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, 1999
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.)
12988 Valley View Road
Eden Prairie, MN 55344
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(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (612) 996-9500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: (1) Common Stock
$.10 par value
(2) Preferred Stock Purchase Rights
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. (X)
The approximate aggregate market value of the registrant's common stock held by
nonaffiliates of the registrant (based on the closing sale price of such stock
as reported by the Nasdaq Stock Market) on January 10, 2000 was approximately
$13,063,000. The number of shares of common stock, $0.10 par value per share,
outstanding as of January 10, 2000 was 5,256,275.
Documents Incorporated by Reference: The Company's Proxy Statement for its
Annual Meeting of Shareholders to be held March 16, 2000 is incorporated by
reference into Part III of this Form 10-K.
TABLE OF CONTENTS
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PART I Page
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Item 1. Business.............................................. 3
Important Factors Regarding
Forward-Looking Statements...................... 15
Executive Officers of the Company.................. 18
Item 2. Properties............................................ 19
Item 3. Legal Proceedings..................................... 19
Item 4. Submission of Matters for a
Vote of Security Holders........................... 20
PART II
Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters............. 21
Item 6. Selected Financial Data............................... 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 24
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk........................................ 28
Item 8. Financial Statements and Supplementary Data........... 28
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 28
PART III
Item 10. Directors and Executive Officers of the Registrant.... 29
Item 11. Executive Compensation................................ 29
Item 12. Security Ownership of Certain
Beneficial Owners and Management................... 29
Item 13. Certain Relationships and Related Transactions........ 29
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K........................................ 30
Signatures...................................................... 32
Part I
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, including statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future. Forward-
looking statements include, without limitation, statements regarding the extent
and timing of future revenues and expenses and customer demand. These statements
include, but are not limited to, changes in worldwide general economic
conditions, cyclicality of capital spending by customers, PPT VISION's ability
to keep pace with technological developments and evolving industry standards,
worldwide competition, and PPT VISION's ability to protect its existing
intellectual property from challenges from third parties and other factors.
All forward-looking statements included in this document are based on
information available to the Company as of the date hereof, and the Company
assumes no obligation to update any such forward-looking statements. It is
important to note that the Company's actual results could differ materially from
those in such forward-looking statements. The forward-looking statements of the
Company are subject to risks and uncertainties. Some of the factors that could
cause future results to materially differ from the Company's recent results or
those projected in the forward-looking statements are described in the
"Important Factors Regarding Forward-Looking Statements" section of this Form 10
- - -K.
Item 1. BUSINESS
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CORPORATE PROFILE
PPT VISION, Inc. ("PPT VISION" or the "Company") designs, manufactures, markets
and integrates machine vision-based automated inspection systems for
manufacturing applications such as electronic and mechanical assembly
verification, verification of printed characters, packaging integrity, surface
flaw detection, and gauging and measurement tasks. A machine vision system is a
combination of cameras, lighting, and computer hardware and software working
together to capture and analyze images of moving parts to determine if the parts
match a defined standard. Machine vision-based inspection systems enable
manufacturers to realize significant economic gains by increasing the quality of
manufactured parts and improving the productivity of manufacturing processes.
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 3M, AMP,
Abbott Labs, Berg Electronics, Daimler-Chrysler, the Delphi Electronic Division
of General Motors, Imation, Johnson & Johnson, Kemet, Micron Technology, Molex,
Philip Morris, Siemens and United Technologies.
WHAT IS MACHINE VISION?
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
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 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 improve and increase 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. The Company's machine vision systems enable manufacturers
to achieve zero defect production.
PPT VISION's family of machine vision systems, which include its proprietary
Vision Program ManagerT (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 less 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) application specific products such as the
PPT861, a high speed, automated in-tray inspection system which provides high
speed two-dimensional (2D) inspection and three-dimensional (3D) scanning of a
wide range of in-tray semiconductor packages including BGA, CSP and BGA as well
as electronic connectors, hard drive components and other applications; 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:
* Providing 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.
* Extending 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.
* Targeting 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.
* Providing 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.
* Increasing 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
Product Overview
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. 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. Using 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 to
establish the execution of 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 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 that 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.
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.
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.
PPT's principal product offerings are discussed below:
Passport DSLT and Scout DSLT (Digital Serial Link)
Passport DSLT and Scout DSLT (Digital Serial LinkT). The Company introduced
its completely digital machine vision systems, the patented Passport DSLT and
Scout DSLT, in fiscal 1998. These products offer an integrated network of
cameras, lighting, image processors and hubs, which together form a complete
machine vision system.
The Passport DSLT and Scout DSLT systems are completely digital, which results
in much greater accuracy and repeatability than traditional analog systems.
These DSL systems feature PPT's Vision Program ManagerT (VPMT)software, a
powerful, graphical programming interface that requires no programming expertise
and operates in the Microsoftr WindowsT environment. The Passport DSLT and
Scout DSLT both incorporate a fully integrated Pentium-based PC, which can be
easily added onto a factory network, allowing for a full range of control and
monitoring capabilities, and an easy way to import or export process information
and images. The DSL systems support a network of up to 16 asynchronously
functioning cameras that capture non-interlaced video images at rates up to
4,000 full frames per minute. The Passport DSLT is housed in an industrially
rugged enclosure while the Scout DSLT is packaged in a non-industrial style
enclosure. To complement the DSL product family, the Company has also developed
the DSL6000 digital camera.
PassportT 440, PassportT 240, and ScoutT machine vision systems
The PassportT 440 is designed to operate with up to four asynchronously
functioning cameras for multiple inspection views and complex imaging tasks. The
PassportT 240 has all of the basic capabilities of the PassportT 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 ScoutT
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 speed and power similar to
that of the PassportT 240.
SpeedScan 3DT Sensor.
The SpeedScan 3DT Sensor is based on PPT's patented Scanning Moire
InterferometryT (SMIT)3D technology. Utilizing a tri-linear CCD sensor and
advanced optics, the SpeedScan 3DT Sensor is capable of real-time calculation of
3D topography in a single pass. PPT's SMIT is a patented, unique technology for
very high speed, highly accurate 3D scanning. It is an area-scanning technology
that gathers height data at rates many times faster than conventional laser-
based sensors. SMIT is especially suitable for applications in the
semiconductor and electronics industries, such as IC coplanarity (BGA, BGA,
QFP), connector coplanarity, solder paste volume and hard drive components.
PPT861T, In-Tray 2D and 3D Inspection System
PPT introduced, in fiscal 1999, the PPT861T, a high-speed, semi-automated 3D
scanning station capable of 2.5 micron resolution. The PPT861T provides the
flexibility to scan a wide range of in-tray semiconductor packages including
BGA, CSP and BGA, as well as electronic connectors, hard drive components and
other applications. Using the Company's patented SMIT 3D technology, the
PPT861T delivers precise measurements at greatly enhanced speeds. With the
addition of the optional 2D module, the PPT861T provides a comprehensive
solution for critical measurement and inspection requirements. The PPT861T
operates with a manual tray load/unload and automated, high speed scanning and
is ideal for small lot production or high volume applications that require off-
line sampling and production verification. All scanning and motion parameters
are programmable to allow the inspection of a broad range of component types
with varying size and thickness.
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, 1999, the Company had sold 2,951 machine vision systems to over 270
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, 1999, sales to one customer, Philip
Morris Incorporated, represented 27% 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.
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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1999 1998 1997
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North America.............................. 74% 62% 78%
Europe..................................... 13% 18% 14%
Asia-Pacific............................... 12% 18% 8%
South America.............................. 1% 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: 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. 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 are 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 $4.5 million, $2.9 million and $2.3
million in the fiscal years ended October 31, 1999, 1998, and 1997,
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 several 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.
In July 1999, the Company was served by National Instruments Corporation (NIC)
of Austin, Texas, in a patent infringement lawsuit filed in United States
District Court for the Western District of Texas. NIC has alleged that the
Company's Vision Program Manager software (VPM) infringes certain United States
patents held by NIC related to graphical programming concepts. For more
detailed information on this lawsuit, see Part I, Item 3 "Legal Proceedings."
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", "Scout", "Passport DSL" and "Scout DSL" 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 12, 2000, the Company had 109 employees, including 49 employees
in research and development, 33 in sales and marketing, 19 in manufacturing and
8 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,
1999, sales to one customer, Philip Morris Incorporated, represented 27% 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.
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. See Item 3, Legal Proceedings.
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, 1999, 1998 and 1997,
sales of the Company's products to customers outside North America accounted for
approximately 26%, 38% and 22%, 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. In fiscal 1999, income tax
expense of $1,650,000 was recorded. This income tax expense resulted from the
recording of a valuation allowance against previously recorded deferred tax
assets due to the uncertainty of future realization. A valuation allowance
equal to the deferred tax asset has been recorded.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers and other key members of management of the Company are
as follows:
NAME AGE POSITION
- - ----- --- --------
Joseph C. Christenson.......... 41 President, Director
Larry G. Paulson............... 48 Vice President of Research and Development,
Director
Thomas R. Northenscold......... 41 Vice President and General Manager,
Vision Systems Division
Arye Malek..................... 43 Vice President of Marketing
Richard R. Peterson............ 34 Chief Financial Officer
David L. Friske................ 56 Vice President of Manufacturing
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.
Larry G. Paulson, has been Vice President and Chief Technology Officer since
March 1999 and a director of the Company since December 1981. Mr. Paulson was a
co-founder of the Company and previously held the position of Vice President of
Research and Development. Mr. Paulson is also a Registered Professional Engineer
and holds Bachelors and Masters Degrees in Science from the University of
Minnesota.
Thomas R. Northenscold has been Vice President and General Manager, of the
Company's Vision Systems Division since March 1999. Prior to that, he served as
Chief Financial Officer of the Company since February 1995. From April 1992 to
April 1994, he was Senior Vice President of Operations in the City Directory
Division of R.L. Polk and Company, a directory publishing company. 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.
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.
Richard R. Peterson has been Chief Financial Officer of the Company since
April 1999. From December 1996 to March 1999, Mr. Peterson served as Chief
Financial Officer of PREMIS Corporation, a developer of enterprise-wide retail
automation systems. From July 1992 through November 1996, Mr. Peterson was Vice
President of Finance and Administration of Teltech Resource Network Corporation,
an information technology company. From October 1988 through June 1992, Mr.
Peterson was at Ernst & Young LLP. Mr. Peterson holds a Bachelor of Science
Degree from Mankato State University.
David L. Friske has been Vice President of Manufacturing of the Company since
March 1999. From February 1984, Mr. Friske served as Director of Manufacturing
and Purchasing. Prior to joining the Company, Mr. Friske was employed by
Medtronic, Inc.
Item 2. PROPERTIES
- - -------------------
The Company entered into a ten-year lease in May 1999 for approximately 59,000
square feet of office and manufacturing space in Eden Prairie, Minnesota. The
lease commenced on June 1, 1999 at an initial monthly rate of approximately
$51,000. The Company has an obligation to occupy additional space with
additional lease payments over the term of the lease. The Company also leases
space for its regional sales and support offices in Massachusetts, Michigan and
North Carolina.
Item 3. LEGAL PROCEEDINGS
- - -------------------------
In July 1999, the Company was served by National Instruments Corporation (NIC)
of Austin, Texas, in a patent infringement lawsuit filed in United States
District Court for the Western District of Texas. NIC has alleged that the
Company's Vision Program Manger software (VPM) infringes certain United States
patents held by NIC related to graphical programming concepts. The Company has
filed a counterclaim and requested that the Court declare the NIC patents
invalid or determine that the Company does not infringe the NIC patents. The
lawsuit is in the initial stages of discovery and a trial has not yet been
scheduled in this action. The Company believes that it has meritorious defenses
to the lawsuit and intends to defend itself vigorously. However, no assurance
can be given as to the outcome of this action. The inability of the Company to
prevail in this action, including the loss or impairment of the right to sell
the Company's products in the United States, could have a material adverse
effect on the Company's future business, financial condition and results of
operations. At October 31, 1999, the Company has accrued $500,000 for estimated
attorneys' fees to be incurred in the defense of this action.
On July 9, 1999 Integrated Electronic Technologies, Inc. (IET) of
Cicero, New York, filed a complaint against the Company in the United
States District Court for the Northern District of New York (Case No.
99-CV-1067). IET is asserting breach of contract and related claims in
connection with the proposed purchase by the Company of certain
handling systems to be manufactured by IET. The Company has filed an
answer denying all liability and has asserted counterclaims seeking
damages from IET. There has been no discovery to date and a trial has not yet
been scheduled in the action. The Company believes that it has meritorious
defenses to the lawsuit and intends to defend itself vigorously.
For further information see Part 1, Item 1 herein "Patents and Proprietary
Rights" and "Important Factors Regarding Forward-Looking Statements- Proprietary
Technology."
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 Stock Market under the symbol
"PPTV". The following table sets forth the high and low closing sale prices of
the Company's Common Stock on the Nasdaq Stock Market as reported by Nasdaq.
HIGH LOW
------ -----
FISCAL YEAR ENDED OCTOBER 31, 1999
First Quarter............................................. $ 6.63 $4.88
Second Quarter............................................ 6.88 4.38
Third Quarter............................................. 5.19 4.38
Fourth Quarter............................................ 5.63 3.13
FISCAL YEAR ENDING OCTOBER 31, 1998
First Quarter............................................. $ 9.75 $6.50
Second Quarter............................................ 9.00 5.56
Third Quarter............................................. 8.62 6.25
Fourth Quarter............................................ 10.38 7.62
On January 12, 2000, there were approximately 682 holders of record of the
Company's common stock. This figure does not reflect more than 2,000 beneficial
stockholders whose shares are held in nominee names.
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
- - --------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- -------- -------- ----------
INCOME STATEMENT DATA:
Net revenues... $11,325,000 $13,512,000 $12,055,000 $12,693,000 $9,750,000
Cost of sales... 5,150,000 5,666,000 4,894,000 5,044,000 4,442,000
----------- ----------- ----------- ---------- ----------
Gross profit... 6,175,000 7,846,000 7,161,000 7,649,000 5,308,000
Selling expenses.. 4,456,000 4,857,000 3,727,000 2,897,000 2,279,000
General and administrative
expenses......... 2,535,000 1,294,000 1,177,000 976,000 851,000
Research and development
expenses.......... 4,524,000 2,879,000 2,339,000 1,827,000 1,299,000
Non-recurring
charges... 1,481,000 -- -- -- --
----------- ----------- ----------- ---------- --------
Income (loss) from
operations.... (6,821,000) (1,184,000) (82,000) 1,949,000 879,000
Other income, net... 737,000 1,009,000 1,147,000 453,000 61,000
----------- ----------- ----------- ---------- --------
Income (loss)
before taxes. (6,084,000) (175,000) 1,065,000 2,402,000 940,000
Income tax benefit
(expense).... (1,650,000) 278,000 (405,000) 1,309,000 407,000
----------- ----------- ----------- ---------- --------
Net income (loss). $(7,734,000) $ 103,000 $ 660,000 $3,711,000 $1,347,000
=========== =========== =========== ========== =========
Diluted earnings
(loss) per share. $ (1.43) $ 0.02 $ 0.12 $ 0.84 $0.37
=========== =========== =========== ========== =========
Common and common
equivalent shares
outstanding. 5,398,000 5,511,000 5,495,000 4,410,000 3,650,000
=========== =========== =========== ========== ==========
OCTOBER 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
----------- ---------- ---------- --------- ---------
(in thousands)
BALANCE SHEET DATA:
Working capital.... $13,444 $20,495 $22,887 $24,083 $4,131
Total assets....... 21,845 29,575 29,986 28,056 6,098
Shareholders' equity 19,171 27,871 27,535 26,809 5,145
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Comparison of Year Ended October 31, 1999 to Year Ended October 31, 1998
- - ------------------------------------------------------------------------
Net Revenues: Net revenues decreased 16% to $11,325,000 in fiscal 1999,
compared to net revenues of $13,512,000 in fiscal 1998. Unit sales of the
Company's machine vision systems decreased to 387 in fiscal 1999 versus 510 in
fiscal 1998. Net revenues decreased primarily due to declines in the
electronics segment as well as new product introduction delays experienced in
the first half of fiscal 1999. Gross revenues in fiscal 1999 increased 1% in
North America and decreased 44% outside North America. The decline in revenues
outside North America was primarily due to lower sales in the Asia/Pacific
region. Sales to customers outside North America represented 26% of net
revenues in fiscal 1999, compared to 38% in fiscal 1998.
Gross Profit: Gross profit decreased 21% to $6,175,000 in fiscal 1999,
compared to $7,846,000 in fiscal 1998. Gross profit as a percentage of net
revenues for fiscal 1999 decreased to 55%, compared with 58% in fiscal 1998.
The decrease in gross profit in absolute dollars in fiscal 1999 is primarily due
to the decrease in net revenues. The decrease in gross profit as a percentage of
net revenues is mainly a factor of unfavorable manufacturing variances resulting
from decreased production volumes and additional costs associated with the
introduction of new products. The Company anticipates that the gross profit as a
percentage of net revenues may fluctuate from quarter to quarter during fiscal
2000, but should remain at or near the levels achieved in fiscal 1999.
Selling Expenses: Selling expenses decreased 8% to $4,456,000 in fiscal 1999,
compared to $4,857,000 in fiscal 1998. As a percentage of net revenues, fiscal
1999 selling expenses increased to 39%, compared with 36% in fiscal 1998. The
decrease in selling expenses in absolute dollars is primarily the result of
lower net revenues in fiscal 1999. Although the Company will limit the rate of
growth in selling expenses, it is anticipated that selling expenses may increase
somewhat in fiscal 2000 as the Company makes the necessary investments to
support strategic initiatives. However, the Company believes that for the whole
of fiscal 2000, selling expenses will decrease slightly as a percentage of net
revenues compared to fiscal 1999, depending on the level of sales growth.
General and Administrative Expenses: General and administrative expenses
increased 96% to $2,535,000 in fiscal 1999, compared to $1,294,000 in fiscal
1998. As a percentage of net revenues, general and administrative expenses
increased to 22% for fiscal 1999, compared to 10% for fiscal 1998. The increase
in expenditures is primarily attributable to legal defense costs related to the
Company's lawsuit with National Instruments Corporation, legal costs associated
with new patent filings, and increased operating costs associated with the
Company's move to a new facility in May 1999. The Company believes that during
fiscal 2000, general and administrative expenses will decline in absolute
dollars and as a percentage of net revenues compared to fiscal 1999, depending
on the level of sales growth.
Research and Development Expenses: Research and development expenses increased
57% to $4,524,000 in fiscal 1999, compared to $2,879,000 in fiscal 1998.
Research and development expenses as a percentage of net revenues for fiscal
1999 increased to 40%, compared to 21% for fiscal 1998. The increase in
expenditures is mainly due to resource commitments required to support new
product development programs, including development of our patented Scanning
Moire Interferometry (SMIT) 3D technology and our patented DSL digital vision
technology. The Company believes that during fiscal 2000, research and
development expenses will remain constant compared to fiscal 1999.
Non-Recurring Charges: In the fourth quarter of fiscal 1999, the Company
recorded a one-time charge of $1,481,000 for the write-down of assets and
inventory associated with discontinuing certain new product development
initiatives. These non-recurring charges do not affect the on-going development
of the Company's patented Scanning Moire Interferometry (SMIT) 3D technology or
its patented DSL digital vision technology.
Interest income decreased 30% to $701,000 in fiscal 1999, compared to $998,000
in fiscal 1998. The decrease in interest income is primarily due to the decline
in balances of cash, cash equivalents and investments.
Income Tax Benefit (Expense): In fiscal 1999, income tax expense of $1,650,000
was recorded. This income tax expense resulted from the recording of a
valuation allowance against previously recorded deferred tax assets due to the
uncertainty of future realization. A valuation allowance equal to the deferred
tax asset has been recorded. An income tax benefit of $278,000 was recorded in
fiscal 1998.
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
net revenues outside North America is primarily due to strength in the
Asia/Pacific region. Sales to customers outside North America represented 38%
of net revenues in fiscal 1998, compared to 22% in fiscal 1997.
Gross Profit: Gross profit increased 10% 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.
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 was primarily the result of investments required to
launch the Microelectronics Systems Division as well as the opening of sales and
support offices in Michigan and North Carolina.
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 was primarily attributable to increased expenses
associated with operating the Company in anticipation of future 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 was mainly due to resource commitments required to support new
product development programs.
Interest income decreased 11% to $998,000 in fiscal 1998, compared to
$1,124,000 in fiscal 1997. The decrease in interest income was 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.
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
Working capital decreased to $13,444,000 at October 31, 1999 from $20,495,000
at October 31, 1998. The Company financed its operations in fiscal 1999 through
internally generated cash flow, existing cash and cash equivalents and sales of
investments. Net cash used in operating activities in fiscal 1999 was
$3,325,000. Accounts receivable increased $484,000 primarily due to increased
product shipments near the end of the fourth quarter of fiscal 1999.
Inventories increased $184,000 in fiscal 1999 primarily due to raw material
purchases to be used in early fiscal 2000 product shipments.
In September of 1997 the Company entered into a license agreement ("1997
License Agreement") with a third party company under which it acquired the
exclusive worldwide rights to use a patented 3D scanning technology for
applications in the electronics and semiconductor industries. Under the terms
of the 1997 License Agreement, the Company paid an initial license fee of
$1,500,000 including payments based on the achievement of certain developmental
milestones, plus a royalty based on sales. In May of 1998 the Company entered
into an Agreement to Assign and License Patent with the same third party company
("1998 Agreement") under which it acquired ownership of the Patent. The 1998
Agreement terminated the previous 1997 License Agreement. Under the terms of
the 1998 Agreement, the Company paid a fee of $1,500,000 including a $500,000
fee based on the achievement of certain developmental milestones. During fiscal
1999, the Company paid the remaining balance due under the 1998 Agreement.
Net cash provided by investing activities for fiscal 1999 was $4,355,000,
generated from the sales and maturities of investments which was partially
offset by cash used for the purchase of fixed assets and investment in other
long-term assets. The Company used $1,877,000 of cash for the purchase of fixed
assets, mainly consisting of computer, lab and manufacturing equipment. The
Company used $416,000 of cash for investment in other long-term assets, mainly
consisting of a payments made under the terms of the previously mentioned
agreements. Investments consist of short-term investment grade securities.
Net cash used in financing activities for fiscal 1999 was $881,000, primarily
resulting from the repurchase of the Company's common stock which was partially
offset by cash generated from the issuance of common stock through the employee
stock purchase plan and upon the exercise of common 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
$1,249,000 of cash to repurchase 295,500 shares of its Common Stock in fiscal
1999. The Company used $92,000 of cash to repurchase 17,800 shares of its
Common Stock in fiscal 1998.
The Company entered into a ten-year lease in May 1999 for approximately
59,000 square feet of office and manufacturing space in Eden Prairie,
Minnesota. The lease commenced on June 1, 1999 at an initial monthly rate of
approximately $51,000. The Company has an obligation to occupy additional
space with additional lease payments over the term of the lease.
Current assets decreased to $16,118,000 at October 31, 1999 from $22,097,000
at October 31, 1998. Investments decreased to $8,262,000 at October 31, 1999
from $15,009,000 at October 31, 1998. Cash and cash equivalents increased to
$2,135,000 at October 31, 1999 from $1,986,000 at October 31, 1998.
The Company's current liabilities increased to $2,674,000 at October 31, 1999
from $1,602,000 at October 31, 1998. The current liabilities at October 31,
1999 include reserves totaling $860,000 for legal defense costs related to its
lawsuit with National Instruments Corporation and a one-time payment to a third
party vendor related to the Company's decision to discontinue certain new
product development efforts.
The Company believes that its cash flows from operations, existing cash and
cash equivalents and investments at October 31, 1999 will be adequate for its
working capital and capital resource needs during fiscal 2000.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- - -------------------------------------------------------------------
The Company believes it does not have material exposure to quantitative and
qualitative market risks. The carrying amounts reflected in the consolidated
balance sheets of cash and cash equivalents, investments, trade receivables and
trade payables approximate fair value at October 31, 1999 due to the short
maturities of these instruments.
Interest Rate Risk
The Company maintains investment portfolio holdings of various issuers, types
and maturities, primarily U.S. government and agency securities and other short
terms, interest-bearing investment grade securities. The Company's cash and
investments include cash equivalents, which the Company considers to be
investments purchased with original maturities of three months or less.
Investments having original maturities in excess of three months are stated at
amortized cost, which approximates fair value, and are classified as available
for-sale. Given the short maturities and investment grade quality of the
portfolio holdings at October 31, 1999, as well as the Company's policy of
holding rate sensitive instruments to maturity, a 100 basis point rise in
interest rates would not be expected to have a material adverse impact on the
fair value of the Company's investment portfolio. As a result, the Company does
not currently hedge these interest rate exposures
Foreign Currency Exchange Rate Risk.
The Company's international sales, which are primarily in Europe, South
America, Japan and Southeast Asia, are transacted in U.S. Dollars. As a
result, the Company believes it is not is not subject to adverse movements in
foreign currency exchange rates.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- - ----------------------------------------------------
See Part IV, Item 14 of 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 on March 16, 2000 (the "2000 Proxy
Statement"), a definitive copy of which will be filed within 120 days of October
31, 1999 and is incorporated herein by reference.
Information concerning executive officers and other key members of management
is set forth in the Section entitled "Executive Officers and Other Key Members
of Management of the Company" in Part I, Item 1 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 section entitled
"Executive Compensation and Other Information," in the Company's 2000 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
"Security Ownership of Principal Shareholders and Management" in the Company's
2000 Proxy Statement and is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- - --------------------------------------------------------
Not Applicable.
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..................... 34
Income Statements for the three years ended
October 31, 1999, 1998 and 1997.................. 35
Balance Sheets as of October 31, 1999 and 1998........ 36
Statements of Cash Flows for the Years
ended October 31, 1999, 1998 and 1997............ 37
Statements of Shareholders' Equity for the Years
ended October 31, 1999, 1998 and 1997............ 38
Notes to Financial Statements......................... 39
(2) FINANCIAL STATEMENT SCHEDULES FOR THE THREE YEARS
ENDED OCTOBER 31, 1999
VIII. Valuation and Qualifying Accounts.............. 50
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
-------------------
A Form 8-K dated October 13, 1999 was filed with the Securities and
Exchange Commission disclosing an amendment to the Company's Preferred Stock
Purchase Rights Plan.
(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)
4.1..... Preferred Stock Purchase Rights Agreement, as amended
(Incorporated by reference to Exhibit 1 to June 17, 1999
Registration Statement on Form 8-A as amended by Exhibit 1 to
October 19, 1999 Amendment No. 1 to Registration Statement on
Form 8-A/A)
10.1.... 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)
10.2.... 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)
10.3.... 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)
10.4.... 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)
10.5*... PPT VISION, Inc. 1988 Stock Option Plan, as amended
(incorporated by reference to Exhibit 10.6 of 1997 Form 10-K)
10.6*... PPT VISION, Inc. 1997 Stock Option Plan
(incorporated by reference to Exhibit 10.7 of 1997 Form 10-K)
10.7.... Lease Agreement dated July 17, 1998 for facilities at
the Prairie Crossroads Corporate Center, Eden Prairie, Minnesota
10.8.... First Amendment of Lease dated October 16, 1999 for
facilities at the Prairie Crossroads Corporate Center,
Eden Prairie, Minnesota
21...... The Company has no subsidiaries
23...... Consent of PricewaterhouseCoopers LLP...................... 51
27...... Financial Data Schedule.................................... 52
*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 28, 2000 By:/s/Joseph C. Christenson
----------------------------
Joseph C. Christenson
(Principal Executive Officer)
Date: January 28, 2000 By:/s/Richard R. Peterson
----------------------------
Richard R. Peterson
(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 Richard R.
Peterson 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 28, 2000 /s/ Joseph C. Christenson
----------------------------
Joseph C. Christenson
President, Director
(Principal Executive Officer)
January 28, 2000 /s/ Richard R. Peterson
----------------------------
Richard R. Peterson
(Principal Accounting Officer)
Chief Financial Officer
January 28, 2000 /s/ Larry G. Paulson
----------------------------
Larry G. Paulson
Vice President and Chief
Technology Officer, Director
January 28, 2000 /s/ Bruce C. Huber
----------------------------
Bruce C. Huber, Director
January 28, 2000 /s/ David C. Malmberg
----------------------------
David C. Malmberg, Director
January 28, 2000 /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, 1999 and 1998, and the results of
its operations and cash flows for each of the three fiscal years in the period
ended October 31, 1999 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
December 10, 1999
PPT VISION, INC.
INCOME STATEMENTS
YEAR ENDED OCTOBER 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
Net revenues............................ $11,325,000 $13,512,000 $12,055,000
Cost of sales........................... 5,150,000 5,666,000 4,894,000
----------- ----------- -----------
Gross profit........................ 6,175,000 7,846,000 7,161,000
----------- ----------- -----------
Expenses:
Selling............................... 4,456,000 4,857,000 3,727,000
General and administrative............ 2,535,000 1,294,000 1,177,000
Research and development.............. 4,524,000 2,879,000 2,339,000
Non-recurring charges................. 1,481,000 -- --
----------- ----------- -----------
Total expenses...................... 12,996,000 9,030,000 7,243,000
----------- ----------- -----------
Loss from operations.................... (6,821,000) (1,184,000) (82,000)
Interest income......................... 701,000 998,000 1,124,000
Other income, net....................... 36,000 11,000 23,000
----------- ----------- -----------
Income (loss) before taxes.............. (6,084,000) (175,000) 1,065,000
Income tax benefit (expense)............ (1,650,000) 278,000 (405,000)
----------- ----------- -----------
Net income (loss)................... $(7,734,000) $ 103,000 $ 660,000
=========== =========== ===========
Basic earnings (loss) per share....... $ (1.43) $ 0.02 $ 0.12
=========== =========== ===========
Diluted earnings (loss) per share..... $ (1.43) $ 0.02 $ 0.12
=========== =========== ===========
Common shares outstanding............. 5,398,000 5,425,000 5,376,000
Common and common equivalent
shares outstanding.................. 5,398,000 5,511,000 5,495,000
=========== =========== ===========
The accompanying notes are an integral part of the financial statements
PPT VISION, INC.
BALANCE SHEETS
OCTOBER 31,
-------------------------
1999 1998
----------- -----------
ASSETS
Current assets
Cash and cash equivalents........................ $ 2,135,000 $ 1,986,000
Investments...................................... 8,262,000 15,009,000
Accounts receivable, net......................... 3,325,000 2,841,000
Inventories...................................... 2,191,000 2,007,000
Other current assets............................. 205,000 254,000
----------- -----------
Total current assets........................... 16,118,000 22,097,000
Fixed assets, net.................................. 2,400,000 2,254,000
Other assets, net.................................. 3,327,000 3,536,000
Deferred income taxes.............................. - 1,688,000
----------- -----------
Total assets................................... $21,845,000 $29,575,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable................................. $ 1,371,000 $ 943,000
Accrued compensation............................. 63,000 39,000
Accrued expenses................................. 1,240,000 320,000
Other short-term liabilities..................... -- 300,000
----------- -----------
Total current liabilities...................... 2,674,000 1,602,000
Deferred rent...................................... - 102,000
Commitments and contingencies (Notes 9 and 12)
Shareholders' equity
Common Stock $.10 par value; authorized
10,000,000 shares;
issued and outstanding 5,256,275 and 5,440,583.. 526,000 544,000
Capital in excess of par value................... 28,862,000 29,725,000
Accumulated (deficit)............................ (10,141,000) (2,407,000)
Accumulated other comprehensive income........... (76,000) 9,000
----------- -----------
Total shareholders' equity..................... 19,171,000 27,871,000
----------- -----------
Total liabilities and shareholders' equity..... $21,845,000 $29,575,000
=========== ===========
The accompanying notes are an integral part of the financial statements
PPT VISION, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED OCTOBER 31,
--------------------------------------
1999 1998 1997
------------ ------------ ------------
Net income (loss).......................$ (7,734,000) $ 103,000 $ 660,000
Adjustment to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization.......... 1,093,000 670,000 422,000
Deferred rent.......................... (102,000) (34,000) (30,000)
Deferred income tax benefit............ (586,000) (278,000) 405,000
Deferred income tax valuation allowance 2,274,000 -- --
Loss on disposal of fixed assets
and other assets 964,000 -- --
Accrued interest income (loss)......... 27,000 (137,000) (322,000)
Realized gain on sales of investments.. (14,000) (4,000) (2,000)
Change in assets and liabilities:
Accounts receivable.................... (484,000) 852,000 758,000
Inventories............................ (184,000) (266,000) (513,000)
Other assets........................... 49,000 (28,000) (55,000)
Restricted cash........................ -- -- 135,000
Accounts payable....................... 428,000 (67,000) 256,000
Accrued compensation................... 24,000 (21,000) (2,000)
Accrued expenses....................... 920,000 75,000 (20,000)
------------ ------------ ----------
Total adjustments.................... 4,409,000 762,000 1,032,000
------------ ------------ -----------
Net cash (used in) provided by
operating activities............. (3,325,000) 865,000 1,692,000
Cash flows from investing activities:
Purchase of fixed assets............... (1,877,000) (1,344,000) (1,095,000)
Purchase of investments............... (10,590,000) (23,148,000 (21,353,000)
Sales and maturities of investments... 17,238,000 23,853,000 21,248,000
Net investment in other
long-term assets..................... (416,000) (2,442,000) (759,000)
------------ ------------ -----------
Net cash provided by (used in)
investing activities............. 4,355,000 (3,081,000) (1,959,000)
Cash flows from financing activities:
Proceeds from issuance of common stock. 368,000 267,000 115,000
Repurchases of common stock............ (1,249,000) (92,000) --
------------ ------------ -----------
Net cash (used in) provided by
financing activities............. (881,000) 175,000 115,000
------------ ------------ -----------
Net increase (decrease) in cash and
cash equivalents....................... 149,000 (2,041,000) (152,000)
Cash and cash equivalents at beginning
of year................................ 1,986,000 4,027,000 4,179,000
------------ ------------ -----------
Cash and cash equivalents at end of year $ 2,135,000 $ 1,986,000 $ 4,027,000
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income tax.............................$ -- $ 70,000 $ 3,000
Interest............................... -- -- --
The accompanying notes are an integral part of the financial statements
PPT VISION, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
CAPITAL IN
COMMON COMMON EXCESS OF
SHARES STOCK PAR VALUE
--------- --------- -----------
October 31, 1996. 5,358,422 $536,000 $29,443,000
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
Comprehensive income:
Net income.......................
Unrealized loss on investments...
Total comprehensive income
--------- --------- -----------
October 31, 1997. 5,387,355 539,000 29,555,000
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)
Comprehensive income:
Net income...................
Unrealized gain on investments...
Total comprehensive income
--------- --------- -----------
October 31, 1998............. 5,440,583 544,000 29,725,000
Stock issued through the
exercise of stock options..... 90,093 10,000 274,000
Stock issued through the
employee stock purchase plan... 21,099 2,000 82,000
Stock repurchased.............. (295,500) (30,000) (1,219,000)
Comprehensive loss:
Net loss.......................
Unrealized loss on investments.
Total comprehensive loss
---------- --------- -----------
October 31, 1999.............. 5,256,275 $526,000 $28,862,000
========== ========= ===========
Accumulated
Other Total
Comprehensive Accumulated Shareholders'
Income Deficit Equity
------------- ----------- ------------
October 31, 1996 -- $(3,170,000) $26,809,000
Stock issued through the
exercise of stock options 79,000
Stock issued through the
employee stock purchase plan 36,000
Comprehensive income:
Net income 660,000 660,000
Unrealized loss on investments (49,000) (49,000)
--------
Total comprehensive income 611,000
------------- ------------ ------------
October 31, 1997 (49,000) (2,510,000) $27,535,000
Stock issued through the
exercise of stock options 139,000
Stock issued through the
employee stock purchase plan 149,000
Stock swapped to exercise
stock options (21,000)
Stock repurchased (92,000)
Comprehensive income:
Net income 103,000 103,000
Unrealized gain on investments 58,000 58,000
-------
Total comprehensive income 161,000
------------ ----------- ------------
October 31, 1998 9,000 (2,407,000) $27,871,000
Stock issued through the
exercise of stock options 284,000
Stock issued through the
employee stock purchase plan 84,000
Stock repurchased (1,249,000)
Comprehensive loss:
Net loss (7,734,000) (7,734,000)
Unrealized loss on investments (85,000) (85,000)
-------------
Total comprehensive loss (7,819,000)
---------- ------------- -----------
October 31, 1999 $ (76,000) $(10,141,000) $19,171,000
========== ============= ===========
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
$74,000 at October 31, 1999, and $29,000 at October 31, 1998.
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,
inventories consist of the following:
1999 1998
---------- ----------
Manufactured and purchased parts............ $1,742,000 $1,648,000
Work-in-process............................. 419,000 339,000
Finished goods.............................. 30,000 20,000
---------- ----------
Totals.................................. $2,191,000 $2,007,000
========== ==========
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, consist of the following:
1999 1998
---------- ----------
Patent and trademark............................. $3,431,000 $3,340,000
Investment in a related party.................... 53,000 53,000
Software development costs, net.................. - 251,000
---------- ----------
3,484,000 3,644,000
Less accumulated amortization.................... (157,000) (108,000)
---------- ----------
Total other assets........................... $3,327,000 $3,536,000
========== ==========
The patent and trademark balance of $3,431,000 as of October 31, 1999
includes $3,041,000 which represents the cost to acquire United States
Patent No. 5,646,733, ("Scanning Phase Measurement Method and System for an
Object at a Vision Station") which was purchased from a third party company
in fiscal year 1998. Patent and trademark costs are amortized over five to
ten years. No amortization has been recorded on Patent No. 5,646,733 as of
October 31, 1999.
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, 1999 and 1998 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." In the fourth quarter of fiscal 1999, the Company, as part
of discontinuing certain new product development initiatives, wrote off its
previously recorded capitalized software development costs.
OTHER SHORT-TERM LIABILITIES
In May of 1998 the Company entered into an Agreement to Assign and License
Patent, with a third party company 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 the third party company
in September of 1997. Under the terms of the 1998 agreement, the Company
agreed to pay 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. During fiscal year
1999 the Company paid the remaining balance due.
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, furniture, fixtures and equipment
consisted of the following:
1999 1998
---------- ----------
Equipment....................................... $5,066,000 $4,536,000
Furniture and fixtures.......................... 864,000 517,000
---------- ----------
5,930,000 5,053,000
Less accumulated depreciation................... (3,530,000) (2,799,000)
---------- ----------
Total fixed assets.......................... $2,400,000 $2,254,000
========== ==========
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to undiscounted future net cash
flows expected to be generated by the assets. If these assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets.
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
Basic earnings per share is computed using only weighted average common
shares outstanding. Diluted earnings per share gives effect to all
dilutive potential common shares outstanding during the fiscal reporting
periods.
1999 1998 1997
----------- ---------- ----------
Net income (loss) ................... $(7,734,000) $103,000 $660,000
Shares -- Basic earnings (loss)
per share......................... 5,398,000 5,425,000 5,376,000
Dilutive effect of common
stock equivalents................. -- 86,000 119,000
Shares -- Diluted earnings (loss)
per share......................... 5,398,000 5,511,000 5,495,000
Basic earnings (loss) per share...... $(1.43) $0.02 $0.12
Diluted earnings (loss) per share.... $(1.43) $0.02 $0.12
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.
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 OPTIONS
The Company follows the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
regarding disclosure of proforma information for stock compensation. As
permitted by Statement No. 123, the Company measures compensation cost using
the methods described in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees."
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
As of October 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("Statement 130").
Statement 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this
Statement had no impact on the Company's reported net income or shareholders'
equity. Statement 130 requires the unrealized gains (losses) related to the
Company's investments, which prior to adoption were reported separately in
shareholders' equity, to be included in other comprehensive income. Prior
year financial statements have been reclassified to conform to the
requirements of Statement 130.
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information ("Statement 131"), was
issued in 1997 and is effective for financial statements for both interim
and annual periods beginning after December 15, 1997. Statement 131 was
issued to establish standards for the way public business enterprises are
to report information about operating segments in annual financial statements
and requires those enterprises to report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. Adoption of this statement did not
affect the Company's results of operation or financial position. Upon review
of the criteria, management believes that the Company continues to operate
as one segment.
Note 3: NON-RECURRING CHARGES
In the fourth quarter of fiscal 1999, the Company recorded a one-time charge
of $1,481,000 for the write-down of assets and inventory associated with
discontinuing certain new product development initiatives. At October 31, 1999,
the Company has included in accrued liabilities $360,000 of non-recurring
charges payable in fiscal 2000.
NOTE 4: CUSTOMER INFORMATION
SIGNIFICANT CUSTOMER INFORMATION
During 1999, 1998 and 1997, revenue from one customer accounted for
27%, 16% and 14% of net revenues respectively. During 1997, revenue
from another customer accounted for 14% of net revenues respectively.
CUSTOMER GEOGRAPHIC DATA
North American and export sales as a percentage of net revenues at October 31,
are as follows:
1999 1998 1997
---- ---- ----
North America......... 74% 62% 78%
Europe................ 13% 18% 14%
Asia-Pacific.......... 12% 18% 8%
South America......... 1% 2% --
NOTE 5: ACCRUED EXPENSES
Accrued expenses at October 31, include:
1999 1998
-------- --------
Vacation............................................. $ 19,000 $ 19,000
Employee stock purchase plan payroll deductions...... 82,000 82,000
Sales and use taxes payable.......................... 122,000 110,000
Reserve for non-recurring charges.................... 360,000 --
Accrued litigation costs............................. 500,000 --
Other................................................ 157,000 109,000
---------- --------
Total............................................ $1,240,000 $320,000
========== ========
NOTE 6: 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 the fair market value on the
date of 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, 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
Granted............................................. 245,550 $ 4.11
Exercised........................................... (95,875) $ 3.24
Forfeited........................................... (26,500) $ 6.79
----------- ---------
Balance at October 31, 1999........................... 647,125 $ 5.78
=========== =========
As of October 31, 1999:
Price Range of Outstanding Options
Options........................................... $2.33-$12.00
Expiration dates.................................. 2000-2006
Options exercisable............................... 275,942
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: 1999--$2.21, 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 (loss) 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, 1999 1998 1997
---------------------------------- ---------- ---------- ----------
Net income (loss)...As reported... $(7,734,000) $ 103,000 $660,000
Pro forma..... $(8,323,000) $ (606,000) $197,000
Diluted earnings
per share..As reported... $ (1.43) $ 0.02 $ 0.12
Pro forma..... $ (1.54) $ (0.11) $ 0.04
The following table summarizes stock options outstanding and exercisable
at October 31, 1999.
Outstanding Exercisable
- - -------------------------------------------------------- --------------------
Weighted
Average Weighted Weighted
Exercise Contractual Average Average
Price Range Options Life Remaining Exercise Price Options Exercise Price
- - --------------- ------- -------------- -------------- -------- ------------
$ 2.33 - $ 3.88 206,950 6.55 $ 3.79 11,400 $ 2.51
$ 4.63 - $ 6.84 57,675 6.21 $ 5.11 4,975 $ 5.51
$ 6.88 - $ 6.94 361,150 4.57 $ 6.88 242,317 $ 6.88
$ 7.00 - $12.00 21,350 4.69 $ 8.49 17,250 $ 8.67
------- -------------- -------------- ------- ------------
647,125 5.35 $ 5.78 275,942 $ 6.78
The fair value of options granted under the Company's fixed stock option
plans during fiscal 1999, 1998 and 1997 was estimated on the dates of grant
using the Black-Scholes options-pricing model. The assumptions for the fiscal
periods ending October 31, were as follows:
Fiscal Year Ended October 31, 1999 1998 1997
--------------------------------- ----------- ----------- -----------
Risk free interest rates......... 6.21% 4.7% - 5.1% 5.6% - 5.9%
Expected life.................... 6.0 6.0 6.9
Expected volatility.............. 47% 44% - 53% 54%
Expected dividends............... 0% 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.
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 7: EMPLOYEE STOCK PURCHASE PLAN
In March 1995 shareholders approved the adoption of the 1995 Employee Stock
Purchase Plan (the "1995 Plan") that provides for the purchase of up to 225,000
shares of common stock during a 5 year annual offering period beginning June 1,
1995. Under the terms of the 1995 Plan, eligible employees may purchase common
stock annually at 85% of the lesser of (1) the fair market value on the first
day of the annual offering period or (2) the fair market value on the last day
of each annual offering period.
The fifth phase of the 1995 Plan began on June 1, 1999 and employees were
granted the right to purchase 20,485 shares at $3.93 per share under the Plan.
The fourth phase of the 1995 Plan ended on May 31, 1999 and employees purchased
21,473 shares at $3.93 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.
Note 8: SHAREHOLDER RIGHTS PLAN
On June 2, 1999, the Company adopted a Shareholder Rights Plan (the "Rights
Plan") designed to deter coercive or unfair takeover tactics and to prevent a
person or a group from gaining control of the Company without offering a fair
price to all shareholders. Under the terms of the Rights Plan, a dividend
distribution of one Preferred Stock Purchase Right ("Right") for each
outstanding share of the Company's common stock was made to holders of record on
June 22, 1999. These Rights entitle the holder to purchase one one-hundredth of
a share of the Company's Series A Junior Participating Preferred Stock
("Preferred Stock") at an exercise price of $28. The Rights become exercisable
(a) 10 days after a public announcement that a person or group has acquired
shares representing 20% or more of the outstanding shares of common stock, or
(b) 10 business days following commencement of a tender or exchange offer for
20% or more of such outstanding shares of common stock. The Company can redeem
the Rights for $0.001 per Right at any time prior to their becoming exercisable.
The Rights expire on June 2, 2009, unless redeemed earlier by the Company. Under
certain circumstances, if a person or group acquires 20% or more of the
Company's common stock, the Rights permit shareholders other than the acquiror
to purchase common stock having a market value of twice the exercise price of
the Rights. In addition, in the event of certain business combinations, the
Rights permit shareholders to purchase the common stock of an acquiror at a 50%
discount. Rights held by the acquiror will become null and void in both cases.
On October 13, 1999, the Company amended the terms of the Rights Plan to
enable a member of the Board of Directors of the Company to purchase up to 30%
of the common stock of the Company without being deemed an "Acquiring Person"
within the meaning of the Rights Agreement.
NOTE 9: OPERATING LEASES
The Company leases facilities and equipment under non-cancelable operating
lease agreements. Rent expense was $450,000, $239,000, and $188,000
in 1999, 1998, and 1997 respectively. Minimum future rental payments due
under non-cancelable operating lease agreements are as follows:
2000............................ 730,000
2001............................ 646,000
2002............................ 613,000
2003............................ 611,000
2004............................ 620,000
Thereafter...................... 2,920,000
----------
Total....................... $6,140,000
==========
NOTE 10: EMPLOYEE SAVINGS 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 $184,000,
$152,000, and $66,000 for the years ended October 31, 1999, 1998 and 1997
respectively.
NOTE 11: INCOME TAXES
The provision for income taxes differs from the statutory U.S. federal
tax rate of 34% applied to earnings before income taxes for the fiscal periods
ended October 31, as follows:
1999 1998 1997
------------ ---------- ---------
Expected tax provision at statutory rate... $(2,068,000) $ (59,000) $362,000
State income tax provision, net of federal
tax effect............................... (241,000) (7,000) 42,000
Permanent differences...................... 5,000 5,000 11,000
Tax credits and other...................... (408,000) (217,000) (10,000)
Increase in valuation allowance............ 4,362,000
------------ ---------- --------
Total income tax expense (benefit) ........ $ 1,650,000 $(278,000) $405,000
============ ========== ========
Deferred tax assets (liabilities) are comprised of the following
at October 31:
YEAR ENDED OCTOBER 31,
------------------------
1999 1998
----------- -----------
Depreciation....................................... $ 56,000 $ 55,000
Deferred rent...................................... - 38,000
Other.............................................. 244,000 (147,000)
Net operating loss carryforwards................... 3,031,000 1,126,000
Income tax credits................................. 1,031,000 616,000
----------- ----------
Total deferred tax assets before valuation allowance. 4,362,000 1,688,000
Less valuation allowance........................... (4,362,000) --
----------- -----------
Net deferred tax asset............................ $ -- $1,688,000
=========== ===========
At October 31, 1999, the Company has available net operating loss and tax credit
carryforwards for income tax purposes of approximately $8.9 million and $1.0
million, respectively. These carryforwards expire in the years ending October
31, 2001 through October 31, 2019.
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. Because of the uncertainty of future
realization, a valuation allowance equal to the deferred tax asset has been
recorded.
NOTE 12: CONTINGENCIES
In July 1999, the Company was served by National Instruments Corporation ("NIC")
of Austin, Texas, in a patent infringement lawsuit filed in United States
District Court for the Western District of Texas. NIC has alleged that the
Company's Vision Program Manger software ("VPM") infringes certain United States
patents held by NIC related to graphical programming concepts. The Company has
filed a counterclaim and requested that the Court declare the NIC patents
invalid or determine that the Company does not infringe the NIC patents. The
lawsuit is in the initial stages of discovery and a trial has not yet been
scheduled in this action. The Company believes that it has meritorious defenses
to the lawsuit and intends to defend itself vigorously. However, no assurance
can be given as to the outcome of this action. The inability of the Company to
prevail in this action, including the loss or impairment of the right to sell
the Company's products in the United States, could have an adverse effect on the
Company's future business, financial condition and results of operations.
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, 1997 $35,000 $95,000 ($100,000) $30,000
Year Ended October 31, 1998 $30,000 $10,000 ($11,000) $29,000
Year Ended October 31, 1999 $29,000 101,000 ($56,000) 74,000
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 December 10, 1999 appearing in this Annual
Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
- - ------------------------------
PricewaterhouseCoopers, LLP
Minneapolis, Minnesota
January 24, 2000
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