SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
______________________________________
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 1997
Commission File No. 0-20097
Advanced Machine Vision Corporation
(Exact name of registrant as specified in its charter)
California 33-0256103
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2067 Commerce Drive
Medford, Oregon 97504
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (541) 776-7700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, no par value
Class A Warrants
Class B Warrants
Preferred Share 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 aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 20, 1998, was approximately $20,583,000. (All officers
and directors of the registrant are considered affiliates; Class B Common Stock
is assumed to be equal in value to Class A Common Stock.)
On March 10, 1998, the registrant had 10,636,384 shares of Class A Common Stock
and 76,835 shares of Class B Common Stock, all no par value, issued and
outstanding.
See Page 22 for Exhibit Index
<PAGE>
Part I
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Item 1. Business
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History
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From inception in 1987 until early 1990, Advanced Machine Vision Corporation's
("AMV" or the "Company") predecessor company, Applied Laser Systems ("ALS"), was
principally engaged in research and development and organizational activities
and its revenues were insignificant. Beginning in early 1990, ALS engaged in the
business of designing, developing, manufacturing and marketing laser diode
devices incorporating its Visible Laser Module, a device which generates a
directed bright red spot of light for pointing out details on presentation
boards, movie and television screens, slides or other surfaces from up to 300
feet away, and laser aimers, devices which can be mounted on pistols, rifles and
other weapons to enhance shooting accuracy by directing a bright red spot of
light onto a target.
In March 1992, ALS completed its initial public offering, the proceeds of which
were used to repay bridge financing and other loans, and for working capital.
In February 1994, the Company acquired all of the issued and outstanding capital
stock of Simco/Ramic Corporation, now SRC VISION, Inc. ("SRC") for $8.1 million
in cash. During late 1993 and early 1994, AMV entered a number of other proposed
acquisition transactions. In Spring 1994, a new management team was hired for
AMV. By September 1994, AMV terminated the other acquisition transactions
resulting in significant losses in 1994. Following these terminations, the
Company restructured to concentrate on its SRC-based vision systems business. In
October 1995, the Company sold the ALS operation for cash. In March 1996, the
Company acquired Netherlands-based Pulsarr Holding BV ("Pulsarr"), and, in July
1996, the Company acquired the assets and operations of Ventek, Inc. ("Ventek"),
both of which are also engaged in designing and marketing automated vision
systems. In May 1997, the Company sold Pulsarr after receiving an unsolicited
offer for Pulsarr. The current operating subsidiaries of AMV are SRC and Ventek.
Business
========
The Company
The Company designs, develops, manufactures and markets machine vision systems
that process images not discernible to the human eye. These systems combine
technologies in four key areas (lighting, cameras, processors and software) to
improve quality, enhance yield, reduce production costs and increase throughput
in a variety of markets and applications where human vision is inadequate due to
fatigue, visual acuity or speed. Where needed, AMV employs highly specialized
mechanical technologies to help customers integrate machine vision systems into
their production processes. The Company's products currently serve two principal
markets, the processing industry and the wood panel (i.e., plywood) production
industry. Applications include quality control in the processing of food, pulp
wood, tobacco, and plastics for recycling, and quality control and automated
process control in wood panel production.
Since its founding in 1964, SRC has evolved from a single-product company (an
optical device to measure length and diameter of freshly cut logs) serving the
timber industry, into a provider of machine vision systems for a number of
processing industries. In 1984, SRC released its first machine vision product, a
fully automated defect removal system for the french fry processing industry,
designed to improve productivity and quality. The system utilized proprietary
material conveying systems, light sources, linear array CCD cameras, image
processing software, and standard bus based electronics to detect defective
french fries and efficiently remove them from a rapidly moving product stream.
SRC built upon its experience in potato processing to develop machine vision
systems for other food processing customers. These new systems increasingly
possessed more sophisticated capabilities, such as fully automated sorting and
continuous high volume product analysis.
From 1984 through the present, SRC has continued to advance and refine its core
technologies to increase the speed and improve the accuracy of its machine
vision products. Over 22 patents have resulted from these ongoing efforts. Early
SRC systems for the food processing industry benefited from state-of-the-art
microprocessors which have been replaced with more powerful microprocessors as
they became available over time. When full color recognition systems were first
introduced in 1987, SRC responded to the need for color signal processing by
developing a three-color image processing system. SRC then invented a high
resolution "RGB" (red green blue) or "true color" camera because commercially
available cameras lacked the ability to detect the precise color of objects
being viewed. The true color camera significantly increased the accuracy of
SRC's color processing machine vision systems. SRC used the experience it gained
developing the true color camera to develop a high resolution panchromatic
camera, so that customers who require only black and white image processing can
achieve the same level of precision made possible by SRC's true color camera.
SRC has further increased the visual discrimination capabilities of its machine
vision systems with lighting, spectral analysis and mechanical technologies.
Since 1989, SRC has developed specialty lamps that take advantage of the
different reflective properties of items being processed on a single conveyer.
SRC began adding to its spectral characterization capability in 1992. During
this period, SRC developed several mechanical technologies, including high-speed
ejection modules, high-speed material handling, air-assist stabilization and
high-speed video motion analysis to facilitate processing on a high-speed
conveyer. SRC continued to make significant technological advances until 1993
when previous management reduced expenditures on research and development
resulting in a technology gap.
Following the acquisition of SRC in 1994, the Company embarked upon a plan to
revitalize its growth potential through significantly increased research and
development efforts and a reassessment of marketing goals. At the same time, the
Company established a new management team dedicated to identifying untapped
markets for machine vision systems. New management targeted marketing efforts at
niche markets in non-food processing industries such as plastics for recycling,
pulp wood and tobacco, which have resulted in higher average per unit sales
prices. For a discussion of the Company's current technology and research and
development expenditures, see "Technology, Engineering and Research and
Development" below.
Ventek was founded in 1991 by three engineers who were an integral part of the
design and development of the "Infrascan" scanner. In the early 1970's, the
Infrascan became the industry standard for detecting defects in wood veneer and
it remained the standard until 1994, when Ventek introduced its "New Vision"
system. Ventek's experience in wood panel production complements the Company's
lighting, camera, processing and software capabilities. The addition of Ventek
in July 1996 gave the Company its first machine vision system application in the
wood panel production industry. The Company believes that an enhanced level of
precision will be achieved by incorporating SRC's high-speed line-scan camera
into Ventek's veneer scanning systems, thereby increasing their ability to
separate the product into various grades, as well as to detect and remove
defects. This improved grading capability is expected to increase the yield of
high margin grades by correctly identifying them and minimizing waste, enabling
customers to increase margins on the product produced from any given amount of
raw inputs.
Industry Background
Machine Vision: Like human vision, machine vision requires sensing elements and
image processors. The camera and lighting components of machine vision systems
are capable of sensing images beyond the region of the electromagnetic energy
spectrum called "visible light." Machine vision systems working outside the
visible light range can often provide significantly enhanced discrimination
capabilities beyond that detectable to the human eye. For example, in plastics
recycling, this capability allows machine vision systems to discriminate between
two different types of plastics, PVC and PET, both of which are the same color.
Under the right kind of non-visible light, the different reflective properties
of these two plastics make them easily distinguishable to a high-speed camera.
In addition, machine vision systems are capable of clearly viewing and reacting
to objects moving at speeds of up to 1,200 feet per minute. The processor and
software components of machine vision systems are capable of rapidly processing
and analyzing signals with a high level of uniformity. Because machine vision
systems do not fatigue, they are often preferable for high-speed, repetitive
scanning or viewing of objects over indefinite periods of time, as required in
many production processes.
Quality Control: Processing applications typically combine a computer-based
conveyor system with a machine vision system. The conveyor presents a moving
stream of raw product to a high-speed inspection camera. Data gathered by the
camera is processed by the computer using specially developed software with the
goal of identifying the location on the conveyor of defective items for the
express purpose of rejecting such defective material. Processors of food, pulp
wood, tobacco and recycled plastics products must process large quantities of
raw product through different stages, including defect detection and sorting to
remove defective pieces and inspect for quality. In the agricultural area, the
frequency and severity of defects in the raw product is highly variable,
depending upon a variety of factors affecting crops.
Historically, defect detection, removal and quality control in the industries
addressed by the Company have been labor intensive and dependent upon and
limited by the variability of the work force. These functions are performed by a
work force that is frequently unskilled and subject to a high turnover rate.
Large numbers of individual workers stand along a conveyor and visually identify
and manually remove defective pieces from the stream of moving product. These
manual methods cause inconsistent defect removal, as well as limited throughput
that varies based upon the number and abilities of the workers. Manual methods
also usually cause excessive amounts of good product to be discarded along with
defective product. The industry has sought to replace these manual methods with
automated systems that achieve higher yield and better quality at reduced costs.
Automated Process Control: Many types of manufacturing and processing require
machine vision systems because of the increasing demands for speed and accuracy.
In high-volume manufacturing processes, the demand for production of quality
products has driven the need for 100% inspection. The identification of defects
in a continuous stream of plywood veneer for wood panel production is the
Company's first such application. However, while machine vision systems have
been successfully used to identify and remove defects in panel production and
other industries, human eyes and hands are typically still used to repair
defects, grade and sort various types of products. Other companies, such as
Cognex Corporation, have and are addressing this need, but must combine their
pattern recognition software and computer hardware with lighting and cameras
provided by other entities. The Company believes that its ability to adapt its
proprietary lighting and cameras gives it an advantage over companies that must
rely on outside suppliers for these key components.
AMV Solutions
The Company seeks to provide its customers with a competitive advantage by
reducing high labor costs, increasing yields and throughput and improving
quality control. The Company's machine vision systems are capable of automated
defect detection and removal and real-time quality analysis. These machine
vision systems use advanced optical inspection technology to help customers
recover more of the good product (higher yield) and remove a higher percentage
of defective product (quality control) than the manual sorting and defect
removal methods historically used by food processors. In the wood panel
production industry, increasing the number of decisions made by machine vision
systems can also result in increased throughput and higher yield with fewer line
workers. Machine vision systems of the type produced by AMV can add significant
value in environments where raw product is highly variable by improving the
uniformity of finished product.
Machine vision technology used for inspection and control of processes (beyond
defect removal) throughout manufacturing can eliminate adding value to defective
products, thereby reducing the finished product scrap rate. Machine vision
systems can be used for automated process control to add value and improve
efficiency in highly repetitive processes, such as grading and statistical
collection, that require speed, accuracy and rapid throughput. In addition,
machine vision systems are capable of providing real-time feedback that could
enable manufacturers to rapidly alter or modify production specifications to
achieve a high level of consistent quality not previously achievable. Thus,
automated process control applications present an opportunity for AMV to achieve
higher margins, while achieving substantial cost savings for customers through
the reduction of direct labor and improved product quality.
Strategy
The Company seeks to establish itself as the technological leader and premier
provider of machine vision systems in the markets it serves by adapting its core
competencies in camera, lighting, processing and software to meet customer
needs. The Company believes that the 1996 acquisition of Ventek and continuous
development of vision systems apart from mechanical product handling equipment
can increase gross margins and enable the Company to enter new higher margin
markets. Important elements of the Company's growth strategy include:
* Leverage Expertise in Lighting, Camera, Processing and Software
Technologies: The Company believes its core competitive strength is its
breadth and depth of expertise in optical, lighting, processing and
software technologies. The Company and its predecessors have developed this
expertise over a period of years, and the Company continues to expand its
capabilities through research and development. AMV seeks to expand the
applications for its technology and to capitalize on its ability to apply
its technology to develop new products and product enhancements.
* Identify and Target Key Niche Markets: The Company will seek to identify
well-defined, niche markets with the potential of higher per unit profit
margins. The Company believes that it will achieve higher margins where
customers require the full range of its machine vision systems'
capabilities in automated process control as well as in quality control. In
order to gain increased acceptance and market penetration for its machine
vision systems, AMV will continue to focus on forming strategic
relationships with leading companies in its target markets. The Company
believes this method of strategic market penetration to be very effective.
The Company believes that its previous relationship with Union Carbide, and
current relationships with VTT and CAE Machinery, Ltd. and others
demonstrate recognition of the technical advantages of its systems.
* Customize Technology to Meet Customer Needs: AMV designs its products to
be adaptable to individual customer requirements. AMV believes that this
flexibility, particularly in lighting and camera capabilities, gives it a
competitive advantage in being able to respond rapidly to changing needs in
existing and new markets. AMV adapts, customizes and integrates its machine
vision systems to solve customers' particular problems and therefore
satisfy customers' needs.
* Expand Sales and Distribution: The Company intends to expand sales and
distribution by implementing a regional sales and service office concept.
The Company is currently building upon its Eindhoven-based European sales
and service center. An additional office in another geographic location is
planned within 18 months. These regional sales and services offices would
oversee and direct the efforts of representatives for AMV. The Company
plans to strategically locate these regional sales and service offices and
to equip them, financing permitting, with demonstration systems to
facilitate customers' testing their products on systems similar to the
equipment that they would order from AMV.
* Aggressively Pursue Use of Trial Units at Customer Sites: The Company will
seek to place increased numbers of trial units at potential customers'
sites. AMV's experience with trial units has been successful because a
company which has a trial unit machine vision system installed in its
facility will frequently decide to retain and purchase the unit. Trial
units provide potential customers with the opportunity to experience a
reduction in their production cost prior to making the capital commitment
involved in purchasing one or more of the Company's machine vision systems.
* Evaluate and Pursue New Vision Related Products: The Company will seek to
identify technologies and capabilities that enhance its product offerings
and market applications through joint ventures, acquisitions, partnerships
or other business relationships.
Products
AMV currently offers the following products:
Product Industry Applications
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VHS OPTISORT(TM) Food processing, Potato Chips, French
Plastics recycling Fries, Whole Potatoes,
Vegetables, Polyethyl
Teraphthalate Green/Clear
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KROMA-SORT(R) Food processing, Vegetables, Plastic Flake
Plastics
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SPECTRA-SORT(TM) Food processing, Potato Products, Cereals,
Plastics recycling Vegetables
- -------------------------------------------------------------------------------
Length & Defect Food processing French Fries
Analyzer(TM)
- -------------------------------------------------------------------------------
Pulp Wood Sorter Forest industry Wood Chips
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Tobacco Sorter II Tobacco Tobacco, Dry Food Products
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"New Vision" Veneer Plywood Veneer Softwood Veneer Production
Scanning System
- -------------------------------------------------------------------------------
AMV's machine vision systems utilize lighting, camera and software components,
and housing and structural components made principally of stainless steel. They
are modular in design, which provides flexibility in configuration to allow
adaptability to products of many types of industries. The mechanical design of
these systems is extremely sturdy and conforms to various industry regulations
and standards.
Defect Detection and Removal: The technology used in AMV's machine vision
systems is capable of viewing, discriminating between usable versus defective
pieces in periods ranging from 20 to 60 milliseconds (thousandths of a second),
and removing the defect while the product is traveling at speeds of 500 to 1,200
feet per minute. Initially, the product stream is mono-layered (arranged into a
single layer) by a vibrating infeed conveyor belt, and fed onto the main
conveyor by a steep infeed chute. The chute accelerates the product to separate
product units in the flow direction. Mono-layering and creating a sufficient
space between each piece of product inspected, such as individual raisins,
facilitate rapid, accurate analysis by AMV's image processing hardware and
software.
Once separated, product is moved through the system by the high-speed main belt
conveyor. Customers select the belt color to provide a sharp contrast with the
product being sorted. Lighting is selected to maximize the difference in the
images reflected by acceptable and defective pieces of product. Intense,
specially conditioned fluorescent, or exotic gas discharge-produced light
illuminates the product beneath AMV's high-speed line-scan camera. High-speed
imaging in the camera module stores and compares light levels reflected by each
piece of product. Levels that fall within discrimination windows selected by the
operator are considered defects.
During the scanning and analysis, the system processor monitors the conveyor
belt position of each defective piece and tracks it through the short distance
to the downstream end of the main conveyor. The distance between the point at
which the camera detects the moving product and the point at which the jet of
air expels the defective piece ranges from two to 25 inches. Just as each
defective piece is leaving the main conveyor, a short jet of air is released
from one or more of the finely tuned ejectors. This jet of air rapidly changes
the paths of the defective pieces downward so that they miss the main outfeed
chute. Accepts are unaffected, pass across the gap to be gently decelerated on
the outfeed chute, and then travel on to downstream processing equipment.
AMV's machine vision systems allow the customer to establish basic sorting
criteria prior to running the system and are easily fine-tuned for day-to-day
changes in product characteristics and light levels.
Markets, Customers and Applications
To further its growth strategy, the Company is actively pursuing expansion in
both its current markets and by identifying and entering into new niche markets
(i.e., markets that are well defined and have the potential for higher profit
margins and in which there is little competition). At the same time, AMV engages
in continuous modifications of its lighting, camera, processing and software
technologies to adapt them for new applications. Until recently, the Company
marketed its machine vision systems primarily for quality control in sorting
applications. However, the Company believes that many additional applications
for its machine vision systems exist in both food and non-food markets,
particularly in the area of automated process control. The Company believes its
ability to respond to customers' needs in niche markets by customizing,
developing and integrating its core technology will allow it to penetrate these
markets.
Food: The Company's largest market is the food processing industry. Within food
processing, the largest market segments for the Company's products have been
potatoes (principally french fries), vegetables and snack foods. The Company has
also penetrated fruits, cereals and confections, as well as a variety of other
market segments. Customers in the food industry include McCains, Lamb Weston,
Del Monte Foods, PepsiCo, Inc. (Frito-Lay, Inc.) and Hershey Chocolate USA.
AMV's systems are used by fruit and vegetable processors where field-harvested
products are cleaned, graded, automatically sorted, blanched and processed prior
to freezing, canning or packaging for sale to institutional and retail markets.
Principal fruit and vegetable market segments for the Company are potato
products, green beans, peas, corn, carrots, onions, raisins and peaches. The
Company's prospects for sales in the vegetable and fruit industry benefit from
its proprietary color automated defect removal systems, since defect detection
in most fruit and vegetable segments requires color analysis. In contrast, the
potato industry has been able to achieve effective detection of good and bad
product using black and white optical scanning technology.
Snack food processors use AMV's machine vision systems in a variety of
applications. Candy manufacturers scan product to remove partially wrapped
pieces. Potato chip manufacturers use AMV's vision capabilities to ensure
consistent color and quality.
Tobacco: AMV's machine vision systems provide tobacco companies sorting
capability to remove impurities and foreign matter from a stream of raw tobacco.
AMV has sold systems to leading U. S. and international tobacco companies,
particularly in Japan and Indonesia. AMV believes market growth for tobacco
systems shows great promise based upon the high degree of acceptance
demonstrated by its customers and the significant size of the worldwide tobacco
processing market. The Company has entered into an agreement with COMAS S.p.A.,
a manufacturer and seller of tobacco processing machinery systems worldwide,
whereby COMAS represents AMV on a non-exclusive basis in all areas of the world
outside of North America and Japan.
Plywood Veneer: The Company has targeted the need for detecting and eliminating
defects (edge cuts, knots and dark color) from the peeled ribbon of veneer used
in wood panel production for the plywood market. Since its introduction in 1994,
the Company's New Vision veneer scanning system has gained wide acceptance in
the North American plywood industry. The Company believes that it has placed
systems in approximately 75% of the North American softwood veneer production
lines, but has not yet penetrated foreign markets to any significant extent with
only six systems sold outside of North America.
The New Vision veneer scanning machine vision system allows identification of
open voids, wane and closed defects in a fast-moving stream of wood veneer used
in plywood production just after a log is peeled. After defect identification,
the New Vision instructs a clipper (manufactured by another company) to cut the
veneer immediately before and after the defect. The New Vision reduces the
amount of good wood attached to the defect and ensures complete defect
identification at the beginning of the plywood production process, which
decreases the number of downgraded panels, increases dryer efficiency by
eliminating material that ultimately becomes dry waste and reduces re-clipping
of previously undetected defects. The savings provided by the New Vision system
in the form of higher portions of good wood recovered create significant added
value for customers. Major customers include Georgia-Pacific, International
Paper and Columbia Forest Products.
The Company believes that its market share in green veneer scanning reflects the
level of confidence that customers have for the reliability and performance of
its products. However, green veneer scanning, or initial inspection of the
veneer represents only one point in the wood vertical panel production market.
There are approximately eight other potential defect detection applications in
both the green and dry (i.e., after the veneer has been dried before lay-up and
lamination) veneer processing. In addition, the Company believes that further
market potential exists in grading and matching of hardwood and furniture-grade
veneers. Thus, existing and potential new customers who process wood at other
steps in the multi-step panel production process are an untapped market for the
Company's machine vision systems. The Company will seek to leverage Ventek's
brand name recognition in green veneer scanning to reach customers at multiple
points in the vertical market for wood panel production so that existing and new
customers can benefit from the full range of the Company's technological
capabilities.
Forest Products: The pulp wood industry is beginning to recognize the benefits
of using machine vision to separate contaminants in pulp wood. Heavy duty AMV
machine vision systems, such as the Pulp Wood Sorter, have been developed to
sort bark, rot and other undesirable wood parts from high quality wood chips
used in making paper. The sorter is able to identify bark, rot and trash and
automatically remove unwanted material from a fast-moving, continuous stream of
wood chips. As a result, high value chips can be economically recovered from
lower quality and formerly unusable limbs and small trees. After sorting for
bark and darker content, the wood chips command a higher market price because
they require less chemical processing in the manufacture of paper products.
Customers in the forest products industry include VTT and CAE Machinery, Ltd.,
the Company's exclusive distributor of the Pulp Wood Sorter in North America.
Based upon interest from major pulp producers, AMV believes that a large
potential market for this process exists worldwide. Other potential applications
for AMV machine vision systems for the forest products industry include
inspection and grading for finished lumber and reclamation of wood yard wastes.
Plastics Recycling: Because different types of plastics used in consumer
products have different characteristics, they must be separated prior to use in
recycled products. AMV's proprietary lighting and camera technologies take
advantage of different reflective properties of these plastics to enable
producers of recycled plastics to accurately separate valuable materials that
could otherwise be wasted. Plastics used in recycled plastics products include
PET (polyethyl teraphthalate) used for transparent soda bottles, NHDPE (natural
high-density polyethylene) used for translucent milk and other fluid bottles,
and colored HDPE used for a variety of opaque, colored bottles, such as those
used for motor oil and dishwashing detergent. Another type of plastic, PVC
(polyvinyl chloride), has melting characteristics different from PET or HDPE.
AMV has developed technologies that (i) separate plastics by melting point,
which is necessary to ensure purity of the recycled material and to prevent
costly shut-downs of equipment used by recyclers in the processes, and (ii)
separate plastics by color, which is vital to the remarketing of the recycled
material. Customers in the plastics recycling market include Union Carbide, Inc.
and Wellman Industries.
Worldwide demand for plastics drives the need for AMV's machine vision systems
in the recycling business. Key factors that may impact the demand for recycled
plastics are the cost for virgin plastics and recycling regulations. If the
price of petroleum products and virgin plastics increases in the future, the
demand for recycled plastics may increase. Management of worldwide petroleum
supplies (e.g., foreign country production cutbacks) may also lead to increased
U. S. and foreign government regulations regarding the use of recycled plastics.
If the demand for recycled plastics products increases due to price or
regulations, demand for the Company's machine vision sorting systems may also
rise. However, there can be no assurance that the use of recycled plastics will
reach a level that would create an opportunity for the Company to increase sales
of systems to that market.
Technology, Engineering and Research and Development
Technology
Lighting: AMV has developed a number of proprietary technologies that form the
foundation of its vision systems, particularly in the areas of lighting and
cameras. The performance of machine vision systems is analogous to human vision
insofar as the ability to see is only as good as the lighting and optics permit.
However, machine vision performance can be optimized through the use of
specialized lighting to improve the contrast between one part of an object and
another part of the same object, with the two parts having differing reflection
properties. AMV has developed proprietary lighting technology to enhance the
contrast discrimination for objects that have nearly identical visual properties
in the visible light range. AMV's proprietary lighting systems are manufactured
in-house.
Optimizing the performance of a machine vision system requires an understanding
of the spectral characteristics of the object being analyzed. This means that
the reflective properties of the object must be characterized as a function of
the varying color of light (i.e. wavelength of light) by which it is
illuminated. This process of characterizing the reflection of the object as a
function of the wavelength of light is called spectral analysis or spectroscopy.
AMV's spectroscopy laboratory is fully equipped to measure the reflective
properties of customer products with lighting that ranges from ultraviolet (UV)
to infrared (IR). This ability to determine the spectral characteristics of an
object allows AMV to eliminate trial and error approaches to lighting and camera
configurations and, therefore, ensures optimal visual discrimination capability
of AMV vision systems. To better serve its customers, AMV has developed a
portable spectrometer that can be taken into the field for applications where
measurements must be made on location due to the mutability or perishability of
the customer's product.
Cameras: Machine vision systems that have full color perception capability are
limited by the camera's ability to represent true color. True color means that
the color seen by both the human observer and the machine vision system's camera
must result in the same interpretation. The Company's full color cameras use
three fundamental colors: red, green and blue (RGB). The best color
representation can be achieved when each of the R, G, and B sensor elements
(i.e. pixels) are optically coincident. This means that when the RGB camera is
looking at a specific point on an object, all three (RGB) sensor arrays (charged
couple devices, or "CCD's") have corresponding R, G & B pixels looking at the
same spot. Color accuracy and, therefore, performance depends on the ability of
its camera to accurately align the RGB CCD's. SRC has a patented alignment
process for building its commercial full color line-scan cameras.
Processing: An accurate interpretation of images created using lighting and
cameras depends on the image processing capabilities of the rest of the machine
vision system. Real-time image processing is accomplished by high-speed
electronic signal processors (hardware) and detection algorithms (software).
Successive generations of AMV vision systems have grown from
pan-chromatic/gray-scale systems to full color vision. The current generation
product under development makes extensive use of DSP (digital signal processor)
chips that allow commonality within the machine with very high throughput
performance and highly flexible functional expansion capability.
Software: High-speed vision requires efficient software algorithms. AMV
maintains a software group that develops specialized proprietary detection
algorithms to achieve real-time signal processing. Multiple generations of
detection algorithms have resulted in continual refinement of image processing
capability. This in-house software resource is also responsible for the creation
of user-friendly Graphics User Interfaces (GUI) that make AMV products easy to
learn, use and maintain. This enables workers in a customer's production process
to achieve the benefits of AMV's systems without extensive and time-consuming
training.
Research and Development
The Company anticipates research and development expenditures will continue to
increase in the future. Some of the more significant research and development
projects undertaken in recent years were the development of an
application-specific tobacco machine vision system for sorting, and processing
enhancements for existing and new systems. Further research and development
efforts are expected to flow from these activities.
AMV's research and development group conducts new product research and
development, provides support engineering for released products and project
engineering for custom systems. The R&D group includes electronic, mechanical
and software engineers, mathematicians and technical support personnel. Ongoing
development activities include improvements to current products and development
of new products. The Company provides engineering support for products in all of
its locations.
AMV's research and development expenses, of which greater than 95% relate to new
products or new applications, have been as follows:
Fiscal year ended December 31, 1995............................$ 1,987,000
Fiscal year ended December 31, 1996............................$ 4,038,000
Fiscal year ended December 31, 1997............................$ 3,950,000
Marketing and Sales
A principal AMV marketing strategy is to determine which new niche market or
application to pursue, and to form a strategic relationship with a leading
company in that market. AMV's objective in such an alliance is (i) to interest
the leader in purchasing AMV's machine vision systems, which may lead to further
sales to other companies in the field that follow industry trends, and (ii) to
obtain the benefit of direct customer input and participation during the product
design phase of adapting the AMV system to the new market or application. AMV
has identified new niche market opportunities for application of its machine
vision technology initially in each of its food, pulp wood, tobacco and plastics
for recycling markets.
Focused Customer Strategy: In recent years, the Company has established certain
contractual and non-contractual relationships with existing customers, potential
customers, distributors and others. The purpose of this focused customer
strategy is to access such customers' knowledge and contacts within the
applicable industries to identify customer needs and expand sales. Relationships
entered into since 1994 include the following:
Name and/or Potential
Type of Company Industry Application Description of Relationship
- --------------- -------- ----------- ---------------------------
1. Union Carbide Plastics Recycling Processing of post-consumer
recycling whole bottles colored HDPE (high density
and plastic polyethylene, used for translucent
flakes milk and other fluid bottles) to
create PRISMA (TM) standard
plastics (PRISMA (TM) is a set of
color standards that allows for
manufacture of consistently
colored HDPE containers which
require certain portions of post-
consumer material).
2. Excel (meat Food Meat sorting Non-exclusive relationship with a
processor) large U. S. meat processor
resulting in a USDA-approved meat
sorting system.
3. COMAS, S.p.A. Tobacco Tobacco COMAS contributes market access as
(manufacturer sorting well as extensive product handling
of tobacco experience for improving AMV
processing sorter designs to accelerate
equipment) market penetration with better
performing machines.
4. VTT (agency Pulp wood Wood chip Exclusive arrangement with VTT on
of the sorting the Massahake wood chip upgrading
government process. The Massahake process
of Finland) allows for efficient utilization
of trees that are taken from the
forest.
5. CAE Machinery, Pulp wood Wood chip AMV seeks to capitalize on the
Ltd. (major reputation of CAE in the techno-
supplier to logically conservative forest
the North products industry in North America
American to speed the adoption of machine
wood products vision sorting technology by that
industry.
6. Columbia Wood Further Agreement to mutually explore
Forest veneer automation further automation of hardwood
Products of veneer plywood manufacturing processes.
processing
The Company believes that adapting current AMV machine vision systems for new
applications through strategic relationships such as these will contribute to
base business growth and accelerate entry into new niche markets.
Sales and Distribution: AMV has a direct sales force of twelve employees. It
also markets its products through representatives pursuant to various agreements
covering different geographical areas. Prior to September 30, 1996, AMV offered
its products for sale outside the United States and Canada through Ham & Hak
Engineering BV and its Foodectronics subsidiary. Sales to Foodectronics amounted
to approximately 2.9% and 6.4% of AMV total sales in the twelve months ended
December 31, 1996 and 1995, respectively. On September 30, 1996, SRC and Ham &
Hak terminated their ten-year exclusive distribution contract. In June 1997, the
Company established SRC VISION BV in Eindhoven, The Netherlands, as its sales
and service center in Europe.
Marketing Through Trial Units: AMV occasionally enters into Site Lease
Agreements with potential customers that provide for a trial period (generally
from two to four months) for the customer to test a system. The potential
customer pays a monthly rental fee for the trial units, which is then credited
against the purchase price when the customer purchases the system. Due to the
near 100% success rate in customer sales resulting from the use of these trial
units as a marketing tool, the Company intends to seek to increase the placement
of trial units in new potential customer sites.
International Sales: International sales (i.e., sales outside the United
States) for the years ended December 31, 1997, 1996 and 1995 accounted for 33%,
53% and 26% of net sales, respectively. International sales as a percentage of
net sales in 1996 were greater because of the acquisition of Pulsarr in 1996
which was sold in May 1997. Foreign sales are denominated in U. S. dollars, or,
in the case of Pulsarr, primarily Dutch guilders.
Backlog
AMV's backlog for its products was approximately $4,206,000 at December 31,
1997, as compared to $7,578,000 at December 31, 1996. Excluding Pulsarr, the
Company's backlog at December 31, 1996 was $5,462,000. Shipment of all the
backlog orders is scheduled to take place within nine months. Backlog includes
only those orders for which a purchase order has been received and for which a
delivery schedule has been established by AMV. However, such orders can be
subject to cancellation by the customer. Because of the timing of orders,
customer changes in delivery schedule, cancellation of orders and trial period
programs that are not included in backlog, backlog as of any particular date may
not be representative of AMV's actual sales for any succeeding fiscal period.
Manufacturing and Supplies
The Company manufactures, assembles and ships its products from its facilities
in Medford and Eugene, Oregon. The Company's Medford facility has a vertically
integrated manufacturing process, beginning with sheets and bars of stainless
steel that are cut and configured, then welded to the Company's specifications
for its components and machines. The Medford operation also manufactures or
assembles many of the components and subassemblies used in its machines, such as
the processing unit, air jet expulsion component, frames and related systems.
Additionally, all proprietary components are manufactured by AMV in Medford,
such as its RGB Cyclops(TM) color cameras used for optical scanning in the
KROMA-SORT(R) systems, and various lights and lamps developed by the Company for
certain of the systems. The Company's Ventek (Eugene) operation integrates
hardware components manufactured by outside suppliers. The Company's machine
vision systems incorporate its proprietary software and algorithms. Basic system
assembly is relatively consistent among product models using similarly
fabricated parts for the machine structure. Most systems are customized as to
number of cameras, lighting configurations and certain other features.
The Company has a computerized manufacturing inventory control system that
integrates and monitors purchasing, inventory control and production. Each
vision system is tested prior to delivery to a customer. The Company's quality
control process tests for reliability and conformance with product
specifications.
The Company is dependent on outside unaffiliated suppliers for some of the
components and parts used in its vision automation systems. Most major parts and
components are available from multiple sources; however, the prisms required in
RGB Cyclops(TM) color cameras are obtained from a single source supplier.
Although such supplier has not indicated any intention to limit or reduce sales
of parts to the Company, if it were to do so, the Company's business, results of
operations and financial condition could be adversely affected. Historically,
AMV has generally been able to obtain parts and components for its systems, as
needed, either from its then-current suppliers or replacement vendors. AMV
believes that it will continue to be able to obtain required components and
parts from various suppliers, although there can be no assurance that it will be
able to do so.
Warranty and Customer Service
AMV generally provides a one-year limited warranty on its products. Since 1993,
there have not been any claims under AMV's warranty program that materially
affected AMV's operations. AMV also provides telephone customer support services
and offers annual service agreements.
In addition, for certain custom-designed systems, the Company contracts to meet
certain performance specifications for specific applications. The Company has
incurred higher warranty expenses related to new products, especially on
products that have not yet been proven to be commercially viable, than it
typically incurs with established products. There can be no assurance that the
Company will not incur substantial warranty expenses in the future related to
new products as well as established products, which may have an adverse effect
on its results of operations and customer relationships.
Competition
The vision automation system industry is subject to intense competition. Some of
AMV's major competitors are substantially larger in size and have greater
financial resources than AMV. Some of its competitors sell machines which are
less expensive than AMV's. In some instances, a potential customer may select
the less expensive alternative even though the AMV system provides greater
sorting capability. Currently, Key Technology, Pulsarr, Elbicon, Sortex, Allen
International, Morvue Electronics and Coe International are believed to be AMV's
direct competitors. There may be other competitors of AMV in addition to the
ones listed above. AMV competes with its competitors on the basis of quality,
technology, systems solutions and price. There can be no assurance that AMV will
continue to successfully differentiate its products from those of its
competitors.
Patents and Trademarks
AMV has been issued or assigned approximately 22 United States patents, and has
applied for seven other United States patents relating to its products,
including various inspection and detection systems and a cutter knife system. In
addition, AMV has obtained or has applied for patent protection for certain of
these systems in selected foreign countries. AMV believes that two of these
patents, a system for stabilizing articles on a conveyor and an RGB camera, are
important to its business. These two patents expire in March 2011 and September
2008, respectively. Other than the two patents described in the previous
sentence, AMV does not consider any of the present patents significant to its
current operations. These patents expire at various times over a six-year period
commencing in April 2005. Additionally, SRC has seven registered trademarks: VHS
OPTISORT(TM), KROMA-SORT(R), SPECTRA-SORT(TM), Length and Defect Analyzer(TM),
Pulp Wood Sorter, Quadra-View(R) and ODSS II(TM).
The Company also attempts to protect its trade secrets and other proprietary
information through proprietary information agreements with employees and
consultants and other security measures. There can be no assurance that these
measures will be successful in protecting the Company's proprietary rights. The
laws of certain countries in which the Company's products are or may be
manufactured or sold may not protect the Company's products and intellectual
property rights to the same extent as the laws of the United States.
There can be no assurance that third parties will not assert infringement of
other claims against the Company with respect to existing or future products or
that licenses will be available on reasonable terms, or at all, with respect to
Company patents or any third-party technology. Litigation to prevent
infringement of Company patents or to determine the validity of any third-party
claims could result in significant expense to the Company and divert the efforts
of the Company's technical and management personnel, whether or not such
litigation is determined in favor of the Company. The Company is not aware of
any threatened or pending patent actions.
As a result of the 1992 settlement of a lawsuit alleging certain patent
infringements, SRC entered into a royalty agreement pursuant to which SRC agreed
to pay royalties of 7% of certain vision system sales through the earlier of
June 30, 2003, and the date at which aggregate royalty payments equal
$1,600,000. The final royalty payment was made in July 1996.
Employees
At December 31, 1997, the Company had 165 full-time employees, including 67 in
manufacturing, 42 in engineering, research and development, 35 in marketing,
sales and service and 21 in general administration and finance. None of the
Company's employees is represented by a labor union. The Company considers its
employee relations to be excellent.
Item 2. Properties
================================================================================
The principal executive office of AMV and the principal executive office and
manufacturing facilities of SRC (a total of approximately 82,000 square feet)
are located on an approximately 6.4 acre parcel of land in Medford, Oregon. SRC
owns the land and building, subject to a deed of trust securing an approximately
$2.7 million loan made by Western Bank (the Western Bank Loan). The Western Bank
Loan bears interest at Western Bank's prime rate plus 3.5% (9.5% as of December
31, 1997). The loan is due February 15, 2003.
Ventek occupies 12,000 square feet of a building located in Eugene, Oregon which
also houses a principal supplier of mechanical components for its vision
systems. The space is leased on a month-to-month basis.
Item 3. Legal Proceedings
================================================================================
The information required by this item is incorporated by reference to the
Company's 1997 Annual Report to stockholders.
Item 4. Submission of Matters to a Vote of Security Holders
================================================================================
None.
<PAGE>
Part II
=======
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
================================================================================
The information required by this item is incorporated by reference to the
Company's 1997 Annual Report to stockholders.
Item 6. Selected Financial Data
================================================================================
The selected financial data for the Company presented below is derived from and
is qualified by the Company's audited financial statements included in the
Company's 1997 Annual Report, which financial statements are included in an
exhibit to this Form 10-K and should be read in conjunction with such financial
statements and the related notes thereto. Until early 1990, the Company was
principally engaged in research and development and organizational activities
relating to its laser operations. In October 1995, the Company sold its laser
operations, which accounted for all sales and related expenses in fiscal year
1993, all sales and a portion of expenses for the three months ended December
31, 1993, and a portion of 1994 sales and related expenses. The laser operations
have been treated as a discontinued business in the selected financial data and
in the financial statements included in the Company's 1997 Annual Report. All
costs incurred by the Company prior to October 1, 1993 related to its laser
operations and are netted against sales and included in the loss from
discontinued operations line. Around October 1, 1993, AMV conceived of a new
business strategy whereby AMV would restructure its organizational and capital
structure to become a parent company of various operating subsidiaries (i.e.,
the platform company concept). Expenses incurred after October 1, 1993 relating
to the platform Company activities are included in their applicable line items
in the selected financial data below as they relate to continuing operations.
In February 1994, the Company acquired SRC. In March and July of 1996, the
Company acquired Pulsarr and Ventek, respectively. In May 1997, the Company sold
Pulsarr. Purchased entity operations account for a large portion of the
fluctuation in amounts between fiscal years 1997, 1996 and 1995. In May 1994,
the Company changed its fiscal year-end from September 30 to December 31. The
quarter ended December 31, 1993, is excluded from any full fiscal year and is
shown separately below. Selected financial data should be read in light of these
facts and in conjunction with the financial statements, notes to financial
statements and other financial information included in the Company's 1997 Annual
Report.
<TABLE>
<CAPTION>
Three Year
Year Ended December 31, Months Ended
---------------------------------------------------------- Ended Sept. 30,
1997 1996 1995 1994 1993 1993
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 31,974,000 $ 29,938,000 $ 19,394,000 $ 11,922,000 $ -- $ --
Cost of sales 16,042,000 15,794,000 11,194,000 8,537,000 -- --
------------ ------------ ------------ ------------ ------------ ------------
Gross profit 15,932,000 14,144,000 8,200,000 3,385,000 -- --
Operating expenses 12,914,000 12,882,000 7,546,000 8,897,000 241,000 --
Charge for acquired
in-process technology -- 4,915,000 -- -- -- --
Charge for royalty expense -- 647,000 -- -- -- --
Gain on sale of Pulsarr 4,989,000 -- -- -- -- --
Interest and other
(expense) - net (892,000) (960,000) 461,000 (37,000) (964,000) --
----------- ------------ ------------ ------------ ------------ ------------
Income (loss) from
continuing operations 7,115,000 (5,260,000) 1,115,000 (5,549,000) (1,205,000) --
Loss from discontinued
operations -- -- (173,000) (2,248,000) (326,000) (3,461,000)
Provision for income taxes 99,000 -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Net income (loss) $ 7,016,000 $ (5,260,000) $ 942,000 $ (7,797,000) $ (1,531,000) $ (3,461,000)
============ ============ ============ ============ ============ ============
Basic earnings (loss)
per share:
Continuing operations $ 0.64 $ (0.49) $ 0.12 $ (0.57) $ (0.20) $ --
Discontinued operations -- -- (0.02) (0.23) (0.05) (0.91)
------------ ------------ ------------ ------------ ----------- ------------
Total $ 0.64 $ (0.49) $ 0.10 $ (0.80) $ (0.25) $ (0.91)
============ ============ ============ ============ =========== ============
Diluted earnings (loss)
per share:
Continuing operations $ 0.49 $ (0.49) $ 0.11 $ (0.57) $ (0.20) $ --
Discontinued operations -- -- (0.02) (0.23) (0.05) (0.91)
------------ ------------ ------------ ------------ ----------- ------------
Total $ 0.49 $ (0.49) $ 0.09 $ (0.80) $ (0.25) $ (0.91)
============ ============ ============ ============ =========== =============
Weighted average number of
common stock outstanding 11,202,000 10,704,000 9,451,000 9,703,000 6,114,000 3,793,000
Balance Sheet Data:
Current assets $ 14,075,000 $ 15,411,000 $ 10,391,000 $ 7,766,000 $ 6,787,000 $ --
Current liabilities 4,942,000 9,498,000 3,501,000 3,181,000 810,000 --
Working capital 9,133,000 5,913,000 6,890,000 4,585,000 5,977,000 --
Net assets relating to
discontinued operations -- -- -- 393,000 1,036,000 3,445,000
Total assets 25,235,000 30,938,000 17,628,000 14,876,000 6,815,000 3,445,000
Long term debt 8,342,000 14,940,000 4,875,000 2,737,000 -- --
Total shareholders' equity 11,951,000 6,500,000 9,252,000 8,958,000 5,996,000 3,445,000
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
================================================================================
Introduction
With the exception of certain cautionary statements and risk factors listed
below, the information required by this item is incorporated by reference to the
Company's 1997 Annual Report to stockholders.
Cautionary Statements and Risk Factors
The Company may, from time to time, make forward-looking statements that involve
risks and uncertainties. Factors associated with the forward-looking statements
which could cause actual results to differ materially from those stated appear
below. Readers should carefully consider the following cautionary statements and
risk factors.
History of Losses; Negative Cash Flow: Prior to 1995 and in 1996, the Company
experienced losses and negative operating cash flow. The Company believes it may
operate at a negative cash flow for certain periods in the future due to (i) the
need to fund certain development projects, (ii) cash required to enter new
market areas, (iii) irregular bookings by customers due to the relatively high
per-unit cost of the Company's products which may cause fluctuations in
quarterly or yearly revenues, (iv) cash required for the repayment of debt,
especially $3.25 million due in July 1999, and (v) possible cash needed to fully
integrate SRC's and Ventek's operations. If the Company is unable to
consistently generate sustained positive cash flow from operations, the Company
must rely on debt or equity financing.
Although the Company achieved profitability in 1995 and 1997, there can be no
assurance as to the Company's profitability on a quarterly or annual basis in
the future. Furthermore, the non-recurring expenses in early 1996 resulted in a
significant loss for the 1996 year.
Uncertain Ability to Manage Growth and Integrate Acquired Businesses: As part of
its business strategy, the Company intends to pursue rapid growth. In March and
July 1996, the Company acquired Pulsarr and Ventek which had sales in 1995 of
approximately $11.4 million and $4.4 million, respectively, and would have added
approximately 80% to the Company's 1995 sales on a proforma basis. Pulsarr was
subsequently sold in May 1997. A growth strategy involving the integration of
new entities, such as Ventek, will require the establishment of sales
representatives and distribution relationships, expanded customer service and
support, increased personnel throughout the Company and the continued
implementation and improvement of the Company's operational, financial and
management information systems. There is no assurance that the Company will be
able to attract qualified personnel or to accomplish other measures necessary
for its successful integration of Ventek or other acquired entities or for
internal growth, or that the Company can successfully manage expanded
operations. As the Company expands, it may from time to time experience
constraints that will adversely affect its ability to satisfy customer demand in
a timely fashion. Failure to manage growth effectively could adversely affect
the Company's financial condition and results of operations.
Rapid Technological Change; Product Development: The markets for the Company's
machine vision products are characterized by rapidly changing technology,
evolving industry standards and frequent new product introductions and
enhancements. For example, the Company believes that the 1995 introduction by
Key Technology, Inc. of its new line of vision sorting equipment adversely
affected bookings in late 1995 and 1996. Sales of products such as those offered
by the Company depend in part on the continuing development and deployment of
emerging technology and new services and applications based on such technology.
The Company's success will depend to a significant extent upon its ability to
enhance its existing products and develop new products that gain market
acceptance. There can be no assurance that the Company will be successful in
selecting, developing and manufacturing new products or enhancing its existing
products on a timely or cost-effective basis or that products or technologies
developed by others will not render the Company's products noncompetitive or
obsolete. Moreover, the Company may encounter technical problems in connection
with its product development that could result in the delayed introduction of
new products or product enhancements. Failure to develop or introduce on a
timely basis new products or product enhancements that achieve market acceptance
would materially and adversely affect the Company's business, operating results
and financial condition.
Market Acceptance of New Products: The Company's future operating results will
depend upon its ability to successfully introduce and market, on a timely and
cost-effective basis, new products and enhancements to existing products. There
can be no assurance that new products or enhancements, if developed and
manufactured, will achieve market acceptance. The Company is currently in the
initial prototype stage of development on a new high-speed software and digital
signal processing technology designed to significantly improve system
performance. There can be no assurance that a market for this system will
develop (i.e., that a need for the system will exist, that the system will be
favored over other products on the market, etc.) or, if a market does develop,
that the Company will be able, financially or operationally, to market and
support the system successfully.
Dependence on Certain Markets and Expansion Into New Markets: The future success
and growth of the Company is dependent upon continuing sales in domestic and
international food processing markets as well as successful penetration of other
existing and potential markets. A substantial portion of the Company's
historical sales has been in the potato and other vegetable processing markets.
Reductions in capital equipment expenditures by such processors due to commodity
surpluses, product price fluctuations, changing consumer preferences or other
factors could have an adverse effect on the Company's results of operations. The
Company also intends to expand the marketing of its processing systems in
additional food markets such as meat and granular food products, as well as
non-food markets such as plastics, wood products and tobacco, and to expand its
sales activities in foreign markets. In the case of Ventek, the wood products
market served is narrow and cyclical, and saturation of that market and the
potential inability to identify and develop new markets could adversely affect
Ventek's growth rate. There can be no assurance that the Company can
successfully penetrate additional food and non-food markets or expand further in
foreign markets.
Lengthy Sales Cycle: The sales cycle in the marketing and sale of the Company's
machine vision systems, especially in new markets or in a new application, is
lengthy and can be as long as three years. Even in existing markets, due to the
$150,000 to $600,000 price range for each system and possibly significant
ancillary costs required for a customer to install the system, the purchase of a
machine vision system can constitute a substantial capital investment for a
customer (which may need more than one machine for its particular proposed
application) requiring lengthy consideration and evaluation. In particular, a
potential customer must develop a high degree of assurance that the product will
meet its needs, successfully interface with the customer's own manufacturing,
production or processing system, and have minimal warranty, safety and service
problems. Accordingly, the time lag from initiation of marketing efforts to
final sales can be lengthy.
Competition: The markets for the Company's products are highly competitive. A
major competitor of the Company introduced several years ago a new flat-belt
optical sorter product which has increased the competition that the Company
faces. In the case of Ventek, the wood industry continues to develop alternative
products to plywood (e.g., oriented strand board) which do not require vision
systems for quality control. Some of the Company's competitors, including
Pulsarr which was sold in May 1997 to a company significantly larger than AMV,
may have substantially greater financial, technical, marketing and other
resources than the Company. Important competitive factors in the Company's
markets include price, performance, reliability, customer support and service.
Although the Company believes that it currently competes effectively with
respect to these factors, there can be no assurance that the Company will be
able to continue to compete effectively in the future.
Dependence Upon Certain Suppliers: Certain key components and subassemblies used
in the Company's products are currently obtained from sole sources or a limited
group of suppliers, and the Company does not have any long-term supply
agreements to ensure an uninterrupted supply of these components. Although the
Company seeks to reduce dependence on sole or limited source suppliers, the
inability to obtain sufficient sole or limited source components as required, or
to develop alternative sources if and as required, could result in delays or
reductions in product shipments which could materially and adversely affect the
Company's results of operations and damage customer relationships. The purchase
of certain of the components used in the Company's products require an 8 to 12
week lead time for delivery. An unanticipated shortage of such components could
delay the Company's ability to timely manufacture units, damage customer
relations, and have a material adverse effect on the Company. In addition, a
significant increase in the price of one or more of these components or
subassemblies could adversely affect the Company's results of operations.
Dependence Upon Significant Customers and Distribution Channel: The Company sold
equipment to an unaffiliated customer totaling 14% of sales in 1997 and to two
unaffiliated customers totaling 13% and 12% of sales in 1996. Sales to another
two unaffiliated customers totaled 19% and 16% of sales in 1995. Ventek's sales
have been to a relatively small number of multi-location plywood manufacturers.
The Company usually receives orders of from one to several machine vision
systems, but occasionally receives larger orders. While the Company strives to
create long-term relationships with its customers and distributors, there can be
no assurance that they will continue ordering additional systems from the
Company. The Company may continue to be dependent on a small number of customers
and distributors, the loss of which would adversely affect the Company's
business.
Risk of International Sales: Due to its export sales, the Company is subject to
the risks of conducting business internationally, including unexpected changes
in regulatory requirements; fluctuations in the value of the U. S. dollar which
could increase the sales prices in local currencies of the Company's products in
international markets; delays in obtaining export licenses, tariffs and other
barriers and restrictions; and the burdens of complying with a variety of
international laws. For example, the possibility of sales to Indonesian
customers will be adversely affected by the recent currency devaluation. In
addition, the laws of certain foreign countries may not protect the Company's
intellectual property rights to the same extent as do the laws of the United
States.
Fluctuations in Quarterly Operating Results; Seasonality: The Company has
experienced and may in the future experience significant fluctuations in
revenues and operating results from quarter to quarter as a result of a number
of factors, many of which are outside the control of the Company. These factors
include the timing of significant orders and shipments, product mix, delays in
shipment, capital spending patterns of customers, competition and pricing, new
product introductions by the Company or its competitors, the timing of research
and development expenditures, expansion of marketing and support operations,
changes in material costs, production or quality problems, currency
fluctuations, disruptions in sources of supply, regulatory changes and general
economic conditions. These factors are difficult to forecast, and these or other
factors could have a material adverse effect on the Company's business and
operating results. Moreover, due to the relatively fixed nature of many of the
Company's costs, including personnel and facilities costs, the Company would not
be able to reduce costs in any quarter to compensate for any unexpected
shortfall in net sales, and such a shortfall would have a proportionately
greater impact on the Company's results of operations for that quarter. For
example, a significant portion of the Company's quarterly net sales depends upon
sales of a relatively small number of high-priced systems. Thus, changes in the
number of such high-priced systems shipped in any given quarter can produce
substantial fluctuations in net sales, gross profits, and net income from
quarter to quarter. In addition, in the event the Company's machine vision
systems' average selling price increases, of which there can be no assurance,
the addition or cancellation of sales may exacerbate quarterly fluctuations in
revenues and operating results.
The Company's operating results may also be affected by certain seasonal trends.
For example, the Company may experience lower sales and order levels in the
first quarter when compared with the preceding fourth quarter due to the
seasonality of certain harvested food items and the timing of annual or
semi-annual plant shut-downs during which systems are installed. The Company
expects these seasonal patterns to continue, though their impact on revenues
will decline as the Company continues to expand its presence in non-agricultural
and other markets which are less seasonal.
Risks Associated With Possible Acquisitions: The Company may pursue strategic
acquisitions or joint ventures in addition to the acquisitions of Pulsarr
(subsequently divested in May 1997) and Ventek as part of its growth strategy.
While the Company has no understandings, commitments or agreements with respect
to any further acquisition, the Company anticipates that one or more potential
opportunities may become available in the future. Acquisitions and joint
ventures would require investment of operational and financial resources and
could require integration of dissimilar operations, assimilation of new
employees, diversion of management resources, increases in administrative costs
and additional costs associated with debt or equity financing. There can be no
assurance that any acquisition or joint venture by the Company will not have an
adverse effect on the Company's results of operations or will not result in
dilution to existing shareholders. If additional attractive opportunities become
available, the Company may decide to pursue them actively. There can be no
assurance that the Company will complete any future acquisitions or joint
ventures or that such a future transaction will not materially and adversely
affect the Company.
Dependence Upon Key Personnel: The Company's success depends to a significant
extent upon the continuing contributions of its key management, technical, sales
and marketing and other key personnel. Except for William J. Young, the
Company's President and Chief Executive Officer, Alan R. Steel, the Company's
Chief Financial Officer, Dr. James Ewan, SRC's President and Chief Executive
Officer, and the four former stockholders of Ventek, the Company does not have
long-term employment agreements or other arrangements with such individuals
which would encourage them to remain with the Company. The Company's future
success also depends upon its ability to attract and retain additional skilled
personnel. Competition for such employees is intense. The loss of any current
key employees or the inability to attract and retain additional key personnel
could have a material adverse effect on the Company's business and operating
results. There can be no assurance that the Company will be able to retain its
existing personnel or attract such additional skilled employees in the future.
Intellectual Property: The Company's competitive position may be affected by its
ability to protect its proprietary technology. Although the Company has a number
of United States and foreign patents, there can be no assurance that any such
patents will provide meaningful protection for its product innovations. The
Company may experience additional intellectual property risks in international
markets where it may lack patent protection.
Product Liability and Other Legal Claims: From time to time, the Company may be
involved in litigation arising out of the normal course of its business,
including product liability and other legal claims. While the Company has a
general liability insurance policy which includes product liability coverage up
to an aggregate amount of $10 million, there can be no assurance that the
Company will be able to maintain product liability insurance on acceptable terms
or that its insurance will provide adequate coverage against potential claims in
the future. There can be no assurance that third parties will not assert
infringement claims against the Company, that any such assertion of infringement
will not result in litigation or that the Company would prevail in such
litigation. Furthermore, litigation, regardless of its outcome, could result in
substantial cost to and diversion of effort by the Company. Any infringement
claims or litigation against the Company could materially and adversely affect
the Company's business, operating results and financial condition. If a
substantial product liability or other legal claim against the Company were
sustained that was not covered by insurance, there could be an adverse effect on
the Company's financial condition and marketability of the affected products.
Warranty Exposure and Performance Specifications: The Company generally provides
a one-year limited warranty on its products. In addition, for certain
custom-designed systems, the Company contracts to meet certain performance
specifications for a specific application. In the past, the Company has incurred
higher warranty expenses related to new products than it typically incurs with
established products. There can be no assurance that the Company will not incur
substantial warranty expenses in the future with respect to new products, as
well as established products, or with respect to its obligations to meet
performance specifications, which may have an adverse effect on its results of
operations and customer relationships.
Possible Need for Additional Financing: The Company may seek additional
financing; however, there can be no assurance the Company will be able to obtain
any additional financing on terms satisfactory to the Company, if at all.
Potential increases in the number of outstanding shares of the Company's Class A
Common Stock due to convertible debt, warrants and stock options, a substantial
loss in 1996 and debt incurred for the acquisition of Ventek due in 1999, may
limit the Company's ability to negotiate additional debt or equity financing.
Shareholder Rights Plan: In February 1998, the Company's Board of Directors
declared a dividend distribution of one Preferred Share Purchase Right ("Right")
on each outstanding share of its common stock. The Rights will be attached to
the Company's common stock and will trade separately and be exercisable only in
the event that a person or group acquires or announces the intent to acquire 20%
or more of AMV's common stock. Each Right will entitle shareholders to buy one
one-hundredth of a share of a new series of junior participating preferred stock
at an exercise price of $15. The Rights expire on February 26, 2008.
The Rights Plan is intended to protect the Company's shareholders against
abusive takeover tactics and to ensure that each shareholder is treated fairly
in any transaction involving an acquisition of control of the Company, such as
partial or two-tiered tender offers that do not treat all shareholders fairly
and equally. The Rights do not affect any takeover proposal which the Board
believes is in the best interests of the Company's shareholders.
Pursuant to the Rights Plan, if the Company is acquired in a merger or other
business combination transaction after a person or group has acquired 20% or
more of the Company's outstanding common stock, each Right will entitle its
holder (other than such person or group) to purchase, at the Right's
then-current exercise price, a number of the acquiring company's common shares
having a market value of twice such price. In addition, if a person or group
acquires 20% or more of AMV's outstanding common stock, each Right will entitle
its holder (other than such person or group) to purchase, at the Right's
then-current exercise price, a number of its common shares having a market value
of twice such price.
Following an acquisition by a person or group of beneficial ownership of 20% or
more of the Company's common stock and before an acquisition of 50% or more of
the common stock, AMV's Board of Directors may exchange the Rights (other than
Rights owned by such person or group), in whole or in part, at an exchange ratio
of one share of common stock (or one one-hundredth of a share of the new series
of junior participating preferred stock) per Right. Before a person or group
acquires beneficial ownership of 20% or more of the Company's common stock, the
Rights are redeemable for $.0001 per Right at the option of the Board of
Directors.
While the Company is not aware of any current intent to acquire a sufficient
number of shares of the Company's common stock to trigger distribution of the
Rights, existence of the Rights could discourage offers for the Company's stock
that may exceed the current market price of the stock, but that the Board of
Directors deems inadequate.
Item 8. Financial Statements and Supplementary Data
================================================================================
The information required by this item is incorporated by reference to the
Company's 1997 Annual Report to stockholders.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
================================================================================
None.
<PAGE>
Part III
========
Item 10. Directors and Executive Officers of the Registrant
================================================================================
The information required by this item is incorporated by reference to the
Company's Proxy Statement to be filed with the Securities and Exchange
Commission before April 30, 1998.
Item 11. Executive Compensation
================================================================================
The information required by this item is incorporated by reference to the
Company's Proxy Statement to be filed with the Securities and Exchange
Commission before April 30, 1998.
Item 12. Security Ownership of Certain Beneficial Owners and Management
================================================================================
The information required by this item is incorporated by reference to the
Company's Proxy Statement to be filed with the Securities and Exchange
Commission before April 30, 1998.
Item 13. Certain Relationships and Related Transactions
================================================================================
The information required by this item is incorporated by reference to the
Company's Proxy Statement to be filed with the Securities and Exchange
Commission before April 30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DATED: March 9, 1998 ADVANCED MACHINE VISION CORPORATION
By: /s/ William J. Young
------------------------
William J. Young
Chief Executive Officer
and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ William J. Young Chairman of the Board of
- -------------------------- Directors, Chief Executive
William J. Young Officer and President,
Principal Executive Officer March 9, 1998
/s/ Alan R. Steel Chief Financial Officer,
- -------------------------- Principal Financial and
Alan R. Steel Accounting Officer March 13, 1998
/s/ Haig S. Bagerdjian Director March 11, 1998
- --------------------------
Haig S. Bagerdjian
/s/ Vikram Dutt Director March 10, 1998
- --------------------------
Vikram Dutt
/s/ James Ewan Director March 2, 1998
- --------------------------
James Ewan
/s/ Robert M. Loeffler Director March 9, 1998
- --------------------------
Robert M. Loeffler
/s/ Jack Nelson Director March 23, 1998
- --------------------------
Jack Nelson
/s/ Rodger A. Van Voorhis
- -------------------------- Director March 30, 1998
Rodger A. Van Voorhis
<PAGE>
Part IV
=======
Item 14. Exhibits, Financial Statement Schedules, And Reports On Form 8-K
================================================================================
(a) The following documents are filed as part of this report:
1,2. Financial Statements and Schedules.
The financial statements and schedules of the Company are set
forth in the "Index to Financial Statements and Financial
Statement Schedules" on page F-1.
3. Exhibits. The following exhibits are filed as a part of this
report:
Exhibit
Number Description
-------- -----------
3.1 Restated Articles of Incorporation of the Company as amended
to date. (12)
3.2 Restated and Amended By-Laws of the Company. (5)
4.1 Form of Warrant Agreement (including forms of Class A and
Class B Warrant Certificates). (1)
4.2 Form of Underwriter's Unit Purchase Option. (1)
4.3 Form of Class C Warrant Agreement (including form of Class C
Warrant Certificate). (1)
4.4 Form of Class D Warrant Agreement. (1)
4.5 Form of Class F Warrant Agreement. (5)
4.6 Form of Class G Warrant Agreement. (6)
4.7 Form of Class H Warrant Agreement. (7)
4.8 Form of Class I Warrant Agreement. (9)
4.9 Form of Laidlaw Warrant Agreement. (5)
4.10 Form of stock option agreement. (8)
4.11 Form of 1997 Restricted Stock Plan and restricted stock
agreement. (10)
4.12 Rights Agreement dated February 27, 1998 between the Company
and American Stock Transfer and Trust Company (16)
10.1 Stock Option Plan and form of option agreements. (1)
10.2 Form of Indemnity Agreement between the Company and each of
its officers and directors. (1)
10.3 Settlement Agreement and License Agreement dated July 27,
1992, between Key Technology, Inc. and SRC VISION, Inc. (2)
10.4 Employment Agreement between Alan R. Steel and the Company
dated January 1, 1998. (17)
10.5 Employment Agreement between William J. Young and the Company
dated January 1, 1998. (17)
10.6 Employment Agreement between William J. Young and SRC VISION,
Inc. dated January 1, 1998. (17)
10.7 Employment Agreement between James Ewan and SRC VISION, Inc.
dated January 1, 1998. (17)
10.8 Asset Purchase Agreement between Applied Laser Systems, Inc.
and Coherent, Inc. dated September 22, 1995. (3)
10.9 Stock Purchase Agreement dated March 1, 1996, (without
exhibits) between Meijn Beheer BV and ARC Netherlands BV, a
wholly-owned subsidiary of the Company. (4)
10.10 Stock Purchase Agreement dated March 1, 1996, between
J. C. Scholt and ARC Netherlands BV, a wholly-owned subsidiary
of the Company. (4)
10.11 Convertible Note dated March 1, 1996, issued in connection
with that certain Stock Purchase Agreement dated March 1,
1996, between J. C. Scholt and ARC Netherlands BV (4)
10.12 Subscription Agreement dated January 18, 1996, between the
Company and Swiss American Securities, Inc. as agent for
Credit Suisse, related to the private placement of 1,400,000
shares of the Company's Class A Common Stock. (4)
10.13 Subscription Agreement dated April 9, 1996, between the
Company and Swiss American Securities, Inc., as agent for
Credit Suisse, related to the private placement of $3,400,000
of convertible secured notes. (6)
10.14 Convertible Secured Note dated April 17, 1996, between the
Company and Ilverton International, Inc. (11)
10.15 Asset Purchase Agreement dated July 24, 1996, by and among
AMV, Ventek and the shareholders of Ventek. (9)
10.16 $1,000,000 Note dated July 24, 1996, between AMV and Ventek.
(9)
10.17 $2,250,000 Convertible Note dated July 24, 1996, between AMV
and Ventek. (9)
10.18 $1,125,000 Note dated July 24, 1996, between AMV and Ventek.
(9)
10.19 Stock Appreciation Rights Agreement dated July 24, 1996
between AMV and Ventek. (9)
10.20 Form of Employment Agreement dated July 24, 1996 between each
of the four stockholders of Ventek. (9)
10.21 Pledge and Security Agreement dated July 24, 1996, by and
among AMV, AMV Subsidiary, Inc., Ventek and Solin and
Associates, P.C. (9)
10.22 1997 SRC VISION, Inc. Stock Option Plan and forms of stock
option agreements. (15)
10.23 Plan of Merger between ARC Capital and AMV to effect an
amendment to the Company's Articles of Incorporation to change
the Company's name from ARC Capital to Advanced Machine Vision
Corporation. (12)
10.24 Share Purchase Agreement dated April 29, 1997 between Barco NV
and ARC Netherlands BV. (13)
10.25 Settlement Agreement dated August 12, 1997. (14)
10.26 1997 Nonqualified Stock Option Plan and form of option
agreement. (14)
13 Annual Report to Security Holders.
23 Consent of Independent Public Accountants.
27 Financial Data Schedule.
----------------------
(1) Previously filed as an exhibit to Form S-1 (File No. 33-45126).
(2) Filed with the SEC on May 18, 1994, as an exhibit to the Company's
Post Effective Amendment No. 5 to Form S-1 (File No. 33-45126).
(3) Filed with the SEC on October 5, 1995, as an exhibit to the Company's
Form 8-K dated October 2, 1995.
(4) Filed with the SEC on March 6, 1996, as an Exhibit to the Company's
Form 8-K dated March 1, 1996.
(5) Previously filed as an exhibit to Form S-3 (File No. 333-10847).
(6) Filed with the SEC on April 14, 1996, as an exhibit to the Company's
Form 10-K for the year ended December 31, 1995.
(7) Filed with the SEC on May 14, 1996, as an exhibit to the Company's
Form 10-Q for the quarter ended March 31, 1996.
(8) Filed with the SEC as an exhibit to form S-1 (File No. 33-45126).
(9) Filed with the SEC on July 30, 1996, as an exhibit to the Company's
Form 8-K dated July 24, 1996.
(10) Filed with the SEC on January 22, 1997, as an exhibit to the
Company's Form 8-K dated January 9, 1997.
(11) Filed with the SEC on May 14, 1996, as an exhibit to the Company's
Form 10-Q for the quarter ended March 31, 1996.
(12) Filed with the SEC on May 14, 1997 as an exhibit to the Company's
Form 10-Q for the quarter ended March 31, 1997.
(13) Filed with the SEC on May 9, 1997 as an exhibit to the Company's
Form 8-K regarding the sale of Pulsarr.
(14) Filed with the SEC on October 30, 1997 as an exhibit to the Company's
Form 10-Q for the quarter ended September 30, 1997.
(15) Filed with the SEC on March 31, 1997 as an exhibit to the Company's
Form 10-K for the year ended December 31, 1996.
(16) Filed with the SEC on February 20, 1998 as an exhibit to the
Company's Form 8-A.
(17) Filed with the SEC on February 27, 1998 as an exhibit to the
Company's Form 8-K regarding implementation of a stock rights program
and employment contracts.
(b) Reports on Form 8-K:
On February 27, 1998, a Form 8-K was filed regarding the
implementation of a stock rights program and employment contracts.
Exhibit 13
Advanced Machine Vision Corporation
Index to Financial Statements and Financial Statement Schedule
Included in the Company's Annual Report to Stockholders
Page
----
Report of Independent Accountants F-2
Financial Statements:
Consolidated Balance Sheets -
December 31, 1997 and 1996 F-3
Consolidated Statements of Operations -
Fiscal Years Ended December 31, 1997, 1996 and 1995 F-4
Statements of Shareholders' Equity -
Fiscal Years Ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows -
Fiscal Years Ended December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
Financial Statement Schedule:
Schedule VIII - Valuation and Qualifying Accounts F-22
Consent of Independent Accountants F-23
Management's Discussion and Analysis of Financial Condition
and Results of Operations F-24
Annual Report Close F-28
F-1
<PAGE>
Report of Independent Accountants
================================================================================
To the Board of Directors and Shareholders of
Advanced Machine Vision Corporation:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Advanced Machine Vision Corporation and its subsidiaries at December 31, 1997
and 1996, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, 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/ PRICE WATERHOUSE LLP
- ------------------------
PRICE WATERHOUSE LLP
Portland, Oregon
January 23, 1998, except as to Note 10, which is as of March 10, 1998
F-2
<PAGE>
================================================================================
Advanced Machine Vision Corporation
Consolidated Balance Sheets
================================================================================
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996
------------- -------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 6,045,000 $ 1,909,000
Accounts receivable, net of allowance for
doubtful accounts of $180,000 and $280,000
at December 31, 1997 and 1996, respectively 2,711,000 4,979,000
Inventories (Note 2) 5,181,000 8,132,000
Prepaid expenses 138,000 391,000
------------- -------------
Total current assets 14,075,000 15,411,000
Property, plant and equipment - net (Notes 3 and 6) 4,775,000 6,488,000
Intangible assets, net (Note 4) 5,535,000 7,876,000
Other assets 850,000 1,163,000
------------- -------------
$ 25,235,000 $ 30,938,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,436,000 $ 1,897,000
Short-term borrowings (Note 6) -- 947,000
Accrued liabilities (Notes 5 and 9) 1,146,000 1,299,000
Customer deposits 1,073,000 2,463,000
Accrued payroll 783,000 707,000
Warranty reserve 477,000 479,000
Current portion of notes payable (Note 6) 27,000 1,706,000
------------- -------------
Total current liabilities 4,942,000 9,498,000
------------- -------------
Notes payable, less current portion (Note 6) 8,342,000 14,940,000
------------- -------------
Commitments and contingencies (Note 9)
Shareholders' equity (Notes 8 and 10):
Common stock:
Class A and B - 10,679,000 and 11,250,000
shares issued and outstanding at
December 31, 1997 and 1996, respectively 24,285,000 25,720,000
Common stock warrants 2,197,000 2,403,000
Additional paid in capital 2,823,000 2,797,000
Accumulated deficit (17,354,000) (24,370,000)
Cumulative translation adjustment -- (50,000)
------------- -------------
Total shareholders' equity 11,951,000 6,500,000
------------- -------------
$ 25,235,000 $ 30,938,000
============= =============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
================================================================================
Advanced Machine Vision Corporation
Consolidated Statements of Operations
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales $ 31,974,000 $ 29,938,000 $ 19,394,000
Cost of sales 16,042,000 15,794,000 11,194,000
------------ ------------ ------------
Gross profit 15,932,000 14,144,000 8,200,000
------------ ------------ ------------
Operating expenses:
Selling and marketing 4,930,000 4,662,000 3,255,000
Research and development 3,950,000 4,038,000 1,987,000
General and administrative 3,303,000 3,549,000 1,933,000
Goodwill amortization 731,000 633,000 371,000
Charge for acquired in-process technology -- 4,915,000 --
Charge for royalty expense -- 647,000 --
------------ ------------ ------------
12,914,000 18,444,000 7,546,000
------------ ------------ ------------
Income (loss) from continuing operations
before other income and expense 3,018,000 (4,300,000) 654,000
Other income and expense:
Gain on sale of Pulsarr 4,989,000 -- --
Gain on rescission of stock
compensation - net -- -- 732,000
Investment and other income 371,000 190,000 212,000
Interest expense (1,263,000) (1,150,000) (483,000)
------------ ------------ ------------
Income (loss) from continuing operations
before income taxes 7,115,000 (5,260,000) 1,115,000
Provision for income taxes (Note 7) 99,000 -- --
------------ ------------ ------------
Income (loss) from continuing operations 7,016,000 (5,260,000) 1,115,000
Loss from discontinued operations (Note 11) -- -- (173,000)
------------ ------------ ------------
Net income (loss) $ 7,016,000 $ (5,260,000) $ 942,000
============ ============ ============
Earnings (loss) per share (Note 10):
Basic $ 0.64 $ (0.49) $ 0.12
Diluted $ 0.49 $ (0.49) $ 0.11
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
================================================================================
Advanced Machine Vision Corporation
Consolidated Statements of Shareholders' Equity
================================================================================
<TABLE>
<CAPTION>
Class A and B Common Stock Class E Common Stock Common Additional Cumulative
-------------------------- -------------------- Stock Paid in Accumulated Translation
Shares Amount Shares Amount Warrants Capital Deficit Adjustments
------ ------ ------ ------ -------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 9,951,000 $ 24,087,000 497,000 $ 326,000 $ 3,097,000 $ 1,500,000 $(20,052,000) $ --
Rescission of stock
compensation - net (612,000) (747,000) -- -- -- -- -- --
Issuance of Class F Warrants -- -- -- -- 15,000 -- -- --
Exercise of options 84,000 84,000 -- -- -- -- -- --
Net income -- -- -- -- -- -- 942,000 --
---------- ------------- ---------- ----------- ----------- ----------- ------------ ---------
Balance, December 31, 1995 9,423,000 23,424,000 497,000 326,000 3,112,000 1,500,000 (19,110,000) --
Redemption of Class E Common
Stock -- -- (497,000) (326,000) -- 326,000 -- --
Expiration of Class E Warrants -- -- -- -- (971,000) 971,000 -- --
Issuance of Class G, H, I and
J Warrants -- -- -- -- 262,000 -- -- --
Common Stock issued through
Regulation S Offering 1,400,000 1,571,000 -- -- -- -- -- --
Exercise of options 83,000 80,000 -- -- -- -- -- --
Partial conversion of note
payable 344,000 645,000 -- -- -- -- -- --
Translation adjustment -- -- -- -- -- -- -- (50,000)
Net loss -- -- -- -- -- -- (5,260,000) --
---------- ------------- ---------- ----------- ----------- ----------- ------------ --------
Balance, December 31, 1996 11,250,000 25,720,000 -- -- 2,403,000 2,797,000 (24,370,000) (50,000)
Issuance of restricted stock 2,000,000 -- -- -- -- -- -- --
Retirement of restricted
stock(1,800,000) -- -- -- -- -- -- -- --
Repurchase of Class A Common
Stock and Class F and H
Warrants (1,001,000) (1,782,000) -- -- (180,000) -- -- --
Exercise of options 97,000 97,000 -- -- -- -- -- --
Partial conversion of note
payable 133,000 250,000 -- -- -- -- -- --
Expiration of warrants -- -- -- -- (26,000) 26,000 -- --
Translation adjustment -- -- -- -- -- -- -- 50,000
Net income -- -- -- -- -- -- 7,016,000 --
---------- ------------- ---------- ----------- ----------- ----------- ------------ --------
Balance, December 31, 1997 10,679,000 $ 24,285,000 -- $ -- $ 2,197,000 $ 2,823,000 $(17,354,000) $ --
========== ============= ========== =========== =========== =========== ============ ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
================================================================================
Advanced Machine Vision Corporation
Consolidated Statements of Cash Flows
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 7,016,000 $ (5,260,000) $ 942,000
Loss from discontinued operations -- -- 173,000
------------- ------------- -------------
Income (loss) from continuing operations 7,016,000 (5,260,000) 1,115,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Gain on sale of Pulsarr (4,989,000) -- --
Charge for acquired in-process technology -- 4,915,000 --
Charge for royalty expense -- 247,000 --
Charge for deferred debt issuance costs 233,000 -- --
Cash outflows related to discontinued operations -- -- (728,000)
Depreciation and amortization 1,369,000 1,263,000 831,000
Stock compensation -- -- (732,000)
Changes in assets and liabilities
(net of amounts purchased/sold
in acquisition/divesture):
Accounts receivable 11,000 (1,741,000) (122,000)
Inventories (499,000) (581,000) 402,000
Prepaid expenses and other assets (186,000) 156,000 (399,000)
Accounts payable, short-term borrowings, accrued
liabilities, customer deposits, accrued payroll
and warranty reserve 842,000 51,000 219,000
------------- ------------- -------------
Net cash provided by (used in) operating activities 3,797,000 (950,000) 586,000
------------- ------------- -------------
Cash provided by (used in) investing activities:
Proceeds from sale of Pulsarr/ALS 7,010,000 -- 1,052,000
Acquisition of Pulsarr/Ventek - net -- (5,984,000) --
Purchases of property and equipment (1,014,000) (1,527,000) (598,000)
Collection of notes receivable -- -- 280,000
------------- ------------- --------------
Net cash provided by (used in) investing activities 5,996,000 (7,511,000) 734,000
------------- ------------- --------------
Cash (used in) provided by financing activities:
Notes payable to bank and others - net (3,792,000) 4,621,000 2,137,000
Proceeds from common stock issuances -- 1,896,000 --
Proceeds from exercise of stock options 97,000 82,000 84,000
Repurchase of Class A Common Stock and Warrants (1,962,000) -- --
Debt issuance costs -- (400,000) (160,000)
------------- ------------- --------------
Net cash (used in) provided by financing activities (5,657,000) 6,199,000 2,061,000
------------- ------------- --------------
Net increase (decrease) in cash 4,136,000 (2,262,000) 3,381,000
Cash and cash equivalents, beginning of the period 1,909,000 4,171,000 790,000
------------- ------------- --------------
Cash and cash equivalents, end of the period $ 6,045,000 $ 1,909,000 $ 4,171,000
============= ============= ==============
Supplemental cash flow information:
Cash paid for:
Interest $ 939,000 $ 809,000 $ 372,000
Income taxes $ 20,000 $ -- $ --
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
ADVANCED MACHINE VISION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Note 1 - Summary of Significant Accounting Policies
================================================================================
Basis of Presentation: The consolidated financial statements include the
accounts of Advanced Machine Vision Corporation ("AMV" or the "Company") and its
four wholly-owned subsidiaries: SRC VISION, Inc. and its wholly-owned SRC VISION
BV subsidiary ("SRC"); Ventek, Inc. ("Ventek") from its July 24, 1996
acquisition date; ARC Netherlands BV and its respective wholly-owned subsidiary,
Pulsarr Holding BV ("Pulsarr"), from its March 1, 1996 acquisition date to its
May 6, 1997 disposition date (see Note 4); and Applied Laser Systems, Inc.
("ALS").
ALS designed, developed, manufactured and marketed laser diode devices,
incorporating its visible laser module, and "no-light" products based on
technology for illumination with infrared laser systems. In October 1995, the
Company sold the operations of ALS to Coherent, Inc. for cash (see Note 11).
Through its subsidiaries, the Company designs, manufactures and markets
computer-aided vision defect detection and sorting and defect removal equipment
for use in a variety of industries, including food processing, wood products and
recycling. The Company's systems combine optical and mechanical systems
technologies to perform diverse scanning, analytical sensing, measuring and
sorting applications on a variety of products such as food, wood and plastics.
The Company sells its products throughout the world (see Note 12).
Use of Estimates: 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.
Accounting Period: The Company utilizes a 52- to 53-week fiscal year ending on
the Sunday closest to the end of the fiscal period. Fiscal periods shown ended
December 28, 1997, December 29, 1996 and December 31, 1995. In these financial
statements, the fiscal periods are shown as December 31 for clarity of
presentation.
Cash Equivalents: For financial reporting purposes, cash equivalents consist
primarily of money market instruments and bank certificates of deposit that have
original maturities of three months or less.
Concentrations of Credit Risk: Financial instruments that potentially subject
the Company to concentrations of credit risk consist principally of money market
instruments and trade receivables. The Company invests its excess cash in money
market instruments and certificates of deposit with high credit quality
financial institutions, and by policy, limits the amount of credit exposure to
any one issuer. Concentrations of credit risk with respect to trade receivables
exist because the Company's subsidiaries rely heavily on a relatively small
number of customers (see Note 12). The Company performs ongoing credit
evaluations of its customers and generally does not require collateral. The
Company maintains reserves for potential credit losses and such losses, to date,
have been within management's expectations.
Inventories: Inventories are stated at the lower of cost or net realizable
value, with cost determined principally by use of the first-in, first-out
method.
Property, Plant, and Equipment: Property, plant and equipment are stated at
cost. Depreciation and amortization are computed by either the straight-line or
an accelerated method over the estimated useful lives of the assets, which range
from three to twenty years. When assets are retired or otherwise disposed of,
the cost and related accumulated depreciation are removed from the accounts and
any resulting gain or loss is recognized in operations for the period. The cost
of maintenance and repairs is charged to expense as incurred; significant
renewals and betterments are capitalized.
Intangible Assets: Intangible assets primarily represent the excess of the
purchase price of acquisitions over the fair value of net assets acquired
("goodwill"). Intangible assets also represent costs allocated to existing
technologies and other specifically identifiable assets arising from business
acquisitions. The gross cost of intangible assets aggregated $7,482,000 and
$9,226,000 as of December 31, 1997 and 1996, respectively. Intangible assets are
being amortized on the straight-line basis over seven to fifteen years (see Note
4). Accumulated amortization aggregated $1,947,000 and $1,350,000 as of December
31, 1997 and 1996, respectively. The Company assesses the recoverability of its
intangible assets as described under Long-Lived Assets below.
Long-Lived Assets: Statement of Financial Accounting Standard No. 121 (FAS 121),
Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to
Be Disposed Of, requires that long-lived assets and certain identifiable
intangible assets to be held and used by a company be reviewed for impairment
whenever events or changes in circumstances indicate that expected future cash
flows (undiscounted and without interest charges) for individual subsidiaries
may not be sufficient to support the recorded assets. If undiscounted cash flows
are not sufficient to support the recorded assets, an impairment is recognized
to reduce the carrying value of the assets based on expected discounted cash
flows of the subsidiary. The Company adopted the statement in fiscal 1996;
however, the adoption did not have a material impact on the Company's financial
statements.
Revenue Recognition: The Company recognizes revenue upon shipment of products
or, in the case of trial units, upon the customer's acceptance of the product.
Customer deposits represent monies received in advance of shipment of products.
Research and Development Costs: Research and development costs are expensed as
incurred. Research and development expense is related to developing new products
and to improving existing products or processes.
Earnings (Loss) Per Share: Earnings (loss) per share for 1997, 1996 and 1995
have been computed in accordance with Statement of Financial Accounting
Standards No. 128 (FAS 128), "Earnings per Share" which was effective December
15, 1997. The changes required by FAS 128 adjusted the calculation of earnings
per share (EPS) under generally accepted accounting principles in the U. S. to
be more consistent with international standards. Under the new standard,
companies replaced the reporting of "primary" EPS with "basic" EPS. Basic EPS is
calculated by dividing the income available to common stockholders by the
weighted average number of common shares outstanding for the period, without
consideration for common stock equivalents. "Fully diluted" EPS was replaced by
"diluted" EPS. Diluted EPS is computed similarly to fully diluted EPS under the
provisions of Accounting Principles Board (APB) Opinion No. 15.
Changes in Classification: Certain reclassifications have been made to the
fiscal 1996 and 1995 financial statements to conform with the financial
statement presentation for fiscal 1997. Such reclassifications had no effect on
the Company's results of operations or shareholders' equity.
Income Taxes: The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards No. 109 (FAS 109), Accounting for Income
Taxes. FAS 109 requires the recognition of deferred tax assets and liabilities
for the expected tax effects from differences between the financial reporting
and tax bases of assets and liabilities. In estimating future tax effects, FAS
109 generally considers all expected future events other than enactments of
changes in tax law or statutorily imposed rates.
Stock-Based Compensation: The Company uses the intrinsic value based method in
accounting for its stock option plans as prescribed by APB Opinion No. 25,
Accounting for Stock Issued to Employees (see Note 8).
Fair Value of Financial Assets and Liabilities: Statement of Financial
Accounting Standards No. 107, Disclosures About Fair Value of Financial
Instruments, requires disclosure of the fair value of certain financial assets
and liabilities. The Company estimates the fair value of its monetary assets and
liabilities based upon the existing interest rates related to such assets and
liabilities compared to current market rates of interest for similar nature and
degree of risk. The Company estimates that the carrying value of all of its
monetary assets and liabilities approximates fair value as of December 31, 1997.
Foreign Currency Translation: All assets and liabilities of foreign subsidiaries
are translated into U. S. dollars at fiscal year-end exchange rates. Income and
expense items are translated at average exchange rates prevailing during the
fiscal year. The resulting translation adjustments are recorded as a component
of shareholders' equity. The translation adjustment recorded as of December 31,
1996 related entirely to Pulsarr and reduced the gain on the sale of Pulsarr in
1997 (see Note 4).
Note 2 - Inventories
================================================================================
Inventories consist of the following:
December 31,
--------------------------------
1997 1996
------------- -------------
Raw materials $ 1,584,000 $ 2,662,000
Work-in-process 1,359,000 2,234,000
Finished goods 2,238,000 3,236,000
------------- -------------
$ 5,181,000 $ 8,132,000
============= =============
The decrease is due principally to the sale of Pulsarr in the current year (see
Note 4).
Note 3 - Property, Plant and Equipment
================================================================================
Property, plant and equipment consist of the following:
December 31,
--------------------------------
1997 1996
------------- -------------
Land $ 879,000 $ 1,339,000
Buildings 3,589,000 4,780,000
Machinery and equipment 700,000 799,000
Furniture, fixtures and office equipment 1,564,000 988,000
------------- -------------
6,732,000 7,906,000
Less: accumulated depreciation (1,957,000) (1,418,000)
------------- -------------
$ 4,775,000 $ 6,488,000
============= =============
Substantially all of the property, plant and equipment is secured by various
mortgage notes payable (see Note 6). Depreciation expense aggregated $638,000,
$630,000 and $460,000, respectively, for 1997, 1996 and 1995.
Note 4 - Acquisitions
================================================================================
SRC: On February 2, 1994, the Company purchased all of the outstanding shares of
stock of SRC for $8.1 million in cash. The Company has accounted for this
acquisition using the purchase method. The cost of the acquisition was allocated
to the assets acquired and liabilities assumed on the bases of their fair values
at the date of acquisition. Goodwill of $2.6 million was recorded as the
difference between the acquisition cost and the fair values of the assets
acquired and liabilities assumed. The Company is amortizing goodwill over seven
years using the straight-line method.
Pulsarr: On March 1, 1996, the Company acquired all of the outstanding capital
stock of Pulsarr for cash of $6.5 million and notes payable aggregating $1.3
million (see Note 6). The acquisition was accounted for under the purchase
method of accounting. The $7.8 million purchase price was allocated based on the
fair values of the identifiable assets of Pulsarr as follows: $1.1 million
represented the fair values of net tangible assets of Pulsarr, $4.9 million
represented acquired in-process technology which was charged to operations in
the quarter ended March 31, 1996, and the remainder of $1.8 million represented
existing technologies and goodwill to be amortized over fifteen years. The fair
values of the acquired in-process technology and existing technologies and
goodwill were determined from independent appraisals received by the Company.
On May 6, 1997, the Company sold its Pulsarr subsidiary to Barco NV of Belgium
for $8.4 million resulting in a gain of approximately $5 million. The sale
resulted in net cash proceeds to AMV of approximately $7 million and a reduction
of current and long-term debt of approximately $4.6 million. The gain on the
sale of Pulsarr is largely a result of the previous reduction in the carrying
value of AMV's investment in Pulsarr due to the $4.9 million charge for acquired
in-process technology the Company recorded in the quarter ended March 31, 1996
in conjunction with this acquisition.
Ventek: On July 24, 1996, the Company acquired certain assets and the business
of Ventek, subject to certain liabilities. The purchase price was approximately
$5.1 million in notes and other securities (see Note 6). The Company also issued
a warrant to purchase 1,000,000 shares of Class A Common Stock which vests over
a four-year period subject to Ventek's meeting specified sales and earnings
goals. The acquisition is accounted for under the purchase method of accounting.
The $5.1 million purchase price was allocated based on the fair values of the
identifiable assets of Ventek as follows: $.2 million represented the fair
values of net tangible assets of Ventek, and the remaining $4.9 million
represented goodwill to be amortized over fifteen years.
The consolidated results of operations for the Company include SRC's, Pulsarr's
and Ventek's results of operations from their respective acquisition dates, and
in the case of Pulsarr, through its disposition date in May 1997.
Unaudited Proforma Statements of Operations: The unaudited proforma condensed
combined statements of operations, shown below as supplemental information,
assume (i) that the acquisition of Ventek occurred as of the beginning of 1996,
and (ii) that Pulsarr was sold at the beginning of 1996. However, the proforma
combined balances are not necessarily indicative of balances which would have
resulted had the acquisition and divestiture occurred as of the beginning of
such periods presented. Proforma condensed combined statements of operations are
presented below:
Proforma (unaudited)
---------------------------------
1997 1996
------------- -------------
Sales $ 29,416,000 $ 25,256,000
============= =============
Gross profit $ 15,014,000 $ 14,244,000
============= =============
Net income $ 2,018,000 $ 1,677,000
============= =============
Earnings per share:
Basic $ 0.18 $ 0.16
============= =============
Diluted $ 0.16 $ 0.14
============= =============
Supplemental Cash Flow Disclosures Relating to Acquisitions: In 1996, the
Company paid $5,984,000 in cash, net of cash acquired, as part of the cost to
acquire Pulsarr and Ventek as follows:
Fair value of tangible assets acquired $ 6,997,000
Acquired existing and in-process technologies 6,653,000
Goodwill and other intangible assets 4,987,000
Liabilities assumed (6,368,000)
Issuance of acquisition notes and warrants (6,285,000)
-------------
Cash paid $ 5,984,000
=============
Note 5 - Accrued Liabilities
================================================================================
Accrued liabilities consist of the following:
December 31,
--------------------------------
1997 1996
------------- -------------
Commissions $ 356,000 $ 192,000
Legal claims and fees 181,000 431,000
Interest 211,000 220,000
Income taxes 79,000 --
Other 319,000 456,000
------------- -------------
$ 1,146,000 $ 1,299,000
============= =============
Note 6 - Financing Arrangements
================================================================================
Short-term borrowings represented Pulsarr's outstanding borrowings pursuant to
its operational line of credit. As of December 31, 1996, Pulsarr had borrowings
under this line of credit totaling $947,000.
Long-term debt consists of the following:
December 31,
--------------------------------
1997 1996
------------- -------------
Mortgage note (SRC) $ 2,690,000 $ 2,715,000
6.75% convertible note 900,000 3,400,000
6.75% note (Ventek) 1,000,000 1,000,000
6.75% convertible note (Ventek) 2,250,000 2,250,000
Ventek note 1,529,000 1,529,000
10.25% convertible note -- 1,515,000
Mortgage notes (Pulsarr)* -- 1,962,000
Pulsarr acquisition note* -- 316,000
6% convertible note* -- 927,000
Technical development grant* -- 1,032,000
------------- -------------
8,369,000 16,646,000
Less: current maturities (27,000) (1,706,000)
------------- -------------
$ 8,342,000 $ 14,940,000
============= =============
* These notes and the operational line of credit were either paid off or
assumed by the buyer in connection with the sale of Pulsarr in May 1997.
The SRC mortgage note is payable to a bank in monthly installments of $23,000
including interest at 9.5%, with the remaining unpaid balance due on February
15, 2003. In February 1996, and every three years thereafter until maturity, the
note provides that the interest rate will be adjusted to 3.5% above the prime
rate. While a normal February 1996 adjustment would have resulted in a rate of
12%, the holder of the note has agreed to fix the interest rate at 9.5% until
February 1999. The note is secured by all of SRC's property, plant and
equipment. The loan agreement contains certain covenants and restrictions
including limitations on incurrence of debt and payment of dividends.
On April 13, 1995, the Company borrowed $2,160,000 pursuant to a convertible
subordinated secured note. Interest on the note was 10.25% and was payable twice
yearly. The note was convertible into the Company's Class A Common Stock at
$1.875 per share. In connection with the borrowing, the Company paid a finders
fee of $160,000 and issued 300,000 warrants to purchase Class A Common Stock at
$1.875 per share. In October 1996 and March 1997, $645,000 and $250,000 of
principal of the note were converted into 344,000 and 133,333 shares of Class A
Common Stock, respectively. The remaining principal balance of $1,265,000 was
paid as scheduled in April 1997. The 300,000 warrants issued in conjunction with
this borrowing were repurchased in August 1997.
In April 1996, in connection with the acquisition of Pulsarr, the Company raised
a net of $3,000,000 in a private placement of $3,400,000 of convertible secured
notes. The notes bear interest at 6.75% payable quarterly. The interest rate may
be adjusted upward on each anniversary date of the notes if the market price of
the Company's Class A Common Stock fails to reach certain levels. The maximum
possible coupon interest rate is 11.25% if none of the market price thresholds
are met. The principal amount will be due in April 2001. The notes are secured
by 54% of the stock of ARC Netherlands BV, a wholly-owned subsidiary of the
Company established to purchase Pulsarr. The notes are convertible into the
Company's Class A Common Stock at $2.125 per share. In connection with the
borrowing, the Company paid a finder's fee of $400,000 and issued 340,000
warrants to purchase Class A Common Stock at $2.125 per share. In September
1997, the Company prepaid $2,500,000 of the note. The 300,000 warrants issued in
conjunction with this borrowing were repurchased in August 1997.
AMV issued the following notes in connection with the acquisition of Ventek: (i)
a 6.75% $1,000,000 note due July 23, 1999; (ii) a 6.75% $2,250,000 note due July
23, 1999 convertible into the Company's Class A Common Stock at $2.25 per share;
and (iii) a $1,125,000 note and stock appreciation rights payable (a) by
issuance of up to 1,800,000 shares of Class A Common Stock or, at the Company's
option, in cash on July 23, 1999, or (b) solely in cash in the event AMV Common
Stock is delisted from the Nasdaq Stock Market. The $1,125,000 note and stock
appreciation rights payable were valued at $1,529,000 on the acquisition date
based upon an independent appraisal received by the Company. All three notes are
secured by all of the issued and outstanding shares of Ventek. The three notes
are payable to Veneer Technology, Inc., a company owned by the four former
stockholders of Ventek, all of whom are current employees of the Company. The
6.75% $2,250,000 note also contains a provision that, upon an initial public
offering ("IPO") of the common stock of one or more of, or any combination of,
SRC and Ventek (together, "Subsidiary"), but only if such IPO occurs during the
term of the note, the noteholder shall have the right to sell back to AMV up to
1,000,000 shares of AMV Class A Common Stock received upon conversion for
consideration consisting of Subsidiary common stock owned by AMV. The number of
shares of Subsidiary common stock to be paid shall be determined by dividing the
total market value (as defined) of the shares of AMV Class A Common Stock to be
sold by 70% of the IPO price of Subsidiary's common stock.
As of December 31, 1997, the aggregate amount of minimum maturities of
long-term debt are as follows: 1998--$27,000; 1999--$4,809,000; 2000--$32,000;
2001--$936,000; 2002--$40,000; and thereafter $2,525,000.
Note 7 - Income Taxes
================================================================================
Income (loss) from continuing operations before income taxes is composed of the
following:
1997 1996 1995
---- ---- ----
Domestic $ 2,143,000 $ 75,000 $ 1,115,000
Foreign 4,972,000 (5,335,000) --
------------ ------------ ------------
$ 7,115,000 $ (5,260,000) $ 1,115,000
============ ============ =============
<PAGE>
The components of the provision for income taxes are as follows:
1997 1996 1995
---- ---- ----
Federal:
Current $ 99,000 $ -- $ --
Deferred 870,000 (124,000) 386,000
------------ ------------ -------------
Total federal 969,000 (124,000) 386,000
------------ ------------ -------------
State:
Deferred 107,000 (14,000) 45,000
------------ ------------ -------------
Total state 107,000 (14,000) 45,000
------------ ------------ -------------
Increase (decrease) in
valuation allowance (977,000) 138,000 (431,000)
------------ ------------ -------------
Total provision $ 99,000 $ -- $ --
============ ============ =============
The tax effect of temporary differences between financial reporting and the tax
bases of assets and liabilities relate to the following:
December 31,
-------------------------------
1997 1996
---- ----
Deferred tax asset:
Loss carry-forwards $ 4,957,000 $ 6,181,000
Reserves and accruals 634,000 454,000
Research and development costs 109,000 167,000
Property basis differences 645,000 520,000
------------ ------------
6,345,000 7,322,000
Deferred tax asset valuation allowance (6,345,000) (7,322,000)
------------ ------------
Net deferred tax asset $ -- $ --
============ ============
The deferred tax asset has been fully reserved in accordance with FAS 109
because the Company cannot anticipate future taxable income to realize the
potential benefits of the gross deferred tax asset.
The provision for (benefit from) income taxes differs from an amount computed
using the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Provision for (benefit from) income taxes
at federal statutory rate $ 2,419,000 $ (1,788,000) $ 320,000
State taxes (benefit) 107,000 (259,000) 38,000
Non-deductible in-process technology charge -- 1,671,000 --
Non-taxable gain on sale of Pulsarr (1,696,000) -- --
Realized benefit from utilizing net operating
loss carry-forward (1,302,000) 191,000 --
Deferred tax valuation allowance 370,000 138,000 (431,000)
Alternative Minimum Tax 99,000 -- --
Other 102,000 47,000 73,000
-------------- ------------- ------------
$ 99,000 $ -- $ --
============== ============= ============
</TABLE>
The Company has net operating loss carry-forwards of approximately $13,000,000.
Such carry-forwards may be used to offset taxable income, if any, in future
years through their expirations in 2007 to 2011. Because of the substantial
change in the Company's ownership which occurred as a result of the initial
public offering in March 1992 and subsequent issuances of common stock, the
annual amount of tax loss carry-forward which can be utilized is limited.
Utilization of approximately $6,500,000 of the above carry-forwards is limited
to approximately $1,800,000 per year. Such limitation could result in the
expiration of a part of the carry-forwards before their utilization.
Note 8 - Employee Benefit and Stock Option Plans
================================================================================
The Company sponsors a defined contribution 401(k) plan covering substantially
all employees. Pursuant to the provisions of the plan, eligible participants may
elect to contribute up to 15% of their base compensation, subject to certain
limitations, and the Company may, at its option, match employee contributions up
to a certain percentage. No Company matching has occurred under the plan.
The Company maintains several stock option plans under which non-qualified and
incentive stock options for the Company's Class A Common Stock have been granted
to directors, officers and other employees. The plans are administered by the
Stock Option Committee of the Board of Directors (the "Committee").
Additionally, the Company has occasionally granted non-plan options to
directors, officers or consultants on terms similar to plan options. The stock
option price per share for options granted is determined by the Committee and is
based on the market price of the Company's common stock on the date of grant,
and each option is exercisable within the period and in the increments as
determined by the Committee, except that no option can be exercised later than
ten years from the date it was granted. The stock options generally vest over
one to four years. The terms of non-plan options are determined by the full
Board of Directors or the Compensation Committee of the Board.
The following table sets forth the options granted, forfeited and exercised
during the three years ended December 31, 1997, and their respective weighted
average exercise price per share:
Weighted
Shares Average
Under Option Price Per Share
------------ ---------------
Balance at December 31, 1994 1,789,000 $ 4.02
Granted 1,957,000 1.00
Exercised (84,000) 1.00
Canceled (1,012,000) 3.89
---------- ------
Balance at December 31, 1995 2,650,000 $ 1.94
Granted 698,000 1.93
Exercised (83,000) 1.00
Canceled (138,000) 1.21
----------- ------
Balance at December 31, 1996 3,127,000 $ 2.00
Granted 1,194,000 1.75
Exercised (97,000) 1.00
Canceled (775,000) 2.21
----------- ------
Balance at December 31, 1997 3,449,000 $ 1.89
=========== ======
The following table sets forth information about stock options outstanding at
December 31, 1997:
Options Outstanding Options Exercisable
- ------------------------------------------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Price Outstanding Contractual Life Price Exercisable Price
- -------------- ----------- ---------------- -------- ----------- --------
1.00 1,323,000 7 years 1.00 1,298,000 1.00
1.44-2.38 1,481,000 9 years 1.75 229,000 1.74
3.00-4.94 645,000 3 years 4.06 645,000 4.06
--------- ---------
3,449,000 2,172,000
========= =========
As of December 31, 1997 there were 278,000 shares available for future grants.
In January 1997, the Company established an SRC stock option plan (the "SRC
Plan") under which incentive and non-qualified stock options for SRC's common
stock may be granted to directors, officers and other employees. The plan is
administered by the Stock Option Committee of the Board of Directors of SRC (the
"SRC Committee"). The stock option price per share for options granted under the
SRC Plan is determined by the SRC Committee and is based on the fair market
value of the Company's common stock on the date of grant, and each option is
exercisable within the period and in the increments as determined by the SRC
Committee, except that no option may be exercised before the ninth anniversary
date of grant unless there shall have been an IPO of SRC's common stock, and
except that no option can be exercised later than ten years from the date it was
granted.
In January 1997, SRC granted a total of 342,000 options under the SRC Plan to
purchase SRC common stock at $1.86 per share. The options become exercisable on
January 10, 2006 and expire one year thereafter. Upon completion of an initial
public offering of SRC's common stock, the vesting of such options will
accelerate so that 100% will be exercisable on the third anniversary date of the
IPO. As of December 31, 1997, there were 73,000 shares available for future
grant under the SRC Plan.
Statement of Financial Accounting Standards No. 123 ("FAS 123"): During 1995,
the Financial Accounting Standards Board issued FAS 123, "Accounting for Stock
Based Compensation," which defines a fair value method of accounting for an
an employee stock option or similar equity instrument and encourages all
entities to adopt that method of accounting for all of their employee stock
compensation plans. However, it also allows an entity to continue to measure
compensation costs for those plans using the method of accounting prescribed by
APB 25. Entities electing to remain with the accounting in APB 25 must make
proforma disclosures of net income and earnings per share, as if the fair value
method of accounting defined in this Statement has been applied.
The Company has elected to account for its stock-based compensation plans under
APB 25; however, the Company has computed for proforma disclosure purposes the
value of all options granted during 1997 and 1996 using the Black-Scholes option
pricing model as prescribed by FAS 123 and the following weighted average
assumptions used for grants:
1997 1996
-------- --------
Risk-free interest rate 6.12% 6.77%
Expected dividend yield 0% 0%
Expected lives 5 Years 5 Years
Expected volatility 63% 67%
Adjustments are made for options forfeited prior to vesting. The total value of
options granted was computed to be the following approximate amounts, which
would be amortized over the vesting period of the options:
Year ended December 31, 1997 $ 752,000
Year ended December 31, 1996 $ 789,000
If the Company had accounted for these plans in accordance with FAS 123, the
Company's net income (loss) and proforma net income (loss) per share would have
been reported as follows:
December 31,
-------------------------------
1997 1996
---- ----
Net income (loss):
As reported $ 7,016,000 $ (5,260,000)
Proforma $ 6,807,000 $ (5,797,000)
Proforma diluted earnings (loss) per share:
As reported $ 0.49 $ (0.46)
Proforma $ 0.46 $ (0.51)
The weighted average fair value of options granted during 1997 and 1996 was
$1.04 and $1.13, respectively.
Note 9 - Commitments and Contingencies
================================================================================
AMV is a party to several suits in the ordinary course of its business. AMV
believes that the outcome of all such proceedings, even if determined adversely
to the Company, will not have a material effect upon its business or financial
position.
Note 10 - Shareholders' Equity and Earnings (Loss) Per Share
================================================================================
Common Stock: The authorized number of shares of no par value Class A Common
Stock and no par value Class B Common Stock are 60,000,000 and 3,000,000,
respectively. Upon sale or transfer, each share of Class B Common Stock is
automatically convertible into one share of Class A Common Stock. Both the Class
A and Class B Common Stock are entitled to one vote per share. As of December
31, 1997, there were 10,602,000 shares of Class A Common Stock and 77,000 shares
of Class B Common Stock outstanding.
Common Stock Warrants: The Company has several classes of common stock warrants
outstanding. The key terms are included in the table below.
On March 9, 1998, Class A, B and C Warrants to purchase approximately 11.4
million shares of Class A Common Stock expired. All classes of remaining
warrants provide for adjustment of the exercise price and for a change in the
number of shares issuable upon exercise to protect holders against dilution in
the event of a stock dividend, stock split, combination or reclassification of
the Class A Common Stock. The Class D Warrants also provide for such an
adjustment upon issuance of shares of Class A Common Stock at prices lower than
the market price then in effect other than issuances upon exercise of options
granted to employees, directors and consultants to AMV, or options to be granted
under any AMV stock option plan.
Schedule of Outstanding Stock, Warrants, Convertible Debt and Potential
Dilution: The following table summarizes outstanding common stock as of December
31, 1997, potential dilution to the outstanding common stock upon exercise of
warrants remaining after March 9, 1998 and conversion of convertible debt, and
proforma proceeds from the exercise of warrants and debt conversion. The table
also sets forth the exercise or conversion prices and warrant expiration and
debt due dates.
<TABLE>
<CAPTION>
Number or Proforma
Principal Amount Class A Common Exercise or Proceeds
Outstanding at Stock After Conversion or Debt
Security December 31, 1997 Conversion Price Reduction
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock:
Class A 10,602,000 10,602,000
Class B 77,000 77,000
-------------
Total currently outstanding 10,679,000
Warrants (expiration date):
D (6/30/98-7/31/98) 275,000 275,000 $ 2.75 $ 756,000
G (2/28/99) 240,000 240,000 2.00 480,000
I (7/23/01) 1,000,000 (A) 1,000,000 2.25 2,250,000
J (9/30/99) 300,000 300,000 2.03 608,000
------------- ------------
1,815,000 4,094,000
------------- ------------
Convertible Debt (due date):
6.75% Notes (4/16/01) $ 900,000 423,000 2.13 900,000
6.75% Ventek Note (7/23/99) $ 2,250,000 1,000,000 2.25 2,250,000
Ventek Note (7/23/99) $ 1,529,000 (A) 1,800,000 1,529,000
------------- ------------
3,223,000 4,679,000
------------- ------------
Potentially outstanding shares and proforma proceeds
and reduction of debt 15,717,000 $ 8,773,000
============= ============
</TABLE>
(A) The Company issued the $1,529,000 note and Class I Warrant in connection
with the Ventek acquisition (see Note 4). The note is payable, (a) at the
Company's option, in cash or by delivery of up to 1,800,000 shares of Class
A Common Stock on the third anniversary date of the note; or (b) solely in
cash in the event AMV Common Stock is delisted from the Nasdaq Stock
Market. The Warrant vests 25% per year through 1999 if sales and earnings
objectives are achieved. As of December 31, 1997, the first 25% increment
(for 1996) of the Warrant was vested and the second 25% increment (for
1997) did not vest as the objectives were not met. The second increment
will only vest in the future if cumulative goals are achieved.
The proforma amounts above are for illustrative purposes only and exclude the
Class A, B and C Warrants which expired March 9, 1998. Unless the market price
of AMV's Class A Common Stock rises significantly above the exercise or
conversion prices, it is unlikely that any warrants will be exercised or that
the debt will be converted.
In addition, on December 31, 1997, AMV had outstanding options to purchase
3,449,000 shares of Class A Common Stock, 2,957,000 of which are under its stock
option plans (see Note 8).
The existence of these outstanding warrants, options, and convertible debt,
including those granted or to be granted under AMV's stock option plans or
otherwise, and potentially issuable shares pursuant to antidilution provisions
of warrant agreements could adversely affect AMV's ability to obtain future
financing. The price which AMV may receive for the Class A Common Stock issued
upon exercise of options and warrants, or amount of debt forgiven in the case of
conversion of debt, may be less than the market price of Class A Common Stock at
the time such options and warrants are exercised or debt is converted. For the
life of the warrants, options and convertible debt, the holders are given, at
little or no cost, the opportunity to profit from a rise in the market price of
the Class A Common Stock without assuming the risk of ownership. Moreover, the
holders of the options and warrants might be expected to exercise them at a time
when AMV would, in all likelihood, be able to obtain needed capital by a new
offering of its securities on terms more favorable than those provided for by
the options and warrants.
1997 Restricted Stock Plan: The 1997 Restricted Stock Plan ("1997 Plan") was
established to retain the services of selected employees, officers and directors
of the Company and provide them with strong incentives to enhance the Company's
growth and stock price. The total number of shares of Class A Common Stock
issuable under the 1997 Plan shall not exceed 2,000,000.
In January 1997, the Company's Board of Directors awarded 2,000,000 shares of
restricted Class A Common Stock to three key employees of the Company. In
September 1997, 1,800,000 shares were donated back to the Company and retired.
The remaining 200,000 shares cannot be traded or transferred unless (i) the
employee remains in the employ of the Company until January 10, 2000 and (ii) a
payment of $1.80 per share is made by the employee to AMV. If any of these
conditions are not met, the related shares of stock will be forfeited and
returned to the Company.
Stock Rights Plan: In February 1998, the Company implemented a stock rights
program. Pursuant to the program, stockholders of record on February 27, 1998
received a dividend of one right to purchase for $15 one one-hundredth of a
share of a newly created Series A Junior Participating Preferred Stock. The
rights are attached to AMV's Class A Common Stock and will also become attached
to shares issued in the future. The rights will not be traded separately and
will not become exercisable until the occurrence of a triggering event, defined
as an accumulation by a single person or group of 20% or more of AMV's Class A
Common Stock. The rights will expire on February 26, 2008 and are redeemable at
$.0001 per right.
After a triggering event, the rights will detach from the Class A Common Stock.
If AMV is then merged into, or is acquired by, another corporation, the Company
has the opportunity to either (i) redeem the rights or (ii) permit the rights
holder to receive in the merger stock of AMV or the acquiring company equal to
two times the exercise price of the right (i.e., $30). In the latter instance,
the rights attached to the acquirer's stock become null and void. The effect of
the rights program is to make a potential acquisition of the Company more
expensive for the acquirer if, in the opinion of AMV's Board of Directors, the
offer is inadequate.
Earnings (Loss) Per Share: Earnings (loss) per share, calculated in accordance
with FAS 128, is presented in the following table:
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------------------------------------------
1997 1996 1995
---------------------- ----------------------- ---------------------
Income Shares (Loss) Shares Income Shares
-------- -------- -------- -------- -------- --------
(In thousands except per share data)
<S> <C> <C> <C> <C> <C> <C>
Calculation of EPS
- ------------------
Income (loss) available to
common shareholders $ 7,016 11,202 $ (5,260) 10,704 $ 1,115 9,451
Reduction for contingently
returnable shares as all
conditions were not
met as of period end -- (200) -- -- -- --
-------- -------- --------- -------- ------- --------
Income (loss) available to
common shareholders $ 7,016 11,002 $ (5,260) 10,704 $ 1,115 9,451
- -----------------------------------------------------------------------------------------------------------------
Basic EPS $ 0.64 $ (0.49) $ 0.12
- -----------------------------------------------------------------------------------------------------------------
Effect of Dilutive Securities:
Note and stock appreciation
rights agreement 100 1,800 -- -- -- --
Stock options and warrants -- 663 -- -- -- 770
Convertible debt 252 1,423 -- -- -- --
-------- -------- --------- -------- ------- --------
Income (loss) available to
common shareholders
and assumed conversions $ 7,368 14,888 $ (5,260) 10,704 $ 1,115 10,221
======== ======== ========= ======== ======= ========
- -----------------------------------------------------------------------------------------------------------------
Diluted EPS $ 0.49 $ (0.49) $ 0.11
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
The number of shares of common stock, along with their respective exercise
prices, underlying options, warrants and convertible debt, which were excluded
from the computation of diluted EPS because their exercise prices were greater
than the average market price of common stock, are listed below.
1997 1996 1995
---- ---- ----
Number of shares of common
stock exercisable from:
Options 1,135,000 1,120,000 800,000
Warrants 13,215,000 13,990,000 14,084,000
Convertible debt -- 3,849,000 1,152,000
------------- ------------- -------------
14,350,000 18,959,000 16,036,000
============= ============= =============
Exercise price ranges $2.00 - $4.94 $2.00 - $4.94 $1.88 - $4.94
On March 9, 1998, the Class A, B and C Warrants to purchase 11,400,000 shares of
common stock expired, and therefore, will not potentially impact diluted EPS in
future periods.
Basic and diluted earnings (loss) per share presented for income from continuing
operations and loss from discontinued operations for the year ended December 31,
1995 are as follows:
Basic EPS:
Income from continuing operations $ 0.12
Loss from discontinued operations (0.02)
-------
Net income $ 0.10
=======
Diluted EPS:
Income from continuing operations $ 0.11
Loss from discontinued operations (0.02)
-------
Net income $ 0.09
=======
Note 11 - Discontinued Operations
================================================================================
In October 1995, the Company sold the ALS laser operations to Coherent, Inc. for
approximately $1,052,000 in cash, which represented the net book value of the
operation. Operating results for the above discontinued business have been
excluded from the Consolidated Statements of Operations to present separately
the results of continuing operations. Net sales for ALS for the year ended 1995
were $2,279,000.
Note 12 - Business Segment and Geographic Information
================================================================================
The Company is engaged in one principal activity--designing, manufacturing and
marketing of computer-aided vision defect detection and sorting and defect
removal equipment. The Company has subsidiaries located in the United States and
the Netherlands. Revenue transfers between geographic areas, and other
intergeographical eliminations are not material. Net sales, net income (loss)
and identifiable assets by geographic areas are as follows:
1997 1996 1995
---- ---- ----
Net sales:
United States $ 29,416,000 $ 21,506,000 $ 19,394,000
Europe 2,558,000 8,432,000 --
------------- ------------- ------------
$ 31,974,000 $ 29,938,000 $ 19,394,000
============= ============= ============
Net income (loss):
United States $ 2,229,000 (D) $ 75,000 (A) $ 942,000 (E)
Europe 4,787,000 (C) (5,335,000)(B) --
------------- ------------- ------------
$ 7,016,000 $ (5,260,000) $ 942,000
============= ============= ============
Identifiable assets:
United States $ 24,294,000 $ 20,784,000 $ 17,628,000
Europe 941,000 10,154,000 --
------------- ------------- ------------
$ 25,235,000 $ 30,938,000 $ 17,628,000
============= ============= ============
(A) Includes charges of $647,000 for the write-off of deferred royalty expense.
(B) Includes a charge of $4,915,000 for the write-off of acquired in-process
technology.
(C) Includes a gain of $4,989,000 from the sale of Pulsarr.
(D) Includes a charge of $233,000 for the write-off of deferred debt issue costs
associated with the early retirement of debt.
(E) Includes a gain of $732,000 from arbitration.
Included in United States sales are export sales of $7,999,000 in 1997,
$7,504,000 in 1996 and $5,117,000 in 1995.
The Company sold equipment to a single customer totaling 14% of sales in 1997,
to two different customers totaling 13% and 12% of sales in 1996, and to two
different customers totaling 19% and 16% of sales in 1995.
Note 13 - Quarterly Financial Data (Unaudited)
================================================================================
<TABLE>
<CAPTION>
Quarters Ended March 31 June 30 September 30 December 31 Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fiscal 1997
Sales $ 9,337,000 $ 7,607,000 $ 5,861,000 $ 9,169,000 $ 31,974,000
Gross profit 4,607,000 3,933,000 3,029,000 4,363,000 15,932,000
Net income (loss) 769,000 5,367,000 (160,000) 1,040,000 7,016,000
Basic earnings (loss) per share 0.07 0.47 (0.01) 0.10 0.64
Diluted earnings (loss) per share 0.05 0.34 (0.01) 0.08 0.49
Fiscal 1996
Sales $ 3,613,000 $ 6,419,000 $ 10,097,000 $ 9,809,000 $ 29,938,000
Gross profit 1,479,000 2,598,000 5,094,000 4,973,000 14,144,000
Net income (loss) (6,797,000) (900,000) 985,000 1,452,000 (5,260,000)
Basic earnings (loss) per share (0.69) (0.08) 0.09 0.13 (0.49)
Diluted earnings (loss) per share (0.69) (0.08) 0.07 0.09 (0.49)
</TABLE>
F-21
<PAGE>
Advanced Machine Vision Corporation
Schedule VIII - Valuation and Qualifying Accounts
For the Years Ended December 31, 1995, 1996 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additions
----------------------------
Balance at Charged to Charged Balance
beginning cost and to other at end
of period expenses accounts Deductions of period
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Allowance for excess and obsolete
inventory $ -- $ 305,000 $ -- $ -- $ 305,000
============= ============= ============= ============= =============
Allowance for doubtful accounts $ 165,000 $ -- $ -- $ -- $ 165,000
============= ============= ============= ============= =============
Year ended December 31, 1996:
Allowance for excess and obsolete
inventory $ 305,000 $ 131,000 $ -- $ -- $ 436,000
============= ============= ============= ============= =============
Allowance for doubtful accounts $ 165,000 $ 21,000 $ 120,000 $ (26,000) $ 280,000
============= ============= ============= ============= =============
Year ended December 31, 1997:
Allowance for excess and obsolete
inventory $ 436,000 $ 271,000 $ -- $ -- $ 707,000
============= ============= ============= ============= =============
Allowance for doubtful accounts $ 280,000 $ -- $ (100,000) $ -- $ 180,000
============= ============= ============= ============= =============
</TABLE>
F-22
Exhibit 23
Consent of Independent Accountants
================================================================================
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-10847),
Registration Statement on Form S-8 (No. 33-87064), Registration Statement on
Form S-8 (No. 33-76864) and Registration Statement on Form S-8 (No. 333-42329)
of Advanced Machine Vision Corporation (formerly Applied Laser Systems or ARC
Capital) of our report dated January 23, 1998, except as to Note 10, which is as
of March 10, 1998, appearing on page F-2 of this Annual Report on Form 10-K.
/s/ Price Waterhouse LLP
- ------------------------
PRICE WATERHOUSE LLP
Portland, Oregon
March 24, 1998
F-23
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
Introduction
Before the February 1994 acquisition of SRC, AMV's sole operation was Applied
Laser Systems, Inc. of Oregon, a manufacturer of laser diode devices. The laser
operation was sold in October 1995. Consequently, the results of operations of
ALS have been reported as a discontinued business in the accompanying financial
statements and in the discussion below.
The Company acquired SRC, Pulsarr and Ventek in February 1994, March 1996 and
July 1996, respectively. Pulsarr was subsequently sold in May 1997. The
operations of the acquired entities are included in the financial statements
from their respective acquisition dates, and in the case of Pulsarr, through its
disposition date.
The following table sets forth the results of operations for the last three
years (amounts in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
Amount % Amount % Amount %
--------- -------- -------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 31,974 100.0% $ 29,938 100.0% $ 19,394 100.0%
Cost of sales 16,042 50.2% 15,794 52.8% 11,194 57.7%
--------- -------- -------- ------- --------- --------
Gross profit 15,932 49.8% 14,144 47.2% 8,200 42.3%
--------- -------- -------- ------- -------- --------
Operating expenses:
Selling and marketing 4,930 15.4% 4,662 15.6% 3,255 16.8%
Research and development 3,950 12.4% 4,038 13.5% 1,987 10.2%
General and administrative 3,303 10.3% 3,549 11.8% 1,933 10.0%
Goodwill amortization 731 2.3% 633 2.1% 371 1.9%
Charge for acquired
in-process technology -- -- 4,915 16.4% -- --
Charge for royalty expense -- -- 647 2.2% -- --
--------- -------- -------- -------- -------- --------
12,914 40.4% 18,444 61.6% 7,546 38.9%
--------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before other
income and expense 3,018 9.4% (4,300) (14.4)% 654 3.4%
Gain on sale of Pulsarr 4,989 15.6% -- -- -- --
Gain on rescission of stock
compensation - net -- -- -- -- 732 3.8%
Investment and other income 371 1.2% 190 .6% 212 1.1%
Interest expense (1,263) (4.0)% (1,150) (3.8)% (483) (2.5)%
--------- --------- -------- -------- -------- --------
Income (loss) from continuing
operations before income taxes 7,115 22.3% (5,260) (17.6)% 1,115 5.8%
Provision for income taxes 99 (0.3)% -- -- -- --
--------- --------- -------- -------- -------- --------
Income (loss) from continuing
operations 7,016 21.9% (5,260) (17.6)% 1,115 5.8%
Loss from discontinued
operations -- -- -- -- (173) (0.9)%
--------- --------- -------- -------- --------- --------
Net income (loss) $ 7,016 21.9% $ (5,260) (17.6)% $ 942 4.9%
========= ========= ======== ======== ========= ========
</TABLE>
F-24
<PAGE>
Fiscal 1997 Compared to Fiscal 1996
Sales for 1997 were $31,974,000, up 7% when compared to sales for 1996 of
$29,938,000. Sales of non-food machine vision systems decreased 4% or $600,000
to $14,924,000. Sales of food machine vision systems increased 18% or $2,636,000
to $17,050,000. Pulsarr's sales, which are comprised entirely of food machine
vision systems, aggregated $2,558,000 in 1997 and $8,432,000 in 1996. Excluding
Pulsarr from both years, sales of food machine vision systems increased 142% or
$8,510,000 to $14,492,000 from $5,982,000. Total machine vision systems sold,
excluding Pulsarr, were 90 in 1997 and 77 in 1996.
Cost of sales was 50.2% of sales in 1997 and 52.8% in 1996.
Gross profit increased by 13% to $15,932,000 in 1997 when compared to
$14,144,000 of gross profit in 1996. In 1997, gross profit was 49.8%, as
compared to 47.2% in 1996. The increase in gross profit as a percentage of sales
is primarily related to a larger volume of higher-margin Ventek products
included in 1997, and an increase in the overall sales volume at SRC which
allowed for the spreading of fixed costs over a larger sales base.
Selling and marketing expenses increased 6% in 1997 to $4,930,000 when compared
to $4,662,000 in 1996. The increase in selling and marketing expense is due to
the increase in sales. Selling and marketing expenses amounted to 15.4% of sales
in 1997 and 15.6% of sales in 1996.
Research and development expenses were $3,950,000 and $4,038,000 in 1997 and
1996, or 12.4% and 13.5% of sales, respectively. The decrease was the result of
the inclusion of only four months of Pulsarr's costs in 1997 as compared to ten
months in 1996, partially offset by increases in research and development
expenses at both SRC and Ventek.
General and administrative expenses decreased $246,000 to $3,303,000 in 1997
from $3,549,000 in 1996. The decrease in general and administrative expenses was
the result of the inclusion of only four months of Pulsarr's costs in 1997 as
compared to ten months in 1996, partially offset by increases in general and
administrative expenses at both SRC and Ventek.
The increase in goodwill amortization is due to a full year of amortization from
the Ventek acquisition in 1997 as compared to only five months in 1996,
partially offset by lower amortization from Pulsarr as a result of its sale in
May 1997.
On May 6, 1997, AMV sold Pulsarr to Barco NV of Belgium for $8.4 million,
resulting in a gain of $4,989,000. AMV had purchased Pulsarr on March 1, 1996
for $7.8 million. This gain primarily represents a recovery of the $4,915,000
charge for acquired in-process technology the Company recorded in 1996 in
conjunction with this acquisition.
The increase in investment and other income is the result of higher cash
balances available for investment.
The increase in interest expense is primarily due to the inclusion of $233,000
of deferred debt issuance costs written off as a result of the early repayment
of $2,500,000 of convertible notes payable.
The provision for income taxes represents income taxes due pursuant to the
Alternative Minimum Tax rules of the Internal Revenue Code. As of December 31,
1997, the Company had net operating loss carry-forwards of approximately
$13,000,000, which may be used to offset future taxable income, if any, and
expire between 2007 and 2011.
Net income for 1997 was $7,016,000 as compared to a loss of $5,260,000 in 1996.
Net income for 1997 includes a gain on the sale of Pulsarr of $4,989,000 and a
charge of $233,000 relating to the write-off of deferred debt issuance costs,
while the net loss for 1996 includes a charge for acquired in-process
technologies of $4,915,000 and a charge for deferred royalty expenses of
$647,000. Income before special items was $2,260,000 for 1997 compared to
$302,000 for 1996 as a result of the factors discussed above.
F-25
<PAGE>
Fiscal 1996 Compared to Fiscal 1995
Sales for 1996 were $29,938,000, up 54% when compared to sales for 1995 of
$19,394,000. The increase is due to the inclusion of $11,234,000 of Pulsarr's
and Ventek's sales. Sales of non-food machine vision systems increased 36% or
$4,118,000 to $15,524,000. Sales of food machine vision systems increased 80% or
$6,426,000 to $14,414,000. Total machine vision systems sold in 1996 were 127 as
compared to 67 in 1995.
Cost of sales was 52.8% of sales in 1996 and 57.7% in 1995.
Gross profit increased by 72.5% to $14,144,000 in 1996 when compared to
$8,200,000 of gross profit in 1995. In 1996, gross profit was 47.2%, as compared
to 42.3% in 1995. The increase in gross profit as a percentage of sales is
primarily related to the higher margin Ventek products included in 1996, as well
as a change in product mix at SRC to higher margin non-food industry systems.
Selling and marketing expenses increased 43.2% in 1996 to $4,662,000 when
compared to 1995 due principally to the addition of Pulsarr and Ventek. Selling
and marketing expenses amounted to 13.5% of sales in 1996. Similar expenses in
1995 were $3,255,000 or 16.8% of sales.
Research and development expenses were $4,038,000 and $1,987,000 in 1996 and
1995, or 13.5% and 10.2% of sales, respectively. The larger research and
development level in 1996 was due principally to the continuing development of
SRC's next generation of vision processor, projects in non-food industry sorting
applications and $885,000 for Pulsarr and Ventek.
General and administrative expenses increased $1,616,000 to $3,549,000 in 1996
from $1,933,000 in 1995. The increase in general and administrative expenses is
due to the addition of Pulsarr and Ventek as well as an increase in personnel
costs and legal fees at SRC and AMV.
The increase in goodwill amortization is due to the acquisitions of Pulsarr and
Ventek.
As discussed in the Notes to the Financial Statements, on March 1, 1996, the
Company acquired Pulsarr for approximately $7.8 million. Approximately $4.9
million of the purchase price was allocated to in-process technology, which was
charged to expense during the quarter ended March 31, 1996. This charge is not
deductible for tax purposes. The Company will need to invest in additional
development related to the in-process technology in order to make these
technologies commercially viable. These expenditures are expected to be paid out
over the next few years and will be funded primarily from cash generated from
operations.
In the first quarter of 1996, the Company wrote off $647,000 of deferred royalty
expenses relating to certain technologies as all royalties have been earned, and
the Company believes that no significant future economic life exists relating to
the royalty agreement as a result of changing technologies (see Liquidity and
Capital Resources below).
In February 1995, Liviakis Financial Communications, Inc. returned approximately
668,000 previously issued and outstanding shares of AMV Class A Common Stock
pursuant to an award in arbitration in favor of the Company. A gain of $732,000
was recorded in February 1995 relating to the shares recovered.
The increase in interest expense is due to the increase in debt outstanding
relating to the acquisitions of Pulsarr and Ventek.
The net loss for 1996 was $5,260,000 as compared to net income of $942,000 in
1995. The variation is due primarily to the non-recurring charges for in-process
technology and royalty expense, the increased level of research and development
expenses, and the non-recurring gain in 1995 relating to the shares of AMV
Common Stock returned pursuant to an arbitration award.
F-26
<PAGE>
Liquidity and Capital Resources
The financial condition of the Company was strengthened during 1997. The
Company's cash balance and working capital increased to $6,045,000 and
$9,133,000, respectively, at December 31, 1997 from $1,909,000 and $5,913,000,
respectively, at December 31, 1996. The Company reduced its long-term and
current bank debt to $8,369,000 at December 31, 1997 from $17,593,000 at
December 31, 1996. In 1997, the Company's shareholders' equity increased to
$11,951,000 as of December 31, 1997, primarily as a result of net income in 1997
of $7,016,000. These changes in debt and equity improved the Company's
debt-to-equity ratio to 1:1.43 as of December 31, 1997 from 1:0.37 as of
December 31, 1996.
During 1997, net cash provided by operating activities totaled $3,797,000
compared to cash used in operating activities of $950,000 in 1996 and cash
provided by operating activities of $586,000 in 1995. Income before special
items was $2,260,000 in 1997 as compared to $302,000 in 1996 and is the
principle reason for the increase in cash provided from operations in 1997 as
compared to 1996. Increases in inventories used cash of $499,000 and $581,000 in
1997 and 1996, respectively, and were necessary to support the growth in sales
volume. A reduction in accounts receivable provided cash of $11,000 in 1997 as
compared to an increase in accounts receivable which consumed cash of $1,741,000
in 1996. These changes in receivables were the result of the changing level of
net sales in the fourth quarter. Sales for the fourth quarter of 1997, 1996 and
1995 were $9.2 million, $9.8 million and $5.1 million, respectively.
Cash provided by investment activities totaled $5,996,000 in 1997 compared to
cash used in investment activities of $7,511,000 in 1996 and cash provided by
investment activities of $734,000 in 1995. The sale of Pulsarr provided net cash
of $7,010,000 in 1997, and the sale of ALS provided $1,052,000 in 1995. The
acquisition of Pulsarr in 1996 used cash of $5,984,000. Consideration given for
the Ventek acquisition was approximately $5.1 million in notes and other
securities. Reference is made to Notes to Consolidated Financial Statements
regarding the July 1999 maturity date for the notes and potential cash payment
requirements. Cash resources of $1,014,000, $1,527,000 and $598,000 were used to
acquire property and equipment in 1997, 1996 and 1995, respectively. The Company
has no material commitments for capital expenditures at December 31, 1997.
Cash used in financing activities totaled $5,657,000 in 1997 as compared to cash
provided by financing activities of $6,199,000 in 1996 and $2,061,000 in 1995.
In 1997, cash generated from operations and the sale of Pulsarr were used to
repay the remaining $1,265,000 principal balance of the Company's 10.25%
Convertible Note in April 1997, to repay early $2,500,000 of its $3,400,000
6.75% Convertible Note, at par, in September 1997 and to purchase 1,001,640
shares of the Company's Class A Common Stock and 640,000 warrants to purchase
Class A Common Stock for $1,962,000 in August 1997. In March 1996, the Company
received $2,000,000 from the sale of 1,400,000 shares of Class A Common Stock
pursuant to a private placement. In April 1996 and April 1995, the Company
received $3,000,000 and $2,000,000, respectively, representing the net proceeds
of private placements of convertible debt. The cash generated from these 1996
and 1995 transactions was used to finance the acquisition of Pulsarr and to
provide funds for working capital purposes.
As a result of the settlement in July 1992 of a lawsuit alleging certain patent
infringements, SRC entered into a royalty agreement whereby aggregate royalty
payments would not exceed $1,600,000. The final royalty payment of $400,000 was
made in July 1996. During the quarter ended March 31, 1996, the Company wrote
off against income $647,000 of deferred royalty expense related to this
settlement as all royalties had been earned and no significant future economic
life was estimated to exist.
Prior to 1995 and in 1996, the Company experienced negative operating cash flow.
The Company believes it will operate at a negative cash flow during certain
periods in the future due to payment of notes issued in connection with prior
financings and acquisitions, working capital requirements, the need to fund
certain development projects, cash required to enter new market areas and
possible cash needed to fully integrate Ventek's operations. Management believes
that the Company has sufficient cash to enable the Company to sustain its
operations and to adequately fund the cash flow expected to be used in operating
activities for the next twelve months. If the Company is unable to consistently
generate sustained positive cash flow from operations, the Company may have to
rely on debt or equity financing. There can be no assurance the Company will be
able to obtain future financing on terms satisfactory to the Company.
F-27
<PAGE>
Outlook
At this time, management believes sales will approximate $30,000,000 for 1998
which is approximately level with 1997 sales excluding Pulsarr. The effects of
international currency fluctuations are expected to negatively impact
operations. For example, with the recent decline in Indonesian currency, further
shipments to that market in the foreseeable future appear unlikely; last year,
this market represented over 6% of the Company's total sales. Additionally, with
the continued strength of the U. S. dollar, the Company's new European sales and
service subsidiary, SRC VISION BV, may have to reduce the price of its products
in Europe.
The Company expects that the plywood manufacturing market served by Ventek will
remain depressed until at least the second half of 1998 and possibly longer.
This will likely put pressure on gross margins in 1998.
During 1998, the Company will introduce new products targeted at the food and
plywood industries. The Company plans to continue emphasis on research and
development to penetrate new markets and provide expanded sales opportunities
for the Company during the next two years.
Inflation
The Company has not been materially affected by general inflation.
Form 10-K Annual Report
The information contained in this report is included as an exhibit to the
Company's annual report on Form 10-K filed with the Securities and Exchange
Commission. Copies of the Form 10-K report (without exhibits) may be obtained
free of charge upon written request to the Investor Relations Department,
Advanced Machine Vision Corporation, 2067 Commerce Drive, Medford, Oregon 97504,
or by calling 541-776-7700.
Market for the Company's Common Equity
The Company's Class A Common Stock has been quoted on the Nasdaq Stock Market
since March 10, 1992. The symbol is AMVC.
Common Stock Market Price
Per Share of Class A Common Stock:
Quarter Ended 1997 March 31 June 30 Sept. 30 Dec. 31
- ------------------ ---------- ---------- ---------- ----------
High $ 2.00 $ 1.94 $ 2.34 $ 2.38
Low 1.38 1.25 1.47 1.91
Quarter Ended 1996 March 31 June 30 Sept. 30 Dec. 31
- ------------------ ---------- ---------- ---------- ----------
High $ 2.50 $ 2.50 $ 2.19 $ 2.38
Low 1.50 1.56 1.50 1.56
On December 31, 1997, there were 114 and 21 record owners of the Company's Class
A and Class B Common Stock, respectively. The majority of outstanding shares of
Class A Common Stock are held of record by a nominee holder on behalf of an
unknown number of ultimate beneficial owners. The Company believes that the
total number of beneficial owners of its common shares was approximately 2,300.
The Company has not declared or paid any cash dividends upon its common stock
since its inception. The Company does not anticipate paying any cash dividends
in the foreseeable future. It is anticipated that earnings, if any, which may be
generated from operations will be used to finance the operations of the Company.
F-28
<PAGE>
<TABLE>
<CAPTION>
Directors, Corporate Officers, Operating Units and Other Information
<S> <C> <C>
Directors Corporate Officers Transfer Agent and Registrar
William J. Young William J. Young American Stock Transfer
Chairman of the Board, President President and Chief Executive and Trust Company
and Chief Executive Officer of the Officer New York, New York
Company
Alan R. Steel Independent Auditors
Haig S. Bagerdjian Vice President Finance, Chief Price Waterhouse LLP
Senior Vice President, Business Financial Officer and Secretary Portland, Oregon
Development and General Counsel,
Syncor International Corporation Lee J. Robinson Legal Counsel
Corporate Controller Troy & Gould Professional Corp.
Vikram Dutt and Assistant Secretary Los Angeles, California
President of
Aaron, Dutt & Edwards, Inc. Operating Units Public Relations
SRC VISION, Inc. Silverman Heller Associates
Dr. James Ewan Medford, Oregon Los Angeles, California
President and Chief Executive Dr. James Ewan, President
Officer of SRC VISION, Inc.
Ventek, Inc.
Robert M. Loeffler Eugene, Oregon
Attorney, Director of Rodger A. Van Voorhis, President
PaineWebber Group, Inc.
Jack Nelson
Chairman of the Board and Chief
Executive Officer of Caprius, Inc.
Rodger A. Van Voorhis
President of Ventek, Inc.
</TABLE>
F-29
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
December 31, 1997 financial statements and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000795445
<NAME> ADVANCED MACHINE VISION CORPORATION
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 6045
<SECURITIES> 0
<RECEIVABLES> 2891
<ALLOWANCES> 180
<INVENTORY> 5181
<CURRENT-ASSETS> 14075
<PP&E> 6732
<DEPRECIATION> 1957
<TOTAL-ASSETS> 25235
<CURRENT-LIABILITIES> 4942
<BONDS> 8342
0
0
<COMMON> 24285
<OTHER-SE> (12334)
<TOTAL-LIABILITY-AND-EQUITY> 25235
<SALES> 31974
<TOTAL-REVENUES> 31974
<CGS> 16042
<TOTAL-COSTS> 28585
<OTHER-EXPENSES> (4989) <F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1263
<INCOME-PRETAX> 7115
<INCOME-TAX> 99
<INCOME-CONTINUING> 7016
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7016
<EPS-PRIMARY> 0.64
<EPS-DILUTED> 0.49
<FN>
<F1>
OTHER-EXPENSES represents the gain on the sale of Pulsarr.
</FN>
</TABLE>
