SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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.)
3709 Citation Way #102
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
Preferred Share Purchase Rights
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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 10, 1999, was approximately $10,727000. (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, 1999, the registrant had 12,813,551 shares of Class A Common Stock
and 56,002 shares of Class B Common Stock, all no par value, issued and
outstanding.
See Page 22 for Exhibit Index
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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. 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. 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. 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 35 patents have resulted from these ongoing efforts.
Additionally, many more patent applications have been filed. 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 FMC Corporation ("FMC") 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.
In 1997, the Company established its Eindhoven-based European sales and
service center. The Company may add additional sales offices in the future.
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. In 1998, the Company entered a representative agreement
with FMC whereby FMC will act as a sales representative in many parts of
the world.
* 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 Fries,
Plastics recycling Whole Potatoes, Vegetables,
Polyethyl Teraphthalate
Green/Clear
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KROMA-SORT(R) Food processing, Vegetables, Plastic Flake
Plastics recycling
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SPECTRA-SORT(TM) Food processing, Potato Products, Cereals,
Plastics recycling Vegetables
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Length & Defect Food processing French Fries
Analyzer(TM)
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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
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"Sequoia Sentry" Plywood Veneer Softwood Veneer Production
Dryer Control System
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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 sectors 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 sectors. 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 sectors 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 applications 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. 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 utilizes the services of several manufacturers and sellers of
tobacco processing machinery systems worldwide, whereby such entities represent
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 80% of the North American softwood veneer production
lines, but has not yet penetrated foreign markets to any significant extent with
only eleven 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, Boise Cascade,
Champion International 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. For example, in 1998 the Company introduced
its Sequoia Sentry veneer dryer control system that measures moisture in veneer
exiting the dryer to determine if additional time in the dryer is necessary. 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. CAE
Machinery, Ltd. is the Company's exclusive distributor of the Pulp Wood Sorter
in North America.
Based on 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 be less than
the amount incurred in 1998. 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, 1996............................ $ 4,038,000
Fiscal year ended December 31, 1997............................ $ 3,950,000
Fiscal year ended December 31, 1998............................ $ 5,024,000
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, representatives, 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:
<TABLE>
<CAPTION>
Name and/or Potential
Type of Company Industry Application Description of Relationship
- ---------------------- ------------- ------------------- ---------------------------
<S> <C> <C> <C>
1. FMC Corporation Food Fruit and vegetable An exclusive and non-exclusiven sales
sorting representative agreement for the sale
of machine vision systems to the food
industry in many areas of the world.
2. CAE Machinery, Ltd. Pulp wood Wood chip sorting AMV seeks to capitalize on the
(major supplier to reputation of CAE in the technologically
the North American conservative forest products industry in
wood products in North America to speed the adoption of
industry) machine vision sorting technology in that
industry.
3. Columbia Forest Wood veneer Further automation Agreement to mutually explore further
Products of veneer processing automation of hardwood plywood manufacturing
processes.
4. Boise Casdade Wood veneer Further automation Agreement to develop dryer temperature control
of veneer processing and moisture detection for dried veneer panels.
5. COMAS, S.p.A. Tobacco Tobacco sorting COMAS contributes market access as well as
(manufacturer of extensive product handling experience for
tobacco processing improving AMV sorter designs to accelerate
equipment) market penetration with better performing
machines.
6. Union Carbide Plastics Recycling whole Processing of post-consumer colored HDPE
recycling bottles and (high-density polyethylene used for
plastic flakes translucent 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).
</TABLE>
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. 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. In 1998, the Company entered a
representation agreement with FMC to sell machine vision systems to the food
industry in many areas of the world.
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, but in some cases, up to one year) 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 high 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, 1998, 1997 and 1996 accounted for 33%, 33% and
53% of net sales, respectively. International sales as a percentage of net sales
in 1996 were greater than 1997 because of the acquisition of Pulsarr in 1996
which was sold in May 1997. Foreign sales are primarily denominated in U. S.
dollars, or, in some cases, Dutch guilders.
Backlog
AMV's backlog for its products was approximately $2,457,000 at December 31,
1998, as compared to $4,206,000 at December 31, 1997. 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 and lenses
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 that 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 25 United States patents, and has
applied for five other United States patents relating to its products, including
various inspection and detection systems. 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, 1998, the Company had 191 full-time employees, including 66 in
manufacturing, 45 in engineering, research and development, 50 in marketing,
sales and service and 30 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
================================================================================
AMV corporate offices occupy approximately 2,600 square feet of rented space in
Medford, Oregon pursuant to a three-year lease expiring in 2001. The lease is
renewable.
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 $3 million loan made by Bank of American
National Trust and Savings Association ("BofA"). The loan bears interest at 8.3%
and is due May 1, 2008. SRC also owns 3.4 acres of land adjacent to its facility
for possible future expansion.
Ventek occupies 12,000 square feet of a building located in Eugene, Oregon that
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 1998 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 1998 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 1998 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. The laser operations have been treated as a discontinued business in
the selected financial data.
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. 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 1998 Annual Report.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 27,041,000 $ 31,974,000 $ 29,938,000 $ 19,394,000 $ 11,922,000
Cost of sales 12,585,000 16,042,000 15,794,000 11,194,000 8,537,000
------------ ------------ ------------ ------------ ------------
Gross profit 14,456,000 15,932,000 14,144,000 8,200,000 3,385,000
Operating expenses 13,894,000 12,914,000 12,882,000 7,546,000 8,897,000
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 (403,000) (892,000) (960,000) 461,000 (37,000)
------------ ----------- ------------ ------------ ------------
Income (loss) from continuing operations 159,000 7,115,000 (5,260,000) 1,115,000 (5,549,000)
Loss from discontinued operations -- -- -- (173,000) (2,248,000)
Provision for (benefit from) income taxes (2,083,000) 99,000 -- -- --
------------ ----------- ------------ ------------ ------------
Net income (loss) $ 2,242,000 $ 7,016,000 $ (5,260,000) $ 942,000 $ (7,797,000)
============ ============ ============ ============ ============
Basic earnings (loss) per share:
Continuing operations $ 0.21 $ 0.64 $ (0.49) $ 0.12 $ (0.57)
Discontinued operations -- -- -- (0.02) (0.23)
------------ ------------ ------------ ----------- ------------
Total $ 0.21 $ 0.64 $ (0.49) $ 0.10 $ (0.80)
============ ============ ============ =========== ============
Diluted earnings (loss) per share:
Continuing operations $ 0.18 $ 0.49 $ (0.49) $ 0.11 $ (0.57)
Discontinued operations -- -- -- (0.02) (0.23)
------------ ------------ ------------ ----------- ------------
Total $ 0.18 $ 0.49 $ (0.49) $ 0.09 $ (0.80)
============ ============ ============ =========== ============
Weighted average number of common
stock outstanding 10,717,000 11,202,000 10,704,000 9,451,000 9,703,000
Balance Sheet Data:
Current assets $ 17,231,000 $ 14,075,000 $ 15,411,000 $ 10,391,000 $ 7,766,000
Current liabilities 5,131,000 4,942,000 9,498,000 3,501,000 3,181,000
Working capital 12,100,000 9,133,000 5,913,000 6,890,000 4,585,000
Net assets relating to discontinued
operations -- -- -- -- 393,000
Total assets 29,839,000 25,235,000 30,938,000 17,628,000 14,876,000
Long-term debt 7,862,000 8,342,000 14,940,000 4,875,000 2,737,000
Total shareholders' equity 16,846,000 11,951,000 6,500,000 9,252,000 8,958,000
</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 1998 Annual Report to stockholders.
Cautionary Statements and Risk Factors
The Company and its representatives may from time to time make written or oral
forward-looking statements with respect to long-term objectives or expectations
of the Company, including statements contained in the Company's filings with the
Securities and Exchange Commission, in its reports to stockholders and in
information provided in its web site.
The words or phrases "will likely," "are expected to," "is anticipated," "is
predicted," "forecast," "estimate," "project," "plans to continue," "believes,"
or similar expressions identify "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. In connection with the "Safe Harbor" provisions on the Private
Securities Litigation Reform Act of 1995, the Company is hereby identifying
important factors that could affect the Company's financial performance and
could cause the Company's actual results for future periods to differ materially
from any opinions or statements expressed with respect to future periods in any
current statements.
The Company cautions that the following list of important factors may not be all
inclusive, and it specifically declines to undertake any obligation to publicly
revise any forward-looking statements that have been made to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events. Among the factors that could have an impact
on the Company's ability to achieve its operating results and growth plan goals
and/or affect the market price of the Company's stock are:
* The Company's history of losses and negative cash flow.
* Fluctuations in quarterly operating results and seasonality in certain of
the Company's markets.
* Rapid technological change in the Company's markets and the need for new
product development.
* Market acceptance of the Company's new products.
* AMV's dependence on certain markets and the need to expand into new
markets.
* The lengthy sales cycle for the Company's products.
* The Company's highly competitive marketplace.
* The dependence on certain suppliers.
* The risks associated with dependence upon significant customers and
reliance on certain distributors.
* The risks associated with international sales.
* The uncertain ability to manage growth and integrate acquired businesses.
* Risks associated with acquisitions and other relationships.
* Dependence upon key personnel.
* The Company's ability to protect its intellectual property.
* The possibility of product liability or other legal claims.
* Exposure to possible warranty and litigation claims.
* The possible need for additional financing.
* The impact of the 1998 Shareholder Rights Plan.
* The inability of the Company or its suppliers or customers to remedy
potential problems with information systems related to the arrival of the
year 2000.
These risk factors are discussed in further detail below.
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 seasonality or
economic downturns in some markets and 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 $2.5 million due in
July 2000, 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, 1997 and 1998, 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.
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 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 customer plant shut-downs during which systems are installed. The
Company expects these patterns to continue.
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 the Company's products depend
in part on the continuing development and deployment of new technology and
services and applications. 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.
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 marketing its new
generation of 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.).
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, longer
product evaluation periods 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. The Company may not be
able to 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 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, the Company may not 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. Ventek's sales
have been to a relatively small number of multi-location plywood manufacturers.
In the emerging pulp wood industry, the Company utilizes a single exclusive
distributor for its products in North America. In 1998, the Company entered an
agreement with FMC Corporation to be its exclusive or nonexclusive sales
representative in much of the United States and in many areas in the rest of the
world. While the Company strives to create long-term relationships with its
customers, distributors and representatives, there can be no assurance that they
will continue ordering or selling additional systems. The Company may continue
to be dependent on a small number of customers, distributors and
representatives, 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 has been adversely affected by that country's currency devaluation
when compared to the U. S. dollar over the past few years. 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.
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. Pulsarr was subsequently
sold in May 1997. A growth strategy involving the integration of new entities,
such as Ventek, will require the establishment of a sales representative 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.
Risks Associated With 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 presently 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. For these
reasons, any acquisition or joint venture by the Company may have an adverse
effect on the Company's results of operations or may result in dilution to
existing shareholders. If additional attractive opportunities become available,
the Company may decide to pursue them actively. Any future acquisitions or joint
ventures may 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.
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, such patents may not 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, patent 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, the Company may not be able
to maintain product liability insurance on acceptable terms in the future.
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. In the past, the Company has incurred higher warranty expenses
related to new products than it typically incurs with established products. The
Company may 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, the Company may not 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 and preferred stock, warrants and stock options, a substantial
loss in 1996 and debt incurred for the acquisition of Ventek due in 2000, may
limit the Company's ability to negotiate additional debt or equity financing.
Shareholder 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.
In October 1998, FMC acquired 119,106 shares of the Company's Series B Preferred
Stock, which, if converted into common stock in accordance with its terms,
represented a 10% ownership position in the Company on that date. FMC also
received a five-year option to acquire 15% of the Company's outstanding common
stock on the date of exercise. While FMC's resulting beneficial ownership
exceeds 20%, the transaction was not a triggering event as defined in the Stock
Rights Plan since the acquisition of shares was directly from the Company. As
stated in a Schedule 13D filed with the Securities and Exchange Commission on
October 22, 1998, FMC's purpose was to invest in the Company and its technology.
FMC currently intends to review its investment position in the Company
periodically and, depending on such review and factors including market
conditions and share prices, the Company's business prospects, technology,
future developments and applicable legal requirements, FMC may seek to acquire
additional securities of the Company from time to time in the open market or in
negotiated transactions. In December 1998, the Company amended the Shareholder
Rights Plan to permit FMC to purchase on the open market up to 1,600,000 shares
of Class A Common Stock without such purchase being a triggering event.
While the Company is not aware of any other circumstance that might result in
the acquisition of 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.
Year 2000 Issues: AMV has established a company-wide initiative to examine the
implications of the Year 2000 on the Company's computing systems and related
technologies, and to assess the potential need for changes. The Company has
identified areas of potential business impact, and appropriate modifications to
its computing systems are underway. Management believes this will be
accomplished in a timely manner. The Company is also communicating with
suppliers and customers to coordinate Year 2000 conversion. Management does not
currently believe that the costs related to the Company's compliance with the
Year 2000 issue will have a material adverse effect on the Company's financial
position, results of operations or cash flows. However, in the event that the
Company or any of the Company's significant suppliers or customers experience
disruptions due to the Year 2000 issue, the Company's operations could be
adversely affected.
<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, 1999.
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, 1999.
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, 1999.
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, 1999.
<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 8, 1999 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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ William J. Young Chairman of the Board of Directors,
- -------------------------------------- Chief Executive Officer and President,
William J. Young Principal Executive Officer March 8, 1999
/s/ Alan R. Steel Chief Financial Officer, Principal
- -------------------------------------- Financial and Accounting Officer March 8, 1999
Alan R. Steel
/s/ Haig S. Bagerdjian Director March 11, 1999
- --------------------------------------
Haig S. Bagerdjian
/s/ Vikram Dutt Director March 10, 1999
- --------------------------------------
Vikram Dutt
/s/ James Ewan Director March 1, 1999
- --------------------------------------
James Ewan
Director March __, 1999
- --------------------------------------
Marc T. Giles
/s/ Robert M. Loeffler Director March 5, 1999
- --------------------------------------
Robert M. Loeffler
/s/ Jack Nelson Director March 8, 1999
- --------------------------------------
Jack Nelson
/s/ Rodger A. Van Voorhis Director March 11, 1999
- --------------------------------------
Rodger A. Van Voorhis
</TABLE>
<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.
Exhibit
Number Description
------- -----------
3.1 Restated Articles of Incorporation of the Company as amended
to date. (9)
3.2 Restated and Amended By-Laws of the Company. (2)
4.1 Form of Class G Warrant Agreement. (5)
4.2 Form of Class H Warrant Agreement. (8)
4.3 Form of Class I Warrant Agreement. (6)
4.4 Form of stock option plan and stock option agreement. (1)
4.5 Form of 1997 Restricted Stock Plan and restricted stock
agreement. (7)
4.6 Form of amendments to restricted stock agreements. (19)
4.7 Rights Agreement dated February 27, 1998 between the Company
and American Stock Transfer and Trust Company ("AST"). (13)
4.8 Amendment to Rights Agreement between the Company and AST.
(20)
4.9 Amendment to Class I Warrant Agreement. (15)
4.10 Form of Certificate of Determination for Series A Junior
Participating Preferred Stock. (16)
4.11 Form of Certificate of Determination for Series B Preferred
Stock. (18)
10.1 Form of Indemnity Agreement between the Company and each of
its officers and directors. (1)
10.2 Employment Agreement between Alan R. Steel and the Company
dated January 1, 1998. (14)
10.3 Employment Agreement between William J. Young and the Company
dated January 1, 1998. (14)
10.4 Employment Agreement between William J. Young and SRC VISION,
Inc. dated January 1, 1998. (14)
10.5 Employment Agreement between James Ewan and SRC VISION, Inc.
dated January 1, 1998. (14)
10.6 Asset Purchase Agreement dated September 22, 1995 between
Applied Laser Systems, Inc. and Coherent, Inc. (3)
10.7 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)
10.8 Stock Purchase Agreement dated March 1, 1996 between J. C.
Scholt and ARC Netherlands BV, a wholly-owned subsidiary of
the Company. (4)
10.9 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)
10.10 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)
10.11 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. (5)
10.12 Convertible Secured Note dated April 17, 1996, between the
Company and Ilverton International, Inc. (8)
10.13 $1,000,000 Note dated July 24, 1996, between AMV and Ventek.
(6)
10.14 $2,250,000 Convertible Note dated July 24, 1996, between AMV
and Ventek. (6)
10.15 $1,125,000 Note dated July 24, 1996, between AMV and Ventek.
(6)
10.16 Stock Appreciation Rights Agreement dated July 24, 1996
between AMV and Ventek. (6)
10.17 Stock Appreciation Rights Agreement dated July 24, 1996
between AMV and Ventek. (6)
10.18 Form of Employment Agreement dated July 24, 1996
between Ventek and each of the four stockholders of Ventek.
(6)
10.19 Pledge and Security Agreement dated July 24, 1996, by and
among AMV, AMV Subsidiary, Inc., Ventek and Solin and
Associates, P.C. (6)
10.20 1997 SRC VISION, Inc. Stock Option Plan and forms of stock
option agreements. (12)
10.21 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. (9)
10.22 Share Purchase Agreement dated April 29, 1997 between Barco NV
and ARC Netherlands BV. (10)
10.23 Settlement Agreement dated August 12, 1997. (11)
10.24 1997 Nonqualified Stock Option Plan and form of option
agreement. (11)
10.25 Business Loan Agreement dated April 30, 1998 between AMV and
Bank of America NT&SA, together with related documents. (17)
10.26 Promissory Note dated April 24, 1998 to Bank of America NT&SA,
together with related documents. (17)
10.27 $250,000 Note dated June 5, 1998 from Rodger A. Van Voorhis to
Ventek. (15)
10.28 Series B Preferred Stock Purchase Agreement between AMV and
FMC Corporation dated October 14, 1998. (18)
10.29 Intellectual Property and Security Agreement dated October 14,
1998 between SRC VISION, Inc. and FMC Corporation. (18)
10.30 1998 Senior Management and Director Stock Purchase Plan. (20)
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) Previously filed as an exhibit to Form S-3 (File No. 333-10847).
(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) 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.
(6) Filed with the SEC on July 30, 1996, as an exhibit to the Company's Form
8-K dated July 24, 1996.
(7) Filed with the SEC on January 22, 1997, as an exhibit to the Company's
Form 8-K dated January 9, 1997.
(8) 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.
(9) 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.
(10) Filed with the SEC on May 9, 1997 as an exhibit to the Company's Form
8-K regarding the sale of Pulsarr.
(11) 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.
(12) 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.
(13) Filed with the SEC on February 20, 1998 as an exhibit to the Company's
Form 8-A.
(14) 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.
(15) Filed with the SEC on June 15, 1998 as an exhibit to the Company's Form
8-K dated June 5, 1998.
(16) Filed with the SEC on February 27, 1998 as an exhibit to the Company's
Form 8-A dated February 27, 1998.
(17) Filed with the SEC on August 4, 1998 as an exhibit to the Company's Form
10-Q dated August 4, 1998.
(18) Filed with the SEC on October 19, 1998 as an exhibit to the Company's
Form 8-K dated October 14, 1998.
(19) Filed with the SEC on October 30, 1998 as an exhibit to the Company's
Form 10-Q dated October 30, 1998.
(20) Filed with the SEC on January 14, 1999 as an exhibit to the Company's
Form 8-K dated December 22, 1998.
(b) Reports on Form 8-K:
On October 19, 1998, a Form 8-K was filed with the SEC regarding the
completion of FMC's purchase of 119,106 shares of the Company's Series B
Preferred Stock.
On January 14, 1999, a Form 8-K was filed with the SEC regarding the
adoption of the 1998 Senior Management and Director Stock Purchase Plan
and an amendment to the Company's Stock Rights Agreement.
On February 16, 1999, a Form 8-K was filed with the SEC regarding the
restructuring of debt due to the former owners of Ventek.
<PAGE>
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
Annual Report Introduction, Financial Highlights and
Letter from President F-3
Financial Statements:
Consolidated Balance Sheets -
December 31, 1998 and 1997 F-7
Consolidated Statements of Operations -
Fiscal Years Ended December 31, 1998, 1997 and 1996 F-8
Consolidated Statements of Shareholders' Equity -
Fiscal Years Ended December 31, 1998, 1997 and 1996 F-9
Consolidated Statements of Cash Flows -
Fiscal Years Ended December 31, 1998, 1997 and 1996 F-10
Notes to Consolidated Financial Statements F-11
Management's Discussion and Analysis of Financial Condition
and Results of Operations F-25
Other Information F-30
Financial Statement Schedule:
Schedule VIII - Valuation and Qualifying Accounts F-32
Consent of Independent Accountants F-33
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 index
appearing under Item 14(a)(1) and (2) on Page 22 present fairly, in all material
respects, the financial position of Advanced Machine Vision Corporation and its
subsidiaries (the "Company") at December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Portland, Oregon
February 16, 1999
F-2
<PAGE>
Introduction
================================================================================
Advanced Machine Vision Corporation, through its SRC VISION, Inc. and Ventek,
Inc. subsidiaries, 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. 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.
The Company is headquartered in Medford, Oregon and currently has approximately
190 employees. Advanced Machine Vision Corporation's common stock is traded on
the Nasdaq Stock Market under the symbol AMVC.
Financial Highlights
================================================================================
<TABLE>
<CAPTION>
Statement of Operations Data
(in thousands, except percentages and per-share amounts)
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 27,041 $ 31,974 $ 29,938 $ 19,394 $ 11,922
Gross profit 14,456 15,932 14,144 8,200 3,385
Gross margin 53% 50% 47% 42% 28%
Income (loss) from continuing
operations before special items 142 2,027 302 383 (5,549)
Benefit from deferred income taxes 2,100 -- -- -- --
Gain on sale of Pulsarr -- 4,989 -- -- --
Charge for acquired in-process
technology -- -- (4,915) -- --
Charge for royalty expense -- -- (647) -- --
Gain from arbitration -- -- -- 732 --
Loss from discontinued operations -- -- -- (173) (2,248)
Net income (loss) 2,242 7,016 (5,260) 942 (7,797)
Basic income (loss) per share $ 0.21 $ 0.64 $ (0.49) $ 0.10 $ (0.80)
Shares outstanding 10,720 10,679 11,250 9,423 8,951
- -------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 29,839 $ 25,235 $ 30,938 $ 17,628 $ 14,876
Total debt 8,652 8,369 16,646 4,897 2,759
Shareholders' equity 16,846 11,951 6,500 9,252 8,958
===================================================================================================================
</TABLE>
F-3
<PAGE>
Letter from the President
================================================================================
Dear Fellow Shareholders:
Difficult worldwide economic conditions led to disappointing operating results
in 1998. Order levels were significantly lower during the second half with
consequently reduced sales levels extending into 1999. Some international
customers exercised caution by postponing capital projects that included our
vision systems.
On the technology front, however, 1998 proved to be another year of significant
advancement for Advanced Machine Vision Corporation. Major new products were
introduced, culminating multi-year research and development efforts. In October,
we expanded our relationship with FMC Corporation with FMC emphasizing its
commitment to sell our machine vision systems in many parts of the world by
purchasing a 10% interest in AMV.
Building for the Future with New Products and Technology
The foundation of AMV's future is continued product development. Although large
research and development expenditures have reduced reported income in the past,
our efforts have produced new and enhanced products that should provide expanded
sales and profit opportunities.
In November of 1998, AMV's SRC VISION subsidiary demonstrated its next
generation machine vision system at the International Exposition for Food
Processors trade show in Chicago. The new platform not only includes an
innovative mechanical design, but a new processing architecture housed in a
stylized controller containing state-of-the-art operating components. The new
design incorporates major improvements in the areas of aesthetics, cleanliness,
serviceability and reliability. Much of the previously exposed cabling will be
enclosed in the environmentally controlled housing; other new features make
in-plant maintenance easier. New processing architecture contains improved color
recognition, customer algorithms for specific products (for color, size and
shape), the ability to recognize ten times more pixels per second and a platform
that supports incremental programming improvements. Best of all, our new system
will keep the same footprint and maintain its flexibility of modularity,
allowing for cost-effective configuration adaptations and technology upgrades.
We expect the new generation of optical sorters for the food industry will begin
to contribute to sales during the second half of 1999.
Also in the fourth quarter, Ventek installed its first "Sequoia Sentry" dryer
management control system for the plywood industry. The dryer system eliminates
the mismarking of veneer exiting the dryer, improving dryer productivity and
veneer quality. Sequoia Sentry continuously looks at the percentage of re-dry
and over-dry, adjusting the dryer speed accordingly, providing a more responsive
control system. Sequoia Sentry eliminates the cycles of over-compensation--no
more wide swings in dryer speed, yielding too much over-dry followed by too much
re-dry. Sequoia Sentry also builds a database of valuable information for plant
operators. Its high-speed processors, Windows NT-based software and built-in
networking capabilities make its data easily accessible for other computers in
the plant. From a central location, plant operators can now pinpoint
inefficiencies in dryer operations.
These and other innovations have enabled AMV to extend its technology lead in
machine vision systems used in defect detection and removal, and have increased
our ability to control other manufacturing processes for our customers. We
expect process control to become a larger part of AMV's business in the future.
Building a Worldwide Selling Network
In the food industry, which makes up about 50% of total AMV sales, we entered
into a representative agreement with FMC Corporation's FoodTech Division, one of
the world's leading producers of machinery and equipment for food processing and
agriculture applications. AMV's SRC VISION subsidiary will work closely with FMC
FoodTech's Food Systems and Handling Division to develop specialized FMC in-feed
and take-away conveying equipment to optimize the performance of SRC VISION's
optical sorting equipment for the customer. Longer term, SRC VISION and FMC
FoodTech will work together to develop new machine vision applications for the
existing FMC FoodTech customer base.
F-4
<PAGE>
In October 1998, the relationship between the two companies was enhanced by
FMC's purchase of 119,106 shares of AMV Series B Preferred Stock for $2.6
million. The preferred stock is convertible into 1,191,060 shares of common
stock at $2.20 per share, which, if converted, would represent a 10% ownership
position based on the current number of AMV common shares outstanding (please
refer to the financial statements for a more complete description of the
preferred stock transaction). Concurrent with the investment, Marc T. Giles,
General Manager of FMC FoodTech's Food Systems and Handling Division, was
elected to AMV's Board of Directors, increasing the size of the board from seven
to eight members. FMC's investment and the new board member represent an
increased commitment to the long-term market acceptance and growth of AMV's
proprietary technologies. We are looking forward to a mutually beneficial
relationship.
During 1998, AMV expanded its sales capability by almost doubling the size of
its customer service organization. In the tobacco industry, initial contacts
were made with three additional designers, fabricators and installers of
manufacturing equipment who may represent SRC tobacco machine vision systems in
the future.
Progress in Meeting our Long-Term Goals
As stated in last year's Annual Report, our three major goals are: (i) to
achieve long-term sales and income growth, (ii) to simplify AMV's capital
structure and (iii) to gain recognition for our products and growth potential in
the financial and commercial marketplace. 1998 and early 1999 progress toward
these goals is discussed below.
To achieve sales and income growth, AMV must continue to offer our customers the
best solution for their quality needs. I have described several new products
developed in 1998 and want to reiterate our commitment to remain the industry
leader in machine vision systems utilizing all five critical components:
lighting, cameras, processors, software and mechanical design. AMV is one of the
few companies in the vision systems industry that offers this complete solution.
Statistical operating results in 1998 appear elsewhere in this report. Sales
were lower in 1998 than in the prior year, primarily due to the exclusion of
Pulsarr, which was sold in 1997. We are seeing customers extending the time for
making purchasing decisions, which sometimes involves lengthy trial periods.
Additionally, global economic instability caused some customers to postpone
projects that included our systems. While we cannot predict the impact on AMV of
continued economic turmoil, we believe our focus on technology will enable us to
sustain long-term growth. One indication of the added value provided by AMV's
machine vision systems is the achievement of consistently greater gross margins
in the face of increasing competition. In 1998, gross margin was 53%, the fourth
consecutive year of increase.
Lower 1998 operating results reflect greater selling and R&D expenses as well as
costs incurred to redefine and enhance SRC's basic internal systems to prepare
SRC for future growth. Significant R&D was expended in the fourth quarter to
finalize SRC's next generation machine vision system for the food industry. We
are confident that this effort will yield positive long-term results.
AMV's capital structure was significantly simplified in 1998 and early 1999.
Through expiration or negotiation, warrants to purchase 12.7 million shares of
common stock were eliminated. Debt due to the former owners of Ventek was
restructured to postpone from 1999 to 2000 the payment of $2,500,000. After
including the preferred stock sold to FMC and the effects of the Ventek debt
restructuring, the cumulative number of outstanding and potentially issuable
shares for warrants and convertible securities declined 42% during the year.
With respect to our third major goal, the completion of the strategic
relationship with FMC and the continued acceptance of our products confirmed our
image as the technology leader in our industry over those of our competitors. In
1998, we participated in head-to-head demonstrations with several competitors
and emerged as the successful solution.
We have maintained our public relations program to the financial community by
participating in investor conferences and numerous meetings with analysts,
brokers and investment advisors. We will continue an open and candid dialog with
our stockholders and these other constituents to maintain the credibility we
have built. AMV is now followed by The Red Chip Review and Stonegate Securities,
Inc. Red Herring Online and Oregon Business Magazine featured AMV in November
and December. We are encouraged by the reception we have received. The
combination of this ongoing effort, long-term sales and earnings growth through
technology innovation, and capital structure simplification is aimed to increase
AMV shareholder value.
F-5
<PAGE>
Summary
We recognized early in 1998 that the year would be somewhat difficult due to
factors beyond our control. As I have said many times, AMV's value should not be
judged based on a single quarter's or year's results, but the business basics
that form its foundation. That foundation is technology that provides the means
for our customers to achieve consistently high product quality at a reasonable
cost. Our customers are competing in a worldwide marketplace, which demands a
consistent quality standard. AMV technology innovations help set that quality
standard.
At this time, I expect 1999 results to approach those of 1998. We anticipate a
return to increasing sales during the second half of 1999.
Sincerely,
William J. Young
Chairman, President and CEO
Safe Harbor Statement under the Private Securities Litigation Act of 1995:
Statements in this Annual Report that are forward-looking statements are subject
to various risks and uncertainties, such as the Company's ability to sustain
adequate customer order levels, the impact of international economic conditions
on our markets, the ability of the Company to successfully introduce new
products, the possible negative impact of competitive products and/or pricing,
the uncertainty as to whether the relationship with FMC will help contribute to
revenues, the Company's ability to sustain a positive cash flow, the impact of a
strengthened of U.S. currency on the Company's ability to compete effectively in
the foreign markets and the effect of these factors on the market price of the
Company's Class A Common Stock. Investors are encouraged to review a more
comprehensive listing of cautionary statements and risk factors contained in the
Company's Forms 10-K and 10-Q SEC filings.
F-6
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Advanced Machine Vision Corporation
Consolidated Balance Sheets
- -------------------------------------------------------------------------------------------------------------------
December 31,
--------------------------------
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 4,423,000 $ 6,045,000
Accounts receivable, net of allowance for doubtful
accounts of $230,000 and $180,000 at
December 31, 1998 and 1997, respectively 4,073,000 2,711,000
Inventories (Note 2) 7,379,000 5,181,000
Prepaid expenses 181,000 138,000
Current deferred tax asset (Note 7) 1,175,000 --
------------- -------------
Total current assets 17,231,000 14,075,000
Property, plant and equipment - net (Notes 3 and 6) 5,274,000 4,775,000
Intangible assets, net (Note 4) 4,894,000 5,535,000
Deferred tax asset (Note 7) 925,000 --
Other assets 1,515,000 850,000
------------- -------------
$ 29,839,000 $ 25,235,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 984,000 $ 1,436,000
Accrued liabilities (Notes 5 and 9) 997,000 1,146,000
Customer deposits 1,151,000 1,073,000
Accrued payroll 761,000 783,000
Warranty reserve 448,000 477,000
Current portion of notes payable (Note 6) 790,000 27,000
------------- -------------
Total current liabilities 5,131,000 4,942,000
------------- -------------
Notes payable, less current portion (Note 6) 7,862,000 8,342,000
------------- -------------
Commitments and contingencies (Note 9)
Shareholders' equity (Notes 8 and 10):
Preferred stock 2,579,000 --
Common stock:
Class A and B - 10,720,000 and 10,679,000 shares issued and
outstanding at December 31, 1998 and 1997, respectively 24,329,000 24,285,000
Common stock warrants 110,000 2,197,000
Additional paid in capital 4,910,000 2,823,000
Accumulated deficit (15,112,000) (17,354,000)
Cumulative translation adjustment 30,000 --
------------- -------------
Total shareholders' equity 16,846,000 11,951,000
------------- -------------
$ 29,839,000 $ 25,235,000
============= =============
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Advanced Machine Vision Corporation
Consolidated Statements of Operations
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales $ 27,041,000 $ 31,974,000 $ 29,938,000
Cost of sales 12,585,000 16,042,000 15,794,000
------------ ------------ ------------
Gross profit 14,456,000 15,932,000 14,144,000
------------ ------------ ------------
Operating expenses:
Selling and marketing 4,762,000 4,930,000 4,662,000
Research and development 5,024,000 3,950,000 4,038,000
General and administrative 3,413,000 3,303,000 3,549,000
Goodwill amortization 695,000 731,000 633,000
Charge for acquired in-process technology -- -- 4,915,000
Charge for royalty expense -- -- 647,000
------------ ------------ ------------
13,894,000 12,914,000 18,444,000
------------ ------------ ------------
Income (loss) before other income and expense 562,000 3,018,000 (4,300,000)
Other income and expense:
Gain on sale of Pulsarr -- 4,989,000 --
Investment and other income 286,000 371,000 190,000
Interest expense (689,000) (1,263,000) (1,150,000)
------------ ------------ ------------
Income (loss) before income taxes 159,000 7,115,000 (5,260,000)
Provision for (benefit from) income taxes (Note 7) (2,083,000) 99,000 --
------------ ------------ ------------
Net income (loss) $ 2,242,000 $ 7,016,000 $ (5,260,000)
============ ============ ============
Earnings (loss) per share (Note 10):
Basic $ 0.21 $ 0.64 $ (0.49)
Diluted $ 0.18 $ 0.49 $ (0.49)
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Advanced Machine Vision Corporation
Consolidated Statements of Shareholders' Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Series B Class A, B and Accumulated
Preferred Stock E Common Stock Common Additional Other Compre-
-------------------- ----------------------- Stock Paid in Accumulated Comprehensive hensive
Shares Amount Shares Amount Warrants Capital Deficit Income Income
------ ------ ------ ------ ---------- ---------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995 -- $ -- 9,920,000 $23,750,000 $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) $ (50,000)
Net loss -- -- -- -- -- -- (5,260,000) -- (5,260,000)
-------- ---------- ---------- ----------- ---------- --------- ----------- --------- ------------
Balance, December 31,
1996 -- -- 11,250,000 25,720,000 2,403,000 2,797,000 (24,370,000) (50,000)
Comprehensive loss 1996 $ (5,310,000)
============
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 $ 50,000
Net income -- -- -- -- -- -- 7,016,000 -- 7,016,000
-------- ----------- ---------- ----------- ---------- ---------- ---------- -------- ------------
Balance, December 31,
1997 -- -- 10,679,000 $24,285,000 2,197,000 2,823,000 17,354,000) --
Comprehensive income 1997 $ 7,066,000
============
Expiration of warrants -- -- -- -- (2,087,000) 2,087,000 -- --
Exercise of options -- -- 8,000 8,000 -- -- -- --
Issuance of
restricted stock -- -- 33,000 36,000 -- -- -- --
Issuance of
preferred stock 119,106 2,579,000 -- -- -- -- -- --
Translation adjustment -- -- -- -- -- -- -- 30,000 $ 30,000
Net income -- -- -- -- -- -- 2,242,000 -- 2,242,000
-------- ----------- ---------- ----------- ---------- ---------- ------------ -------- ------------
Balance, December 31,
1998 119,106 $ 2,579,000 10,720,000 $24,329,000 $ 110,000 $4,910,000 $(15,112,000) $ 30,000
======== =========== ========== =========== ========== ========== ============ ========
Comprehensive income 1998 $ 2,272,000
============
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
F-9
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Advanced Machine Vision Corporation
Consolidated Statements of Cash Flows
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------------------
1998 1997 1996
------------- ------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,242,000 $ 7,016,000 $ (5,260,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Benefit from deferred income taxes (2,100,000) -- --
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 --
Depreciation and amortization 1,610,000 1,369,000 1,263,000
Changes in assets and liabilities
(net of amounts purchased/sold in
acquisition/divesture):
Accounts receivable (1,363,000) 11,000 (1,741,000)
Inventories (2,199,000) (499,000) (581,000)
Prepaid expenses and other assets (760,000) (186,000) 156,000
Accounts payable, accrued liabilities, customer
deposits, accrued payroll and warranty reserve (539,000) 842,000 51,000
------------- ------------- -------------
Net cash provided by (used in) operating activities (3,109,000) 3,797,000 (950,000)
------------- ------------- -------------
Cash provided by (used in) investing activities:
Proceeds from sale of Pulsarr -- 7,010,000 --
Acquisition of Pulsarr/Ventek - net -- -- (5,984,000)
Purchases of property and equipment (1,383,000) (1,014,000) (1,527,000)
------------- ------------- -------------
Net cash provided by (used in) investing activities (1,383,000) 5,996,000 (7,511,000)
------------- ------------- -------------
Cash provided by (used in) financing activities:
Notes payable to bank and others - net 283,000 (3,792,000) 4,621,000
Proceeds from preferred stock issuance 2,579,000 -- --
Proceeds from common stock issuances -- -- 1,896,000
Proceeds from exercise of stock options 8,000 97,000 82,000
Repurchase of Class A Common Stock and Warrants -- (1,962,000) --
Debt issuance costs -- -- (400,000)
------------- ------------- -------------
Net cash provided by (used in) financing activities 2,870,000 (5,657,000) 6,199,000
------------- ------------- -------------
Net increase (decrease) in cash (1,622,000) 4,136,000 (2,262,000)
Cash and cash equivalents, beginning of the period 6,045,000 1,909,000 4,171,000
------------- ------------- -------------
Cash and cash equivalents, end of the period $ 4,423,000 $ 6,045,000 $ 1,909,000
============= ============= =============
Supplemental cash flow information:
Cash paid for:
Interest $ 583,000 $ 939,000 $ 809,000
Income taxes $ 62,000 $ 20,000 $ --
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
F-10
<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 (inactive) 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. (inactive).
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 applications, 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 11).
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
January 3, 1999, December 28, 1997 and December 29, 1996. 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 11). 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.
F-11
<PAGE>
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 $7,536,000 and
$7,482,000 as of December 31, 1998 and 1997, respectively. Intangible assets are
being amortized on the straight-line basis over seven to fifteen years (see Note
4). Accumulated amortization aggregated $2,642,000 and $1,947,000 as of December
31, 1998 and 1997, 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 1998, 1997 and 1996
have been computed in accordance with Statement of Financial Accounting
Standards No. 128 (FAS 128), "Earnings per Share."
Changes in Classification: Certain reclassifications have been made to the
fiscal 1997 and 1996 financial statements to conform with the financial
statement presentation for fiscal 1998. 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, 1998.
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.
Comprehensive Income: The Company has adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" as of January 1, 1998.
Translation adjustments represent the Company's only Other Comprehensive Income
item.
Note 2 - Inventories
================================================================================
Inventories consist of the following:
December 31,
--------------------------------
1998 1997
------------- -------------
Raw materials $ 2,837,000 $ 1,584,000
Work-in-process 1,563,000 1,359,000
Finished goods 2,979,000 2,238,000
------------- -------------
$ 7,379,000 $ 5,181,000
============= =============
Note 3 - Property, Plant and Equipment
================================================================================
Property, plant and equipment consist of the following:
December 31,
--------------------------------
1998 1997
------------- -------------
Land $ 1,338,000 $ 879,000
Buildings 3,734,000 3,589,000
Machinery and equipment 869,000 700,000
Furniture, fixtures and office equipment 2,026,000 1,564,000
------------- -------------
7,967,000 6,732,000
Less: accumulated depreciation (2,693,000) (1,957,000)
------------- -------------
$ 5,274,000 $ 4,775,000
============= =============
Substantially all of the property, plant and equipment is secured by a note
payable (see Note 6). Depreciation expense aggregated $915,000, $638,000 and
$630,000, respectively, for 1998, 1997 and 1996.
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. In 1998, the
warrant was reduced to 250,000 fully vested shares, and was subsequently
eliminated upon the restructuring of the acquisition notes (see Note 6). 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 that Pulsarr was sold at the beginning of 1997. However, the proforma
combined balances are not necessarily indicative of balances which would have
resulted had the divestiture occurred as of the beginning of such periods
presented. Proforma condensed combined statements of operations are presented
below:
1997
Proforma
(unaudited)
-------------
Sales $ 29,416,000
=============
Gross profit $ 15,014,000
=============
Net income $ 2,018,000
=============
Earnings per share:
Basic $ 0.18
=============
Diluted $ 0.16
=============
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,
--------------------------------
1998 1997
------------- -------------
Commissions $ 359,000 $ 356,000
Interest 317,000 211,000
Legal claims and fees 113,000 181,000
Income taxes 34,000 79,000
Other 174,000 319,000
------------- -------------
$ 997,000 $ 1,146,000
============= =============
Note 6 - Financing Arrangements
================================================================================
The Company has a line of credit with a commercial bank that provides for a
secured operating line of credit up to $2,000,000. At the option of the Company,
interest is stated at the prime rate or at an "offshore rate" plus 1.85%. The
Business Loan Agreement governing the line of credit contains covenants
requiring certain levels of liquid assets, tangible equity and working capital.
At December 31, 1998, the Company had no borrowings under the line and was in
compliance with all covenants. The line expires on April 30, 1999.
Long-term debt consists of the following:
December 31,
--------------------------------
1998 1997
------------- -------------
Mortgage note (SRC) $ 2,979,000 $ 2,690,000
6.75% convertible note 900,000 900,000
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
------------- -------------
8,658,000 8,369,000
Less: current maturities (790,000) (27,000)
------------- -------------
$ 7,868,000 $ 8,342,000
============= =============
The SRC mortgage note is payable to a bank in monthly installments of $24,000
including interest at 8.3%, with the remaining unpaid balance due on May 1,
2008. The note is secured by substantially all of SRC's property, plant and
equipment and is guaranteed by the Company. The loan agreement contains certain
covenants and restrictions including limitations on incurrence of debt.
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 presently bear interest at 10.25% 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 340,000 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.
In February 1999, the Ventek notes were restructured. $750,000 of the $1,000,000
note was prepaid, and the maturity date of the remaining $250,000 was extended
to July 23, 2000. The maturity date of the $2,250,000 note was extended to July
23, 2000. The $1,125,000 note was paid in full by delivery of 1,800,000
restricted shares (see Note 10) and the stock appreciation rights were
cancelled.
As of December 31, 1998, the aggregate amount of minimum maturities of long-term
debt, as adjusted for the Ventek debt restructuring, are as follows:
1999--$790,000; 2000--$4,072,000; 2001--$946,000; 2002--$50,000; 2003--$55,000
and thereafter $2,745,000.
Note 7 - Income Taxes
================================================================================
<TABLE>
<CAPTION>
Income (loss) before income taxes is composed of the following:
1998 1997 1996
------------ ------------- --------------
<S> <C> <C> <C>
Domestic $ 366,000 $ 2,143,000 $ 75,000
Foreign (207,000) 4,972,000 (5,335,000)
------------ ------------ --------------
$ 159,000 $ 7,115,000 $ (5,260,000)
============ ============ ==============
The components of the provision
for income taxes are as follows:
1998 1997 1996
---- ---- ----
Federal:
Current $ 17,000 $ 99,000 $ --
Deferred 59,000 870,000 (124,000)
------------ ------------ --------------
Total federal 76,000 969,000 (124,000)
------------ ------------ --------------
State:
Deferred 15,000 107,000 (14,000)
------------ ------------ --------------
Total state 15,000 107,000 (14,000)
------------ ------------ ---------------
Increase (decrease) in valuation allowance (2,174,000) (977,000) 138,000
------------ ------------ --------------
Total provision $ (2,083,000) $ 99,000 $ --
============ ============ ==============
</TABLE>
The tax effect of temporary differences between financial reporting and the tax
bases of assets and liabilities relate to the following:
December 31,
-----------------------------
1998 1997
------------ ------------
Deferred tax asset:
Loss carry-forwards $ 4,686,000 $ 4,957,000
Property basis differences 876,000 576,000
Reserves and accruals 563,000 634,000
Research and development costs 69,000 109,000
Alternative minimum taxes 77,000 69,000
------------ ------------
6,271,000 6,345,000
Deferred tax asset valuation allowance (4,171,000) (6,345,000)
------------ ------------
Net deferred tax asset $ 2,100,000 $ --
============ ============
The net reduction in the valuation allowance of $977,000 in 1997 was the result
of the utilization of the net operating loss carry-forwards to reduce current
income taxes, partially offset by the net changes in temporary differences.
The net reduction in the valuation allowance of $2,174,000 in 1998 was the
result of the utilization of the net operating loss carry-forwards to reduce
current income taxes, partially offset by the net changes in temporary
differences, and to recognize a deferred tax asset of $2,100,000. The recognized
deferred tax asset is based upon expected utilization of the temporary
differences as well as a portion of the net operating loss carry-forwards.
The Company has assessed its past earnings history and trends, budgeted sales
and the expiration dates of carry-forwards and has determined that it is more
likely than not that $2,100,000 of the deferred tax asset will be realized. The
remaining valuation allowance of $4,171,000 is maintained against the net
operating loss carry-forwards, which the Company has determined may not be
realized.
The Company has net operating loss carry-forwards of approximately $12,300,000.
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 $5,800,000 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.
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,
-------------------------------------------------
1998 1997 1996
-------------- ------------- -------------
<S> <C> <C> <C>
Provision for (benefit from) income taxes
at federal statutory rate $ 124,000 $ 2,419,000 $ (1,788,000)
State taxes (benefit) 15,000 107,000 (259,000)
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 (271,000) (1,302,000) 191,000
Deferred tax valuation allowance (1,903,000) 370,000 138,000
Alternative Minimum Tax 17,000 99,000 --
Other (65,000) 102,000 47,000
-------------- ------------- -------------
$ (2,083,000) $ 99,000 $ --
============== ============= =============
</TABLE>
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, 1998, and their respective weighted
average exercise price per share:
Weighted
Shares Average
Under Option Price Per Share
------------ ---------------
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
Granted 528,000 1.86
Exercised (8,000) 1.00
Canceled (539,000) 4.05
----------- ------
Balance at December 31, 1998 3,430,000 $ 1.55
=========== ======
<TABLE>
<CAPTION>
The following table sets forth information about stock options outstanding at
December 31, 1998:
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
- -------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
1.00 1,315,000 6 years 1.00 1,315,000 1.00
1.19-2.19 1,900,000 8 years 1.77 381,000 1.71
3.00 215,000 5 years 3.00 215,000 3.00
----------- -----------
3,430,000 1,911,000
=========== ===========
</TABLE>
As of December 31, 1998 there were 429,000 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, 1998, there were 317,000 options under grant and 79,000
shares available for future grant under the SRC Plan.
Disclosure Requirements of Statement of Financial Accounting Standards No. 123
("FAS 123"): The Company has elected to account for its stock-based compensation
plans under APB 25. FAS 123 requires that the Company provide proforma
information regarding net income and earnings per share as if the Company had
accounted for the stock options granted under the fair value method of the
statement. The fair value of options granted was estimated using the
Black-Scholes model. The Company's proforma information follows:
1998 1997
------------ ------------
Proforma net income $ 1,746,000 $ 6,807,000
Proforma diluted earnings per share $ 0.14 $ 0.46
The fair value of the options granted was $1.05 and $1.04 in 1998 and 1997,
respectively, and estimated using the following weighted average assumptions:
1998 1997
------------ ------------
Risk-free interest rate 5.32% 6.12%
Dividend yield 0% 0%
Expected life of option 5 years 5 years
Volatility factor 61% 63%
The above information is based on historical activity and may not represent
future trends.
Note 9 - Commitments and Contingencies
================================================================================
AMV is a party to several lawsuits 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
================================================================================
Series B Preferred Stock: In October 1998, the Company sold 119,106 shares of
Series B Preferred Stock (the entire authorized number of such shares) to FMC
Corporation ("FMC") for $2,579,000. The preferred stock is convertible into
1,191,060 shares of Class A Common Stock ("Common Stock"), which, if converted,
represents a 10% ownership position based on the number of common shares
outstanding on the transaction date. Each share of preferred stock is allowed
ten votes in matters placed before the common stockholders except in the
election of directors, in which case FMC has the right to elect one director.
The preferred stock pays no dividends. The preferred stock has a $22-per-share
liquidation preference. FMC also has a five-year one-time option to purchase a
number of shares of Common Stock equal to 15% of the shares outstanding on the
exercise date at a price equal to the greater of the then-current market value
(as defined) of the Common Stock or $2.20 per share.
So long as any shares of preferred stock are outstanding, the Company must
obtain the consent of the holders of a majority of the then-outstanding shares
of preferred stock to (i) take any action which adversely alters or changes or
may adversely alter or change the rights, preferences or privileges of the
Series B Preferred Stock; (ii) increase or decrease the authorized number of
shares of Series B Preferred Stock; (iii) create (by reclassification or
otherwise) any class or series of shares having rights, preferences or
privileges senior to or on a parity with the Series B Preferred Stock; (iv)
redeem or repurchase any shares of capital stock except in certain instances;
(v) merge with or into any other entity or enter into any other corporate
reorganization, recapitalization, sale of control or any transaction that,
directly or indirectly, results in the sale, license, lease, transfer,
conveyance or other disposition of all or substantially all of the assets or
properties of the Company; (vi) sell, license, lease, transfer, convey or
otherwise dispose of the Company's intellectual property in which FMC received a
security interest; (vii) amend or waive any provision of the Company's Articles
of Incorporation or By-laws; (viii) acquire assets or securities of another
person or entity if the aggregate consideration paid in all such transactions
(other than those in the ordinary course of business) combined exceeds
$2,000,000 or any one such transaction exceeds $500,000; (ix) issue any
additional equity securities or any other securities convertible or exchangeable
into equity securities (other than issuance of shares of Common Stock pursuant
to employee stock options or other employee stock plans in effect as of the FMC
transaction date and, with the approval of the Board of Directors, shares of
Common Stock to unrelated third parties, in arms-length transactions that do not
exceed 100,000 shares for any fiscal year); or (x) approve the liquidation,
dissolution or winding up of the Company.
The provisions of the preferred stock also provide that if FMC desires to
transfer the preferred stock, the Company has the right of first refusal to
acquire such shares. For as long as the preferred stock is outstanding, if the
Company intends to issue equity securities other than to FMC, or as permitted,
FMC shall have the right to acquire a portion of such securities to retain its
percentage ownership immediately prior to such issuance.
The Company and FMC also entered a Representative Agreement whereby FMC would
undertake to sell the Company's machine vision products to the food processing
industry in many areas of the world. The Representative Agreement may be
terminated for or without cause. Each share of Series B Preferred Stock shall
automatically be converted into shares of Common Stock upon the later of (i) the
third anniversary of the date of issuance or (ii) the sixtieth day after the
termination of the Representative Agreement.
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, 1998, there were 10,664,000 shares of Class A Common Stock and 56,000 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.
In 1998, Class A, B, C and D Warrants to purchase approximately 11.7 million
shares of Class A Common Stock expired. Also in 1998, Class I Warrants to
purchase 750,000 shares of Class A Common Stock were eliminated. In 1999, the
remaining 250,000 Class I Warrants were eliminated as part of the Ventek debt
restructuring (see Note 6). 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 Common
Stock.
Schedule of Outstanding Stock, Warrants, Convertible Debt and Potential
Dilution: The following table summarizes outstanding common stock as of December
31, 1998, potential dilution to the outstanding common stock upon exercise of
warrants and conversion of convertible debt remaining after (i) the February 9,
1999 restructuring of Ventek debt (see Note 6) and issuance of 350,000 shares of
restricted stock, and (ii) the February 28, 1999 expiration of 240,000 Class G
Warrants, 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>
Proforma
Number or Principal Class A Common Stock Exercise or Proceeds
Amount Outstanding After Exercise or Conversion or Debt
Security at February 28, 1999 Conversion Price Reduction
---------------------------- -------------------- -------------------- ----------- ---------
<S> <C> <C> <C> <C>
Common Stock: 12,870,000
Warrants (expiration date):
J (9/30/99) 300,000 300,000 $ 2.03 $ 608,000
------------ ------------
Convertible Debt (due date):
6.75% Notes (4/16/01) $ 900,000 423,000 2.13 900,000
6.75% Ventek Note (7/23/00) $ 2,250,000 1,000,000 2.25 2,250,000
------------ ------------
1,423,000 3,150,000
------------ ------------
Preferred Stock: 119,100 1,191,000
------------
Potentially outstanding shares
and proforma proceeds and
reduction of debt 15,784,000 $ 3,758,000
============ ============
</TABLE>
The proforma amounts above are for illustrative purposes only. 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, 1998, AMV had outstanding options to purchase
3,430,000 shares of Class A Common Stock, 2,798,000 of which are under its stock
option plans (see Note 8).
The existence of these outstanding warrants, options, and convertible
securities, including options that may be granted under AMV's stock option plans
or otherwise, 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 the 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
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 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 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.
In February 1999, the Company's Board of Directors awarded 350,000 shares of
restricted Common Stock to four key employees of the Company. The shares cannot
be traded or transferred unless a payment of $1.25 per share is made by the
employee to AMV between February 1, 2000 and January 31, 2001. If this condition
is not met, the related shares 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 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 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 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.
In December 1998, the Rights Plan was amended to permit FMC to acquire up to
1,600,000 shares of AMV Common Stock on the open market without causing a
triggering event.
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,
----------------------------------------------------------------------------------
1998 1997 1996
---------------------- ----------------------- ---------------------
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 $ 2,242 10,717 $ 7,016 11,202 $(5,260) 10,704
Reduction for contingently
returnable shares as all
conditions were not
met as of period end -- (200) -- (200) -- --
--------- -------- --------- -------- ------- ---------
Income (loss) available to
common shareholders $ 2,242 10,517 $ 7,016 11,002 $(5,260) 10,704
- -------------------------------------------------------------------------------------------------------------------
Basic EPS $ 0.21 $ 0.64 $ (0.49)
- -------------------------------------------------------------------------------------------------------------------
Effect of Dilutive Securities:
Stock options and warrants -- 744 -- 663 -- --
Preferred stock -- 251 -- -- -- --
Note and stock appreciation
rights agreement 100 1,800 100 1,800 -- --
Convertible debt 252 1,424 252 1,423 -- --
--------- -------- --------- -------- ------- ---------
Income (loss) available to
common shareholders
and assumed conversions $ 2,594 14,736 $ 7,368 14,888 $(5,260) 10,704
========= ======== ========= ======== ======= =========
- -------------------------------------------------------------------------------------------------------------------
Diluted EPS $ 0.18 $ 0.49 $ (0.49)
- -------------------------------------------------------------------------------------------------------------------
</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.
1998 1997 1996
------------- ------------- -------------
Number of shares of common
stock exercisable from:
Options 2,113,000 1,135,000 1,120,000
Warrants 790,000 13,215,000 13,990,000
Convertible debt -- -- 3,849,000
------------- ------------- -------------
2,903,000 14,350,000 18,959,000
============= ============= =============
Exercise price ranges $1.41 - $3.00 $2.00 - $4.94 $2.00 - $4.94
Note 11 - Business Segment and Geographic Information
================================================================================
The Company operates in one industry--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:
1998 1997 1996
-------------- ------------- -------------
Net sales:
United States $ 25,272,000 $ 29,416,000 $ 21,506,000
Europe 1,769,000 2,558,000 8,432,000
-------------- ------------- -------------
$ 27,041,000 $ 31,974,000 $ 29,938,000
============== ============= =============
Net income (loss):
United States $ 2,449,000 $ 2,229,000 (A) $ 75,000 (C)
Europe (207,000) 4,787,000 (B) (5,335,000) (D)
-------------- -------------- -------------
$ 2,242,000 $ 7,016,000 $ (5,260,000)
============== ============= =============
Identifiable assets:
United States $ 27,126,000 $ 24,294,000 $ 20,784,000
Europe 2,713,000 941,000 10,154,000
-------------- ------------- -------------
$ 29,839,000 $ 25,235,000 $ 30,938,000
============== ============= =============
(A) Includes a charge of $233,000 for the write-off of deferred debt issue costs
associated with the early retirement of debt.
(B) Includes a gain of $4,989,000 from the sale of Pulsarr.
(C) Includes charges of $647,000 for the write-off of deferred royalty expense.
(D) Includes a charge of $4,915,000 for the write-off of acquired in-process
technology.
Included in United States sales are export sales of $7,057,000 in 1998,
$7,999,000 in 1997 and $7,504,000 in 1996.
The Company sold equipment to a single customer totaling 14% in 1997, and to two
different customers totaling 13% and 12% of sales in 1996.
Note 12 - Quarterly Financial Data (Unaudited)
================================================================================
<TABLE>
<CAPTION>
Quarters Ended March 31 June 30 September 30 December 31 Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fiscal 1998
Sales $ 7,103,000 $ 9,087,000 $ 5,546,000 $ 5,305,000 $ 27,041,000
Gross profit 3,333,000 5,035,000 2,879,000 3,209,000 14,456,000
Net income 182,000 1,016,000 75,000 969,000 2,242,000
Basic earnings per share 0.02 0.10 0.01 0.09 0.21
Diluted earnings per share 0.02 0.08 0.01 0.07 0.18
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
</TABLE>
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
================================================================================
Introduction
The Company acquired Pulsarr and Ventek in 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,
-----------------------------------------------------------------------
1998 1997 1996
--------------------- -------------------- -------------------
Amount % Amount % Amount %
--------- -------- -------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 27,041 100.0% $ 31,974 100.0% $ 29,938 100.0%
Cost of sales 12,585 46.5% 16,042 50.2% 15,794 52.8%
--------- -------- -------- ------- --------- -------
Gross profit 14,456 53.5% 15,932 49.8% 14,144 47.2%
--------- -------- -------- ------- --------- -------
Operating expenses:
Selling and marketing 4,762 17.6% 4,930 15.4% 4,662 15.6%
Research and development 5,024 18.6% 3,950 12.4% 4,038 13.5%
General and administrative 3,413 12.6% 3,303 10.3% 3,549 11.8%
Goodwill amortization 695 2.6% 731 2.3% 633 2.1%
Charge for acquired in-process
technology -- -- -- -- 4,915 16.4%
Charge for royalty expense -- -- -- -- 647 2.2%
--------- -------- -------- ------- --------- -------
13,894 51.4% 12,914 40.4% 18,444 61.6%
--------- -------- -------- ------- --------- -------
Income (loss) before other income
and expense 562 2.1% 3,018 9.4% (4,300) (14.4)%
Gain on sale of Pulsarr -- -- 4,989 15.6% -- --
Investment and other income 286 1.1% 371 1.2% 190 .6%
Interest expense (689) (2.5)% (1,263) (4.0)% (1,150) (3.8)%
--------- --------- -------- ------- --------- --------
Income (loss) before income taxes 159 0.6% 7,115 22.3% (5,260) (17.6)%
Provision for (benefit from) income
taxes (2,083) (7.7)% 99 (0.3)% -- --
--------- --------- -------- ------- --------- --------
Net income (loss) $ 2,242 8.3% $ 7,016 21.9% $ (5,260) (17.6)%
========= ========= ======== ======= ========= ========
</TABLE>
Fiscal 1998 Compared to Fiscal 1997
Sales for 1998 were $27,041,000, down 15% when compared to sales for 1997 of
$31,974,000. Sales of non-food machine vision systems decreased 15% or
$2,164,000 to $12,760,000. Sales of food machine vision systems decreased 16% or
$2,769,000 to $14,281,000. Pulsarr sales, which were comprised entirely of food
machine vision systems, aggregated $2,558,000 in 1997 and represent the primary
cause for the decrease in sales of food machine vision systems. Total machine
vision systems sold, excluding Pulsarr, were 75 in 1998 and 90 in 1997.
Cost of sales was 46.5% of sales in 1998 and 50.2% in 1997.
Gross profit decreased by 9% to $14,456,000 in 1998 when compared to $15,932,000
of gross profit in 1997. In 1998, gross profit was 53.5%, as compared to 49.8%
in 1997. The increase in gross profit as a percentage of sales in 1998 as
compared to 1997 is primarily related to the exclusion of the lower-margin
Pulsarr products as well as a change in sales mix to higher-margin products.
Selling and marketing expenses decreased $168,000 in 1998 to $4,762,000 when
compared to $4,930,000 in 1997. Selling and marketing expenses in 1997 included
$260,000 relating to Pulsarr as compared to none in 1998. This decrease was
partially offset by increased sales and service personnel at both SRC and
Ventek.
F-25
<PAGE>
Research and development expenses were $5,024,000 and $3,950,000 in 1998 and
1997, or 18.6% and 12.4% of sales, respectively. Research and development
expenses in 1997 included $178,000 relating to Pulsarr as compared to none in
1998. The increased expenses were incurred to accelerate completion of the
Company's next generation of food sorter and vision system processor, as well as
to develop new products for the processing of softwood veneer. Research and
development expenses are expected to approximate 14% of sales in 1999.
General and administrative expenses increased $110,000 to $3,413,000 in 1998
from $3,303,000 in 1997. General and administrative expenses in 1997 included
$343,000 relating to Pulsarr as compared to none in 1998. The increase is
primarily the result of costs associated with a project of reevaluating the
financial and operational processes and procedures in preparation for possible
future growth in business, as well as an increase in personnel costs.
The decrease in goodwill amortization is due to the exclusion of goodwill
related to Pulsarr in 1998 as compared to 1997.
The decrease in investment and other income is the result of lower cash balances
available for investment.
The decrease in interest expense is primarily due to lower debt balances
outstanding. Additionally, interest expense in 1997 included $233,000 of
deferred debt issuance costs written off as the result of the early repayment of
$2,500,000 of convertible notes payable.
The benefit from income taxes of $2,083,000 is composed of a benefit from
deferred income taxes of $2,100,000 to recognize a deferred tax asset, partially
offset by a provision for current income taxes of $17,000 due pursuant to the
Alternative Minimum Tax rules of the Internal Revenue Code. The Company has
assessed its past earnings history and trends, budgeted sales and the expiration
dates of carry-forwards and determined that it is more likely than not that
$2,100,000 of the deferred tax asset will be realized. A valuation allowance of
$4,171,000 is maintained against the remaining deferred tax asset, which the
Company determined may not be realized.
Net income for 1998 was $2,242,000 as compared to $7,016,000 in 1997. Net income
for 1998 includes a benefit from deferred taxes of $2,100,000, while net income
for 1997 includes a gain on the sale of Pulsarr of $4,989,000 and a charge
relating to the write-off of deferred debt issuance costs. Income before special
items was $142,000 for 1998 compared to $2,260,000 for 1997 as a result of the
factors described above.
Fiscal 1997 Compared to Fiscal 1998
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 products included in
1997, and an increase in the overall sales volume that 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 the Company's other operating subsidiaries.
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 the Company's other operating subsidiaries.
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.
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.
Liquidity and Capital Resources
The Company's cash balance and working capital was $4,423,000 and
$12,100,000, respectively, at December 31, 1998 compared to $6,045,000 and
$9,133,000, respectively, at December 31, 1997. The Company's debt-to-equity
ratio at December 31, 1998 was .51 compared to .70 at December 31, 1997.
During 1998, net cash used in operating activities totaled $3,109,000 compared
to cash generated in operating activities of $3,797,000 in 1997 and cash used by
operating activities of $950,000 in 1996. Income before special items was
$142,000 in 1998 as compared to $2,260,000 in 1997 and is one of the causes of
the decrease in cash generated from operations in 1998 as compared to 1997. The
Company used $2,199,000 of cash in 1998 to build inventories in order to place
more trial and demonstration machines at customer locations. Accounts receivable
increased by $1,363,000 in 1998 as the result of granting slightly longer
payment terms relating to certain sales. Cash was also used in 1998 to increase
prepaid and other assets by $760,000 and to reduce current liabilities by
$539,000.
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 used in investment activities totaled $1,383,000 in 1998 compared to cash
provided in investment activities of $5,996,000 in 1997 and cash used by
investment activities of $7,511,000 in 1996. Cash resources of $1,383,000,
$1,014,000 and $1,527,000 were used to acquire property and equipment in 1998,
1997 and 1996, respectively. The Company has no material commitments for capital
expenditures at December 31, 1998. The sale of Pulsarr provided net cash of
$7,010,000 in 1997. 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.
Cash provided by financing activities totaled $2,870,000 in 1998 as compared to
cash used by financing activities of $5,657,000 in 1997 and cash provided by
financing activities of $6,199,000 in 1996. In 1998, the Company received net
proceeds of $2,579,000 from the sale of preferred stock to FMC Corporation, and
in April, refinanced its 9.75% $2,680,000 mortgage with a new 8.3% $3,000,000
mortgage. In 1997, cash generated from operations and the sale of Pulsarr was
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, the Company received $3,000,000
representing the net proceeds of a private placement of convertible debt. The
cash generated from this transaction was used to finance the acquisition of
Pulsarr and to provide funds for working capital purposes.
In February 1999, an agreement was reached with the former owners of Ventek
pursuant to which the Company prepaid $750,000 of debt that would have otherwise
been due on July 23, 1999, and issued 1,800,000 shares of restricted Class A
Common Stock in prepayment of another note. The maturity date of the remaining
$2,500,000 was changed to July 23, 2000 (see Note 6).
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.
Outlook
At this time, management believes 1999 sales will approximate $30,000,000. The
tendency of customers to extend the time taken to make purchasing decisions and
the effects of international currency fluctuations may continue to negatively
impact operations. With the strength of the U. S. dollar, the Company's recently
established European sales and service subsidiary, SRC VISION BV, may have to
reduce the price of its products in Europe.
The Company expects ongoing pressure in the plywood manufacturing market served
by Ventek due to competing, less expensive wood panel products. To combat this
pressure, Ventek has introduced or will introduce several new products.
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.
Year 2000 Conversion
The Company has initiated a Year 2000 compliance program that includes the
following phases: identifying computer systems, applications and products that
need to be replaced or fixed, carrying out remediation work and conducting
validation testing of systems, applications and products to ensure compliance.
The Company has essentially completed the identification and remediation phases
of the program. The amount of remediation work required was not extensive
because the Company has replaced certain of its financial and operational
systems during the last several years to better meet its functional business and
operational requirements. Management believes that such replacements
substantially meet or address its Year 2000 issues. In addition, the Company may
be required to modify other existing software and hardware in order for its
computer systems to function properly with respect to dates in the year 2000 and
thereafter. The Company anticipates that the remaining remediation work and
validation phase will be completed no later than June 30, 1999. The estimated
cost of the remaining replacement and modification for the Year 2000 conversion
is estimated at $100,000. The Company believes that the internal aspects of the
Year 2000 conversion contain only a moderate to low level of risk.
The Company has contacted its major suppliers and customers to assess their
preparations for the year 2000. These actions are intended to help mitigate the
possible external impact of Year 2000 issues. Even so, it is impossible to fully
assess the potential consequences if service interruptions occur from suppliers
or in such infrastructure areas as utilities, communications, transportation,
banking and government. The Company assigns a higher level risk to these
activities as they are outside the Company's control.
The Company has not yet developed a contingency plan to provide for continuity
of processing in the event of various problem scenarios, but will assess the
need to develop such a plan based on the outcome of its validation phase and the
results of surveying its major suppliers and customers. If the Company is
unsuccessful or if the remediation efforts of its key suppliers or customers are
unsuccessful in dealing with Year 2000 problems, there may be a material adverse
impact on the Company's consolidated results and financial condition. The
Company is unable to quantify any potential adverse impact at this time, but
will continue to monitor and evaluate the situation.
Inflation
The Company has not been materially affected by general inflation.
<PAGE>
Other Information
================================================================================
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, 3709 Citation Way #102, Medford, Oregon
97504, or by calling 541-776-7700.
Future Quarterly Reports
Beginning in 1999, the Company's quarterly financial information will be posted
to AMV's web site at www.amvcorp.com, replacing quarterly reports previously
sent to stockholders. This will save printing and mailing costs and provide
information on a more timely basis. Copies may be obtained by fax or mail upon
request.
Annual Meeting
The Annual Meeting of Stockholders of Advanced Machine Vision Corporation will
be held at the Company's headquarters in Medford, Oregon at 2:00 p.m. Pacific
Time on May 13, 1999.
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:
<TABLE>
<CAPTION>
Quarter Ended 1998 March 31 June 30 Sept. 30 Dec. 31
- ------------------ ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
High $ 2.34 $ 2.38 $ 2.16 $ 1.56
Low 1.78 1.81 1.50 1.06
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
</TABLE>
On December 31, 1998, there were 133 and 19 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-30
<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 PricewaterhouseCoopers LLP
Executive Vice President, Chief Financial Officer and Secretary Portland, Oregon
Legal Officer and Secretary,
Syncor International Corporation Lee J. Robinson Legal Counsel
President & Chief Executive Corporate Controller Troy & Gould Professional Corp.
Officer, Syncor Overseas Ltd. and Assistant Secretary Los Angeles, California
Vikram Dutt Operating Units Public Relations
President of SRC VISION, Inc. Silverman Heller Associates
Aaron, Dutt & Edwards, Inc. Medford, Oregon Los Angeles, California
Dr. James Ewan, President
Dr. James Ewan
President and Chief Executive Ventek, Inc.
Officer of SRC VISION, Inc. Eugene, Oregon
Rodger A. Van Voorhis, President
Marc T. Giles
General Manager of FMC FoodTech
Division of FMC Corporation
Robert M. Loeffler
Attorney, Director of
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>
<PAGE>
<TABLE>
<CAPTION>
Advanced Machine Vision Corporation
Schedule VIII - Valuation and Qualifying Accounts For the Years Ended
December 31, 1996, 1997 and 1998
- -----------------------------------------------------------------------
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, 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
============== ============= ============ =========== ===========
Year ended December 31, 1998:
Allowance for excess and obsolete
inventory $ 707,000 $ (45,000) $ -- $ -- $ 662,000
============== ============= ============ =========== ===========
Allowance for doubtful accounts $ 180,000 $ 50,000 $ -- $ -- $ 230,000
============== ============= ============ =========== ===========
</TABLE>
F-32
<PAGE>
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 February 16, 1999, appearing on page F-2 of this
Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Portland, Oregon
March 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
December 31, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4423
<SECURITIES> 0
<RECEIVABLES> 4303
<ALLOWANCES> 230
<INVENTORY> 7379
<CURRENT-ASSETS> 17231
<PP&E> 7967
<DEPRECIATION> 2693
<TOTAL-ASSETS> 29839
<CURRENT-LIABILITIES> 5131
<BONDS> 7862
0
2579
<COMMON> 24329
<OTHER-SE> (10062)
<TOTAL-LIABILITY-AND-EQUITY> 29839
<SALES> 27041
<TOTAL-REVENUES> 27041
<CGS> 12585
<TOTAL-COSTS> 26193
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 689
<INCOME-PRETAX> 159
<INCOME-TAX> (2083) <F1>
<INCOME-CONTINUING> 2242
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2242
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.18
<FN>
<F1>
Income tax includes a benefit from deferred income taxes of $2,100,000.
</FN>
</TABLE>
