (30) days' written
notice must be given to Landlord prior to cancellation thereof. Tenant shall
furnish evidence satisfactory to Landlord at the time this Lease is executed
that such coverage is in full force and effect.
ARTICLE 8. CONDEMNATION
8.1 SUBSTANTIAL TAKING. If all or a substantial part of the Premises is taken
for any public or quasi-public use under any governmental law, ordinance or
regulation, or by right of eminent domain or by purchase in lieu thereof, and
the taking would prevent or materially interfere with the use of the Premises
for the purpose for which it is then being used, this Lease shall terminate and
the rent shall be abated during the unexpired portion of this Lease effective on
the date physical possession is taken by the condemning authority. Tenant shall
have no claim to the condemnation award or proceeds in lieu thereof, except that
Tenant shall be entitled to a separate award for the cost of removing and moving
its personal property.
8.2 PARTIAL TAKING. If all or a substantial part of the Premises are taken for
any public or quasi-public use under any governmental law, ordinance or
regulation, or by right of eminent domain or by purchase in lieu thereof, and
this Lease is not terminated as provided in Section 8.1 above, then Landlord
shall restore the Premises so as to permit effective use and occupancy thereof
by Tenant, and the rent payable under this Lease during the unexpired portion of
the term shall be adjusted to such an extent as may be fair and reasonable under
the circumstances. Tenant shall have no claim to the condemnation award or
proceeds in lieu thereof which are or may be payable to Landlord, provided,
however, that Tenant shall be entitled to apply for and receive a separate award
as allowed by law, for damages that Tenant sustains by reason of any such
taking.
ARTICLE 9. ASSIGNMENT OR SUBLEASE
9.1 LANDLORD ASSIGNMENT. Landlord shall have the right to sell, transfer or
assign, in whole or in part, its rights and obligations under this Lease and in
the Building. Any such sale, transfer or assignment shall operate to release
Landlord from any and all liabilities under this Lease arising after the date of
such sale, assignment or transfer.
9.2 TENANT ASSIGNMENT. Tenant shall not assign, in whole or in part, this
Lease, or allow it to be assigned, in whole or in part, by operation of law or
otherwise (including assignment by merger where the surviving corporation does
not have a net worth at least equal to the net worth of Tenant as of the date
hereof, or by dissolution, which merger or dissolution shall be deemed an
assignment) or mortgage or pledge the same, or sublet the Premises, in whole or
in part, without the prior written consent of Landlord, and in no event shall
said such assignment or sublease ever release Tenant or any guarantor from any
obligation or liability hereunder. Notwithstanding anything in this Lease to
the contrary, in the event of any assignment or sublease, any option or right of
first refusal granted to Tenant shall not be assignable by Tenant to any
assignee or sublessee. No assignee or sublessee of the Premises or any portion
thereof may assign or sublet the Premises or any portion thereof.
9.3 CONDITIONS OF ASSIGNMENT. If Tenant desires to assign or sublet all or any
part of the Premises, it shall so notify Landlord at least thirty (30) days in
advance of the date on which Tenant desires to make such assignment or sublease.
Tenant shall provide Landlord with a copy of the proposed assignment or sublease
and such information as Landlord might request concerning the proposed sublessee
or assignee to allow Landlord to make informed judgments as to the financial
condition, reputation, operations and general desirability of the proposed
sublessee or assignee. Within fifteen (15) days after Landlord's receipt of
Tenant's proposed assignment or sublease and all required information concerning
the proposed sublease or assignee, Landlord shall have the following options:
(1) consent to the proposed assignment or sublease, and, if the rent due and
payable by any assignee or sublessee under any such permitted assignment or
sublease (or a combination of the rent payable under such assignment or sublease
plus any bonus or any other consideration or any payment incident thereto)
exceeds the rent payable under this Lease for such space, Tenant shall pay to
Landlord all such excess rent and other excess consideration within ten (10)
days following receipt thereof by Tenant; or (2) refuse, with reasonable
discretion and judgement, to consent to the proposed assignment or sublease,
which refusal shall be deemed to have been exercised unless Landlord gives
Tenant written notice providing otherwise. Upon the occurrence of an event of
default, if all or any part of the Premises are then assigned or sublet,
Landlord, in addition to any other remedies provided by this Lease or provided
by law, may, at its option, collect directly from the assignee or sublessee all
rents becoming due to Tenant by reason of the assignment or sublease. Any
collection directly by Landlord from the assignee or sublessee shall not be
construed to constitute a novation or a release of Tenant or any guarantor from
the further performance of its obligations under this Lease. No permitted
assignment or subletting pursuant to the terms of this section shall result in a
release of Tenant of its obligations under this Lease, which obligations shall
remain in full force and effect throughout the Lease Term, unless expressly
released, in writing, by Landlord.
9.4 RIGHTS OF MORTGAGE. Tenant accepts this Lease subject and subordinate to
any recorded mortgage presently existing or hereafter created upon the Building
and to all existing recorded restrictions, covenants, easements and agreements
with respect to the Building. Landlord is hereby irrevocably vested with full
power and authority to subordinate Tenant's interest under this Lease to any
first mortgage lien hereafter placed on the Premises, and Tenant agrees upon
request to execute additional instruments subordinating this Lease as Landlord
may require. If the interests of Landlord under this Lease shall be transferred
by reason of foreclosure or other proceedings for enforcement of any first
mortgage or deed of trust on the Premises, Tenant shall be bound to the
transferee (sometimes called the "Purchaser") at the option of the Purchaser,
under the terms, covenants and conditions of this Lease for the balance of the
term remaining, including any extensions or renewals, with the same force and
effect as if the Purchaser were Landlord under this Lease, and, if requested by
the Purchaser, Tenant agrees to attorn to the Purchaser, including the first
mortgagee under any such mortgage if it be the Purchaser, as its Landlord.
Notwithstanding the foregoing, Tenant shall not be required to attorn to any
successor in interest to Landlord unless such successor has delivered to Tenant
a written agreement reasonably satisfactory to Tenant that this Lease and all
Tenant's rights under this Lease shall not be disturbed by such successor so
long as an event of Default is not continuing under this Lease. Further, Tenant
shall not be disturbed in its possession of the Premises so long as an event of
Default is not continuing under this Lease.
9.5 TENANT'S STATEMENT. Tenant agrees to furnish, from time to time, within
twenty (20) days after receipt of a request from Landlord or Landlord's
mortgagee, a statement certifying, if applicable, the following: Tenant is in
possession of the Premises; the Premises are acceptable; the Lease is in full
force and effect; the Lease is unmodified; Tenant claims no present charge,
lien, or claim or offset against rent; the rent is paid for the current month,
but is not prepaid for more than one month and will not be prepaid for more than
one month in advance; there is no existing default by reason of some act or
omission by Landlord; and such other matters as may be reasonably required by
Landlord or Landlord's mortgagee. Tenant's failure to deliver such statement,
in addition to being a default under this Lease, shall be deemed to establish
conclusively that this Lease is in full force and effect except as declared by
Landlord, that Landlord is not in default of any of its obligations under this
Lease, and that Landlord has not received more than one month's rent in advance.
Tenant agrees to furnish, up to once per year, within twenty (20) days after
receipt of a request from Landlord, a current financial statement of Tenant,
certified as true and correct by Tenant, provided that the form of the financial
statement shall be such form generally available in Tenant's published
statements.
ARTICLE 10. LANDLORD'S LIEN AND SECURITY AGREEMENT
(Intentionally Omitted)
ARTICLE 11. DEFAULT AND REMEDIES
11.1 DEFAULT BY TENANT. The following shall be deemed to be events of default
("Default") by Tenant under this Lease: (1) Tenant shall fail to pay when due
any installment of rent or any other payment required pursuant to this Lease,
and such failure is not cured within five (5) business days after written notice
to Tenant; (2) Tenant shall fail to comply with any term, provision or covenant
of this Lease, other than the payment of rent or other sums due hereunder, and
the failure is not cured within thirty (30) days after written notice to Tenant;
(3) Tenant shall file a petition or an involuntary petition is filed against
Tenant; or Tenant becomes insolvent under any applicable federal or state
bankruptcy or insolvency law; or Tenant admits that it cannot meet its financial
obligations as they become due; or a receiver or trustee shall be appointed for
all or substantially all of the assets of Tenant; or Tenant shall make a
transfer in fraud of creditors or shall make an assignment for the benefit of
creditors; or (4) Tenant shall do or permit to be done any act which results in
a lien being filed against the Premises or the Building and/or project of which
the Premises are a part, except if such a lien is filed, Tenant shall, within
ten (10) days of Landlord's written notice to Tenant, provide Landlord with a
bond in the amount of said lien, and Tenant shall diligently pursue a release of
said lien.
In the event that an order for relief is entered in any case under Title 11,
U.S.C. (the "Bankruptcy Code") in which Tenant is the debtor and: (A) Tenant as
debtor-in-possession, or any trustee who may be appointed in the case (the
"Trustee") seeks to assume the lease, then Tenant, or Trustee if applicable, in
addition to providing adequate assurance described in applicable provisions of
the Bankruptcy Code, shall provide adequate assurance to Landlord of Tenant's
future performance under the Lease by depositing with Landlord a sum equal to
the lesser of twenty-five percent (25%) of the rental and other charges due for
the balance of the Lease term or six (6) months' rent ("Security"), to be held
(without any allowance for interest thereon) to secure Tenant's obligation under
the Lease, and (B) Tenant, or Trustee if applicable, seeks to assign the Lease
after assumption of the same, then Tenant, in addition to providing adequate
assurance described in applicable provisions of the Bankruptcy Code, shall
provide adequate assurance to Landlord of the proposed assignee's future
performance under the Lease by depositing with Landlord a sum equal to the
Security to be held (without any allowance or interest thereon) to secure
performance under the Lease. Nothing contained herein expresses or implies, or
shall be construed to express or imply, that Landlord is consenting to
assumption and/or assignment of the Lease by Tenant, and Landlord expressly
reserves all of its rights to object to any assumption and/or assignment of the
Lease. Neither Tenant nor any Trustee shall conduct or permit the conduct of
any "fire", "bankruptcy", "going out of business" or auction sale in or from the
Premises.
11.2 REMEDIES FOR TENANT'S DEFAULT. Upon the occurrence of a Default as defined
above, Landlord may elect either (i) to cancel and terminate this Lease and this
Lease shall not be treated as an asset of Tenant's bankruptcy estate, or (ii) to
terminate Tenant's right to possession only without cancelling and terminating
Tenant's continued liability under this Lease. Notwithstanding the fact that
initially Landlord elects under (ii) to terminate Tenant's right to possession
only, Landlord shall have the continuing right to cancel and terminate this
Lease by giving three (3) days' written notice to Tenant of such further
election, and shall have the right to pursue any remedy at law or in equity that
may be available to Landlord.
In the event of election under (ii) to terminate Tenant's right to possession
only, Landlord may, at Landlord's option, enter the Premises and take and hold
possession thereof, without such entry into possession terminating this Lease or
releasing Tenant in whole or in part from Tenant's obligation to pay all amounts
hereunder for the full stated term. Upon such reentry, Landlord may remove all
persons and property from the Premises and such property may be removed and
stored in a public warehouse or elsewhere at the cost and for the account of
Tenant, without becoming liable for any loss or damage which may be occasioned
thereby. Such reentry shall be conducted in the following manner: without
resort to judicial process or notice of any kind if Tenant has abandoned or
voluntarily surrendered possession of the Premises; and, otherwise, by resort to
judicial process. Upon and after entry into possession without termination of
the Lease, Landlord may, but is not obligated to, relet the Premises, or any
part thereof, to any one other than the Tenant, for such time and upon such
terms as Landlord, in Landlord's sole discretion, shall determine, but Landlord
shall use reasonable efforts to relet the Premises. Landlord may make
alterations and repairs to the Premises to the extent deemed by Landlord
necessary or desirable to relet the Premises.
Upon such reentry, Tenant shall be liable to Landlord as follows:
A. For all attorneys' fees incurred by Landlord in connection with
exercising any remedy hereunder;
B. For the unpaid installments of base rent, additional rent or
other unpaid sums which were due prior to such reentry, including
interest and late payment fees, which sums shall be payable
immediately.
C. For the installments of base rent, additional rent, and other
sums falling due pursuant to the provisions of this Lease for the
period after reentry during which the Premises remain vacant,
including late payment charges and interest, which sums shall be
payable as they become due hereunder.
D. For all expenses incurred in releasing the Premises, including
leasing commissions, attorneys' fees, and costs of alteration or
repairs, which shall be payable by Tenant as they are incurred by
Landlord; and
E. While the Premises are subject to any new lease or leases made
pursuant to this Section, for the amount by which the monthly
installments payable under such new lease or leases is less than the
monthly installment for all charges payable pursuant to this Lease,
which deficiencies shall be payable monthly.
Notwithstanding Landlord's election to terminate Tenant's right to possession
only, and notwithstanding any reletting without termination, Landlord, at any
time thereafter, may elect to terminate this Lease, and to recover (in lieu of
the amounts which would thereafter be payable pursuant to the foregoing, but not
in diminution of the amounts payable as provided above before termination), as
damages for loss of bargain and not as a penalty, an aggregate sum equal to the
amount by which the present value of the rental value of the Premises for the
portion of the term unexpired at the time of such election is less than the
present value of the base rent, percentage rent, and additional rent and all
other charges which would have been payable by Tenant for the unexpired portion
of the term of this Lease (using an eight percent (8%) interest rate), which
deficiency and all expenses incident thereto, including commissions, attorneys'
fees, expenses of alterations and repairs, shall be due to Landlord as of the
time Landlord exercises said election, notwithstanding that the term had not
expired. If Landlord, after such reentry, leases the Premises, then the rent
payable under such new lease shall be conclusive evidence of the rental value of
the unexpired portion of the term of this Lease.
If this Lease shall be terminated by reason of bankruptcy or insolvency of
Tenant, Landlord shall be entitled to recover from Tenant or Tenant's estate, as
liquidated damages for loss of bargain and not as a penalty, the amount
determined by the immediately preceding paragraph.
11.3 LANDLORD'S RIGHT TO PERFORM FOR ACCOUNT OF TENANT. If Tenant shall be in
Default under this Lease, Landlord may cure the Default at any time for the
account and at the expense of Tenant. If Landlord cures a Default on the part
of Tenant, Tenant shall reimburse Landlord upon demand for any amount expended
by Landlord in connection with the cure, including, without limitation,
attorneys' fees and interest.
11.4 INTEREST, ATTORNEY'S FEES AND LATE CHARGE. In the event of a Default by
Tenant: (1) if a monetary default, interest shall accrue on any sum due and
unpaid at the Reference Rate (prime rate) of interest established from time to
time by US Bank N.A., Minneapolis, Minnesota, plus four percent (4%), and, if
Landlord places in the hands of an attorney the enforcement of all or any part
of this Lease, the collection of any rent due or to become due or recovery of
the possession of the Premises, Tenant agrees to pay Landlord's costs of
collection, including reasonable attorney's fees for the services of the
attorney, whether suit is actually filed or not. Other remedies for nonpayment
of rent notwithstanding, if the monthly rental payment or any other payment due
from Tenant to Landlord is not received by Landlord on or before the tenth
(10th) day of the month for which the rent is due, a late payment charge of
three percent (3%) of such past due amount shall become due and payable in
addition to such amounts owed under this Lease.
11.5 ADDITIONAL REMEDIES, WAIVERS, ETC.
A. The rights and remedies of Landlord set forth herein shall be in
addition to any other right and remedy now and hereafter provided by
law. All rights and remedies shall be cumulative and not exclusive of
each other. Landlord may exercise its rights and remedies at any
times, in any order, to any extent, and as often as Landlord deems
advisable without regard to whether the exercise of one right or
remedy precedes, concurs with or succeeds the exercise of another.
B. A single or partial exercise of a right or remedy shall not
preclude a further exercise thereof, or the exercise of another right
or remedy from time to time.
C. No delay or omission by Landlord in exercising a right or remedy
shall exhaust or impair the same or constitute a waiver of, or
acquiescence to, a Default.
D. No waiver of Default shall extend to or affect any other Default
or impair any right or remedy with respect thereto.
E. No action or inaction by Landlord shall constitute a waiver of
Default.
F. No waiver of a Default shall be effective unless it is in writing
and signed by Landlord.
ARTICLE 12. RELOCATION
(Intentionally Omitted)
ARTICLE 13. AMENDMENT AND LIMITATION OF WARRANTIES
13.1 ENTIRE AGREEMENT. IT IS EXPRESSLY AGREED BY TENANT, AS A MATERIAL
CONSIDERATION FOR THE EXECUTION OF THIS LEASE, THAT THIS LEASE, WITH THE
SPECIFIC REFERENCES TO WRITTEN EXTRINSIC DOCUMENTS, IS THE ENTIRE AGREEMENT OF
THE PARTIES: THAT THERE ARE, AND WERE, NO VERBAL REPRESENTATIONS, WARRANTIES,
UNDERSTANDINGS, STIPULATIONS, AGREEMENTS OR PROMISES PERTAINING TO THIS LEASE OR
TO THE EXPRESSLY MENTIONED WRITTEN EXTRINSIC DOCUMENTS NOT INCORPORATED IN
WRITING IN THIS LEASE.
13.2 AMENDMENT. THIS LEASE MAY NOT BE ALTERED, WAIVED, AMENDED OR EXTENDED
EXCEPT BY AN INSTRUMENT IN WRITING SIGNED BY LANDLORD AND TENANT.
13.3 LIMITATION OF WARRANTIES. LANDLORD AND TENANT EXPRESSLY AGREE THAT THERE
ARE AND SHALL BE NO IMPLIED WARRANTIES OF MERCHANTABILITY, HABITABILITY, FITNESS
FOR A PARTICULAR PURPOSE OR OF ANY OTHER KIND ARISING OUT OF THIS LEASE, AND
THERE ARE NO WARRANTIES WHICH EXTEND BEYOND THOSE EXPRESSLY SET FORTH IN THIS
LEASE.
ARTICLE 14. MISCELLANEOUS
14.1 SUCCESSORS AND ASSIGNS. This Lease shall be binding upon and inure to the
benefit of Landlord and Tenant and their respective heirs, personal
representatives, successors and assigns. It is hereby covenanted and agreed
that should Landlord's interest in the Premises cease to exist for any reason
during this Lease, then notwithstanding the happening of such event this Lease
nevertheless shall remain unimpaired and in full force and effect, and Tenant
hereunder agrees to attorn to the then owner of the Premises, and the successor
owners shall execute an appropriate instrument recognizing the terms and
conditions of this Lease and agree not to disturb the Tenant in its use and
enjoyment of the Premises so long as Tenant is not in Default hereunder.
14.2 USE OR RENT TAX. If applicable in the jurisdiction where the Premises are
issued, Tenant shall pay and be liable for all rental, sales and use taxes or
other similar taxes, if any, levied or imposed by any city, state, county or
other governmental body having authority, such payments to be in addition to all
other payments required to be paid to Landlord under the terms of this Lease,
except that payments shall not include taxes on Landlord's income. Any such
payment shall be paid concurrently with the payment of the rent, additional
rent, operating expenses or other charge upon which the tax is based as set
forth above.
14.3 ACT OF GOD. Unless otherwise specifically provided in this Lease, Landlord
shall not be required to perform any covenant or obligation in this Lease, or be
liable in damages to Tenant, so long as the performance or non-performance of
the covenant or obligation is delayed, caused or prevented by an act of God,
force majeure or by Tenant.
14.4 HEADINGS. The section headings appearing in this Lease are inserted only
as a matter of convenience and in no way define, limit, construe or describe the
scope or intent of any Section.
14.5 NOTICE. All rent and other payments required to be made by Tenant shall be
payable to Landlord at the address set forth in Section 1.8. All payments
required to be made by Landlord to Tenant shall be payable at the address set
forth in Section 1.8, or at any other address within the United States as Tenant
may specify from time to time by written notice. Any notice or document
required or permitted to be delivered by the terms of this Lease shall be deemed
to be delivered (whether or not actually received) three (3) days after the date
such notice is deposited in the United States Mail, postage prepaid, certified
mail, return receipt requested, addressed to the parties at the respective
addresses set forth in Section 1.8.
14.6 TENANT'S AUTHORITY. If Tenant executes this Lease as a corporation, each
of the persons executing this Lease on behalf of Tenant does hereby personally
represent and warrant that Tenant is a duly authorized and existing corporation,
that Tenant is qualified to do business in the state in which the Premises are
located, that the corporation has full right and authority to enter into this
Lease, and that each person signing on behalf of the corporation is authorized
to do so.
14.7 HAZARDOUS SUBSTANCES. Tenant, its agents or employees, shall not bring or
permit to remain on the Premises or Building any asbestos, petroleum or
petroleum products, explosives, toxic materials, or substances defined as
hazardous wastes, hazardous materials, or hazardous substances under any
federal, state, or local law or regulation ("Hazardous Materials"), except in
such quantities as are common for businesses of the type operated by Tenant in
premises similar to those occupied by Tenant, provided that any such materials
are handled by Tenant in compliance with all applicable environmental laws.
Tenant's violation of the foregoing prohibition shall constitute a material
breach and default hereunder and Tenant shall indemnify, hold harmless and
defend Landlord from and against any claims, damages, penalties, liabilities,
and costs (including reasonable attorney fees and court costs) caused by or
arising out of (i) a violation of the foregoing prohibition by Tenant or (ii)
the presence of any Hazardous Materials on, under, or about the Premises or the
Building during the term of the Lease to the extent caused by or arising out of
the actions of Tenant, its agents or employees. Tenant shall clean up, remove,
remediate and repair any soil or ground water contamination and damage caused by
the presence and any release of any Hazardous Materials in, on, under or about
the Premises or the Building during the term of the Lease caused by or arising,
in whole or in part, out of the actions of Tenant, its agents or employees, in
conformance with the requirements of applicable law. Tenant shall immediately
give Landlord written notice of any suspected breach of this paragraph; upon
learning of the presence of any release of any Hazardous Materials, and upon
receiving any notices from governmental agencies pertaining to Hazardous
Materials which may affect the Premises or the Building. The obligations of
Tenant hereunder shall survive the expiration or earlier termination, for any
reason, of this Lease.
14.8 SEVERABILITY. If any provision of this Lease or the application thereof to
any person or circumstances shall be invalid or unenforceable to any extent, the
remainder of this Lease and the application of such provisions to other persons
or circumstances shall not be affected thereby and shall be enforced to the
greatest extent permitted by law.
14.9 LANDLORD'S LIABILITY. If Landlord shall be in default under this Lease
and, if as a consequence of such default, Tenant shall recover a money judgment
against Landlord, such judgment shall be satisfied only out of the right, title
and interest of Landlord in the Building as the same may then be encumbered and
neither Landlord nor any person or entity comprising Landlord shall be liable
for any deficiency. In no event shall Tenant have the right to levy execution
against any property of Landlord nor any person or entity comprising Landlord
other than its interest in the Building as herein expressly provided.
14.10 BROKERAGE. Landlord and Tenant each represents and warrants to the
other that there is no obligation to pay any brokerage fee, commission, finder's
fee or other similar charge in connection with this Lease, other than fees due
to Bill Ritter of Welsh Companies, which are the responsibility of Landlord.
Each party covenants that it will defend, indemnify and hold harmless the other
party from and against any loss or liability by reason of brokerage or similar
services alleged to have been rendered to, at the instance of, or agreed upon by
said indemnifying party. Notwithstanding anything herein to the contrary,
Landlord and Tenant agree that there shall be no brokerage fee or commission due
on expansions, options or renewals by Tenant.
14.11 MANAGEMENT AGENT. Landlord hereby notifies Tenant that the person
authorized to execute this Lease and manage the Premises is CSM Corporation, a
Minnesota corporation, which has been appointed to act as the agent in leasing
management and operation of the Building for Landlord and is authorized to
accept service of process and receive or give receipts for notices and demands
on behalf of Landlord. Landlord reserves the right to change the identity and
status of its duly authorized agent upon written notice to Tenant.
14.12 CONTINGENCY. In the event that Landlord has not received necessary
approvals to proceed with the Home Depot Stores/PPT Vision Eden Prairie project
or has not entered into a lease agreement with Home Depot Stores for the
property adjacent to the Premises (designated as "Building B" on attached
EXHIBIT A) on or before August 5, 1998, then Landlord or Tenant shall have the
option to terminate this Lease with no further obligation to the other party
upon written notice to the other party on or before August 7, 1998.
14.13 EXPANSION SPACE. At any time during lease months forty-two through
sixty (42-60) (the "Delivery Period"), Landlord agrees to lease and Tenant
agrees to accept, an additional, approximate 21,146 square feet of lease space
("Expansion Space"), as depicted on EXHIBIT A, under the following terms and
conditions contained in this Lease, with the following modifications:
A. The delivery date for the Expansion Space shall occur during the
Delivery Period and shall be determined by Landlord, provided that
Landlord will provide Tenant with not less than six (6) months prior
written notice of said delivery date.
B. The base rental rate for the Expansion Space shall be the same
per square foot rate as the rate applicable to the original Premises
pursuant to Section 1.4, plus, if applicable, the amortization of
"expansion space carrying costs" (as defined in this section).
C. The term of the Expansion Space shall commence on the delivery
date of the Expansion Space and shall expire coterminous with the term
of Tenant's existing lease.
D. In the event that some or all of the Expansion Space is delivered
to Tenant with existing office improvements in place, then the area of
the Expansion Space with existing office improvements shall be
provided to Tenant in the "as is" condition.
E. In the event that some or all of the Expansion Space is delivered
to Tenant with building shell or warehouse finishes in place, then
Landlord agrees to provide a tenant improvement allowance of up to
$15.00 per square foot for areas with shell or warehouse finishes in
place. Landlord agrees to coordinate, design and construct the
improvements to the shell or warehouse finish areas of the Expansion
Space under the same procedure depicted in Section 6.2.
F. Landlord's notice to Tenant shall include an amendment to this
Lease establishing the delivery date of the Expansion Space, the
rentable square foot area of the Expansion Space and the existing
office space, the amount of improvement allowance funds available to
Tenant, the base rental rate and monthly rental for the Expansion
Space, and Tenant's pro-rata share of operating expenses adjusted to
reflect the Expansion Space. Additional rent and operating expenses
payable on the Expansion Space shall commence upon delivery of the
Expansion Space, whether or not construction of tenant improvements to
the Expansion Space are necessary or complete.
G. It shall be a condition of Landlord's obligation to provide the
Expansion Space that Tenant is not in Default under Section 11 or this
Lease.
H. From the Commencement Date until the earlier of: (1) the date
Landlord delivers the Expansion Space to Tenant; or (2) the date
Landlord leases the Expansion Space to an outside party during the
period between the Commencement Date and the Expansion Space delivery
date; Tenant shall accrue an obligation to Landlord in an amount equal
to $4,000.00 per month (or a lesser amount during months of partial
occupancy, based on partial month and/or partial space occupancies,
determined on a pro-rata basis) to compensate Landlord for its
carrying expenses associated with the Expansion Space ("Expansion
Space Carrying Costs"), which shall be payable to Landlord upon
delivery of the Expansion Space to Tenant. Landlord agrees to
exercise good faith efforts to lease the Expansion Space during the
period between the Commencement Date and the Expansion Space delivery
date.
I. In the event that the Expansion Space is available prior to the
Delivery Period, Tenant may, with three (3) months prior written
notice to Landlord, lease the Expansion Space prior to the Delivery
Period under the same terms and conditions depicted in this section,
except that the additional base rent and operating expenses payable on
the Expansion Space shall commence three (3) months from the date of
Tenant's notice to Landlord, whether or not construction of Tenant's
improvements to the Expansion Space is necessarily complete.
Landlord's notice to Tenant shall contain reasonable
documentation of Tenant's Expansion Space Carrying Costs obligation to
the notice date, and an estimate of Tenant's remaining obligation for
payment of Expansion Space Carrying Costs, if applicable. Tenant
shall be required to pay the full amount to Landlord within sixty (60)
days of Landlord's notice, or elect to have such sum amortized as
additional base rent for the Premises and the Expansion Space over the
remaining term of this Lease, commencing with delivery of the
Expansion Space, at an amortization rate of ten percent (10%).
14.14 RIGHT TO TERMINATE. Tenant shall have the one time option to
terminate this Lease, with no further obligation, upon the expiration of lease
month eighty-four (84) with delivery of written notice indicating Tenant's
irrevocable intent to exercise its termination right, and payment of a lease
termination fee in the amount of $500,000.00, delivered to Landlord prior to the
expiration of lease month seventy-two (72). The termination fee shall be
payable fifty percent (50%) upon the date of notice and fifty percent (50%) upon
the date which is ninety (90) days prior to the effective date of termination.
It shall be a condition of Tenant's Right to Terminate that Tenant shall not be
in default under Section 11 of this Lease.
14.15 MARKET RATE OPTION. Upon two hundred seventy (270) days written
notice, Tenant may extend the term of this Lease for two (2) additional sixty
(60) month terms under the same conditions contained herein, except that the
Base Rental shall be adjusted to reflect the prevailing market rate for
comparable space in the Eden Prairie, Minnesota area. In no case shall the
adjusted rate(s) be less than the latest rate paid by the Tenant during the
primary term or previous extension term of this Lease. It shall be a condition
of the exercise of this option that the Tenant not be in Default per Section 11
of this Lease, and further, it shall be a condition of Tenant's second option to
extend that Tenant has exercised and faithfully completed its first option term.
In the event that Tenant has not provided timely notice of its election to
exercise its option to extend as depicted in this section, said option to extend
shall be null and void and of no further force and effect.
14.16 LANDLORD DEFAULT. In the event of any default in the performance of
any obligation of Landlord under this Lease, Tenant will deliver to Landlord
written notice listing the reasons for Landlord's default and Landlord will have
thirty (30) days following receipt of such notice to cure such default or, in
the event the default cannot reasonably be cured within a thirty (30) day
period, to commence action and proceed diligently to cure such default. A copy
of such notice to Landlord will be sent to any lessor under any ground lease or
holder of any other mortgage or deed of trust of which Tenant has been notified
in writing, and any such lessor or holder will also have the same rights to cure
such default. Tenant shall be entitled to recover from Landlord any damages
arising out of Landlord's breach of this Lease and to exercise any other rights
or remedies provided at law or in equity.
14.17 SUBMISSION OF LEASE. Submission of this Lease to Tenant for signature
does not constitute a reservation of space or an option to lease. This Lease is
not effective until execution by and delivery to both Landlord and Tenant.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease effective the
day and year first above written.
LANDLORD TENANT
CSM PROPERTIES, INC. PPT VISION, INC.
BY: /s/David Carland BY: /s/Joseph C. Christenson
ITS: Vice President ITS: President
EXHIBIT 23: CONSENT OF INDEPENDENT ACCOUNTANTS
-----------------------------------------------
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8, Numbers 33-39459, 33-61266, 333-00665 and 333-48065 of
PPT Vision, Inc. of our report dated November 20, 1998 appearing in this Annual
Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers, LLP
Minneapolis, Minnesota
January 29, 1999
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