<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from
to ----------------------
--------------------------
COMMISSION FILE NUMBER 0-17869
-------
COGNEX CORPORATION
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2713778
------------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE VISION DRIVE
NATICK, MASSACHUSETTS 01760-2059
(508) 650-3000
------------------------------------------------------------
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
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 the 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. [ ]
Aggregate market value of voting stock held by non-affiliates
as of February 28, 1999: $1,008,663,000
$.002 par value common stock outstanding as of
February 28, 1999: 40,346,520 shares
Documents incorporated by reference:
Specifically identified information in the Annual Report to Stockholders for the
year ended December 31, 1998, is incorporated by reference into Parts I and II
hereof.
Specifically identified information in the definitive Proxy Statement for the
Special Meeting in Lieu of the 1999 Annual Meeting of Stockholders to be held on
April 27, 1999, is incorporated by reference into Part III hereof.
A list of Exhibits to this Annual Report on Form 10-K is located on page 18.
================================================================================
<PAGE> 2
COGNEX CORPORATION ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998
INDEX
PART I
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 4A. EXECUTIVE OFFICERS AND OTHER MEMBERS OF THE MANAGEMENT TEAM
OF THE REGISTRANT
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<PAGE> 3
PART I
The Company's results are subject to certain risks and uncertainties. This
Annual Report on Form 10-K contains certain forward-looking statements within
the meaning of the Federal Securities Laws. The Company's future results may
differ materially from current results and actual results may differ
materially from those projected in the forward-looking statements as a result
of certain risk factors. Readers should pay particular attention to
considerations described in the section captioned "Forward-Looking
Statements" in Management's Discussion and Analysis of Financial Condition
and Results of Operations appearing on page 18 of the Annual Report to
Stockholders for the year ended December 31, 1998, which is Exhibit 13
hereto, and is incorporated herein by reference, as well as considerations
included in other documents filed with the Securities and Exchange
Commission.
ITEM 1. BUSINESS
CORPORATE PROFILE
Cognex(R) Corporation ("Cognex" or the "Company," each of which term
includes, unless the context indicates otherwise, Cognex Corporation and its
subsidiaries) was incorporated in Massachusetts in 1981. Its principal
executive offices are located at One Vision Drive, Natick, Massachusetts
01760 and its telephone number is (508) 650-3000.
The Company designs, develops, and markets machine vision systems that
are used to automate a wide range of manufacturing processes where vision is
required. Cognex machine vision systems consist of two primary elements: a
computer, which serves as a "machine vision engine," and software that
processes and analyzes images. When connected to a video camera, the machine
vision system captures images and extracts information, which determines
appropriate action for other equipment in the manufacturing process.
Machine vision systems are used in a variety of industries including the
semiconductor, electronics, automotive, consumer products, metals, plastics,
and paper industries. Machine vision is important for applications in which
human vision is inadequate due to fatigue, visual acuity, or speed, or in
instances where substantial cost savings are obtained through the reduction
of direct labor and improved product quality. Today, many types of
manufacturing equipment require machine vision because of the increasing
demands for speed and accuracy in manufacturing processes, as well as the
decreasing size of items being manufactured.
WHAT IS MACHINE VISION?
In a typical machine vision application, a video camera positioned on
the production line captures an image of the part to be inspected. The
machine vision computer then uses sophisticated image analysis software to
extract information from the image and provide an answer to a question.
Cognex machine vision systems can answer four types of questions:
<TABLE>
<CAPTION>
QUESTION DESCRIPTION EXAMPLE
-------- ----------- -------
GUIDANCE
--------
<S> <C> <C>
Where is it? Determining the exact physical Determining the position of a printed circuit board
location of an object. so that a robot can automatically be guided to
insert electronic components.
</TABLE>
1
<PAGE> 4
<TABLE>
<CAPTION>
IDENTIFICATION
--------------
<S> <C> <C>
What is it? Identifying an object by analyzing Identifying the serial number on an automotive
its shape or by reading a serial airbag so that it can be tracked and processed
number. correctly through manufacturing.
INSPECTION
----------
How good is it? Inspecting an object for flaws or Inspecting the quality of printing on
defects. pharmaceutical labels and packaging.
GAUGING
-------
What size is it? Determining the dimensions of an Determining the diameter of a bearing prior to
object. final assembly.
</TABLE>
Once the machine vision system has processed the image and performed any
necessary analysis, the result is then communicated to other equipment on the
factory floor, such as an industrial controller, a robotic arm, a deflector
which removes the part from the line, a positioning table which moves the
part, or alternatively, to a computer file for analysis or subsequent process
control. This process is repeated during the manufacturing process as product
moves into position in front of the camera. Machine vision systems can
perform inspections quickly enough to keep pace with machines that process
thousands of items or material feet per minute, thus increasing both quality
and productivity.
THE MACHINE VISION MARKET
The machine vision market consists of two customer types: original
equipment manufacturers (OEMs) and end users. OEMs are companies that build
standard products sold as capital equipment for end users on the factory
floor. These customers, most of which are in the semiconductor and
electronics industries, have the technical expertise to build Cognex's
programmable, board-level machine vision systems directly into their products
which are then sold to end users.
End users are companies that manufacture products, such as radios,
telephones, ball-point pens, metals, and paper. While they may purchase
capital equipment containing machine vision or hire a system integrator to
build an inspection system, many end users choose to purchase machine vision
directly for specific applications on their production lines. Unlike OEMs and
system integrators, these customers typically have little or no computer
programming or machine vision experience.
System integrators are companies that create complete, automated
inspection solutions for end users on the factory floor. For example, they
combine lighting, conveyors, robotics, machine vision, and other components
to produce custom inspection systems for various applications. Because system
integrators encounter a broad range of automation problems, they purchase a
variety of Cognex products, from general-purpose systems to
application-specific systems tailored to solve particular manufacturing
tasks. The Company includes system integrators in its definition of end
users.
BUSINESS STRATEGY
The Company's goal is to expand its position as a leading worldwide
supplier of machine vision systems for factory automation. Currently, the
Company's products are designed for factory automation because the Company
believes that this market offers the greatest opportunity for selling high
value-added, standard products in high volume. Within the factory automation
market, the Company has historically focused primarily on those customers who
must have machine vision because of the increasing complexity of their
products or manufacturing methods.
2
<PAGE> 5
Emphasizing high value-added products and applications is important to
the Company's strategy because not every segment of the machine vision market
offers opportunity for sustained profitability. High value-added is realized
in the Company's products in several ways. The primary value-added is derived
from offering unique vision software algorithms which solve challenging
problems better than competing products. The other major mode of realizing
high value-added is by offering products which are complete solutions to
known problems, incorporating all of the necessary vision software,
applications software, hardware, and electro-optics. Both modes of realizing
high value-added require the Company to maintain an industry-leading level of
investment in research, development, and engineering.
Within the factory automation market, the Company has tailored its
product offerings to match the characteristics of its two customer types:
OEMs and end users. Historically, OEMs have been the source of the majority
of the Company's sales. However, the Company believes that end users have the
potential in the long term to generate more sales than OEMs. Consequently,
the Company has invested in developing and acquiring products which meet the
needs of end users and in developing a strong worldwide direct sales and
support infrastructure. The Company will continue to invest in both customer
types, defending its strong position in the OEM market while expanding in the
end user market.
The Company has historically pursued a global business strategy,
investing in building a strong direct presence in North America, Japan,
Europe, and Southeast Asia. In 1998, approximately 63% of the Company's
revenue came from customers based outside of the United States. In all of
these regions, the Company is acknowledged to be a leading machine vision
supplier. The Company intends to continue to invest in the expansion of
direct sales and support in these regions.
The factory automation market for machine vision is comprised of many
market niches defined by differing application requirements, industries, and
cost/performance criteria. The Company's business strategy includes selective
expansion into other industrial machine vision applications through the
internal development of new products and the acquisition of companies and
technologies. The Company's acquisitions to date include Acumen, Inc., a
developer of machine vision systems for semiconductor wafer identification;
Isys Controls, Inc., a developer of high-performance machine vision systems
for high-speed surface inspection; Mayan Automation, Inc., a developer of
intelligent camera-based machine vision systems for surface inspection; and
certain technology of Rockwell Automation's Allen-Bradley machine vision
business, which supplied machine vision systems to end users.
PRODUCTS
The Company designs, develops, and markets a wide range of machine
vision products. These products include modular vision systems that are used
to control the manufacturing of discrete items, such as semiconductor chips,
cellular phones, and automobile wheels, by locating, identifying, inspecting,
and measuring them during the manufacturing process. The Company's product
offerings also include surface inspection vision systems that are used to
inspect surfaces of materials that are manufactured in a continuous fashion,
such as plastics, metals, and paper, to ensure that there are no flaws or
defects on the surfaces.
Machine vision systems sold by the Company are defined as either
general-purpose or application-specific products. General-purpose systems
enable customers to solve a wide range of problems by selecting the tools
necessary to solve their vision problem from the Company's vision software
library, and then configuring their solution by utilizing a programmable
language or point-and-click interface. Application-specific systems are
"packaged" combinations of software and hardware that are designed to solve
targeted problems without any customization by the Company or its customers.
3
<PAGE> 6
GENERAL-PURPOSE SYSTEMS
Vision Software Library
The Company offers an extensive library of machine vision software which
includes both low-level image processing software and high-level image
analysis tools. The image processing software prepares the image for accurate
analysis and the image analysis tools extract information about the image to
locate, measure, and identify objects, characters, and codes. In 1997, the
Company introduced PatMaxTM, a pattern location tool that can locate with
very high accuracy objects that vary in size and orientation or whose
appearance is degraded. In 1998, the Company introduced PatInspectTM, a
vision software tool that combines high-accuracy part location and defect
detection capabilities in a single vision operation and detects flaws along
the edges or boundary regions of objects.
MVS-8000 product family
In 1998, the Company introduced its next generation of vision systems
(programmable in C++ language), the MVS-8000 product family, which combines
Cognex's unique algorithms with Intel's new MMX instruction set. Prior to
this introduction, all of the Company's software ran only on its own
proprietary hardware which was based on the Motorola 68k line of
microprocessors. For host-based processing, the MVS-8100 Series features a
PCI bus-mastering frame grabber for high-speed image transfer from the video
camera to the host PC for processing and display. For embedded processing,
the MVS-8200 Series of embedded CPU vision systems enable all vision
processing to occur on-board, freeing the PC to perform other tasks. The
MVS-8000 product family features Cognex's new Object Manager Interface (OMI),
which provides a graphical interface to each tool in the Cognex vision
software library.
The MVS-8000 product family is sold primarily to OEMs located in North
America and Japan who integrate the vision systems into manufacturing
equipment for the semiconductor and electronics industries. These vision
systems are also sold to system integrators located principally in North
America, Japan, Europe, and Southeast Asia who integrate the vision systems
into manufacturing equipment for the factory floor in industries ranging from
automotive to consumer products.
Checkpoint product family
The Checkpoint(R) product family is designed for customers with little
or no computer programming or machine vision experience. Checkpoint combines
the Company's existing vision software and standard vision hardware platforms
with a unique Microsoft Windows-based graphical user interface (GUI).
Customers utilize pull-down menus and dialog boxes in the GUI to create
customized vision applications. This easy-to-use, point-and-click programming
environment enables the developer to focus on tasks associated with solving
the overall vision application, freeing the developer from the detail and
complexity of a programming language.
Checkpoint is sold primarily to end users located in North America,
Japan, Europe, and Southeast Asia in a wide range of general manufacturing
industries, such as manufacturers of medical devices, automotive parts,
disposable consumer goods, and electronic components. Although the
application environment is designed for customers with little or no computer
programming or machine vision experience, deployment of Checkpoint on the
factory floor requires the services of trained system integrators to
mechanically and electrically integrate Checkpoint into manufacturing lines.
Other General-Purpose Systems
The Company continues to offer vision systems (programmable in C
language) that run on its own proprietary hardware including the Cognex 4000
Series which plugs directly into a VME backplane, as well as the Cognex 5000
Series which run on the PC.
4
<PAGE> 7
APPLICATION-SPECIFIC SYSTEMS
The Company also offers a variety of application-specific systems that
combine Cognex hardware and software to create a solution that is tailored to
the particular requirements of certain vision applications. These products
are sold to OEMs and end users worldwide. A partial list of
application-specific systems is as follows:
Surface Mount Device Placement Guidance Package (SMD/PGP), when coupled
with a Cognex 4000, 5000, or 8000 Series vision system, quickly and
accurately locates fiducial marks on printed circuit boards for alignment,
inspects the quality of surface mount devices, and then guides the placement
of those devices onto printed circuit boards.
acuReader/Optical Character Recognition (OCR) reads degraded serial
numbers from semiconductor wafers with near 100% accuracy.
acuReader/2D locates and decodes two-dimensional matrix codes. The
two-dimensional codes are used as alternative marks for identifying wafers,
integrated circuit packages, liquid crystal display (LCD) panels,
pharmaceutical packages, and for small parts tracking applications.
Ball Grid Array (BGA) Inspection Package inspects BGA devices for
missing, misplaced, or improperly formed solder balls.
Fiducial Finder II locates fiducial or alignment marks on printed
circuit boards for automatic printed circuit board alignment.
DisplayInspect software inspects the small, high resolution displays
commonly found on cellular phones, pagers, medical test instruments, and
other electronic devices.
iS High Performance Inspection Systems detect and classify defects in
the most challenging surface inspection applications. iS systems are built
from a family of hardware and software components which include proprietary
line-scan cameras with motorized camera mounts, specialized lighting systems,
ultra-high performance image processing boards, Unix workstations, and
intelligent defect detection and classification software algorithms. iS
systems can contain from one to sixty cameras and can be used to inspect webs
up to 25 feet wide at speeds of up to 5,000 feet per minute. iS systems are
primarily sold to producers of metals, specialized coated paper, and
high-value non-woven materials.
Fine-Line(TM) Intelligent Camera Systems are complete surface
inspection devices packaged in a compact and rugged enclosure. Each camera
contains a line-scan charge-coupled device (CCD) sensor, image digitizer,
digital signal processor (DSP), custom hardware for pixel processing, surface
inspection algorithms in firmware, and a CPU for control and communications.
In addition to the camera, the Company provides a PC-based operator
interface, specialized lighting components, supporting mechanical components,
and power supply/control boxes to provide customers with a complete solution
to their surface inspection applications. Fine-Line systems can be used in a
single-camera, "stand-alone" fashion for simple, narrow web applications, or
they can be installed in multi-camera configurations to view wider webs.
Fine-Line systems are targeted primarily at the plastics, non-wovens, and
converting markets.
SmartView(TM) Modular Camera Network (MCN), introduced in 1998, detects,
measures, and classifies defects on products made in continuous processes.
SmartView systems have a drag-and-drop Windows NT-based interface with some
of the features previously only associated with high-end systems. In addition
to providing flexibility, the systems offers more power than its predecessor,
the Fine-Line Intelligent Camera System, and has enabled the Company to
expand into more complex applications, including the inspection of high-end
plastics and non-wovens.
5
<PAGE> 8
RESEARCH, DEVELOPMENT, AND ENGINEERING
The Company engages in research, development, and engineering (R, D & E)
to enhance its existing products and to develop new products and
functionality to meet market opportunities. In addition to internal research
and development efforts, the Company intends to continue its strategy of
gaining access to new technology through strategic relationships and
acquisitions where appropriate. The Company considers its on-going efforts in
R, D & E to be a key component of its strategy.
At December 31, 1998, the Company employed 152 professionals in R, D &
E, most of whom are software developers. The Company's R, D & E expenses
totaled $24,662,000, $22,481,000, and $19,434,000, or 20%, 14%, and 16% of
revenue, in 1998, 1997, and 1996, respectively.
MANUFACTURING
The majority of the Company's vision systems are manufactured at its
Natick, Massachusetts headquarters. The Company's Natick manufacturing
organization utilizes a turnkey manufacturing operation whereby the majority
of component procurement, subassembly, final assembly, and initial testing
are performed under agreement by third-party contractors. After the
completion of initial testing, the third-party contractors deliver the
products to the Company to perform final testing and assembly. The products
provided by the third-party contractors are manufactured using specified
components and assembly and test documentation created and controlled by the
Company. Certain components purchased by the third-party contractors are
presently available from a single source.
The Company's iS High Performance Inspection systems are manufactured at
its Alameda, California facility and its Fine-Line Intelligent Camera systems
and SmartView Modular Camera Network systems are manufactured at its
Montreal, Canada facility. The manufacturing processes at the Alameda and
Montreal facilities consist of systems design, configuration management and
control, component procurement, subassembly, integration and final test,
quality control, shipment, and installation. Certain products are
manufactured by third-party contractors using assembly and test documentation
created and controlled by the Company. Certain components purchased by the
third-party contractors are presently available from a single source.
SALES AND SUPPORT
The Company markets its products through a direct sales force in North
America, and through a direct sales force and distributors in Japan, Europe,
and Southeast Asia. The Company's distributors do not have any rights of
return and payment for products is due upon delivery. Distributors generally
have non-exclusive distribution rights and there may be more than one
distributor per territory.
At December 31, 1998, the Company's direct sales and service force
consisted of 130 professionals, including sales and application engineers.
The majority of the Company's sales and service personnel have engineering or
science degrees. Sales engineers call directly on targeted accounts and
coordinate the activity of the application engineers. They focus on potential
customers that represent possible volume purchases and long-term
relationships. Opportunities that represent single-unit sales or turnkey
system requirements are identified by the sales engineer and turned over to
an independent system integrator or OEM that uses the Company's products. The
Company sells to OEMs, many of whom have entered or are expected to enter
into volume discount contracts with the Company. These contracts are
typically for one year and have associated delivery schedules.
Sales to international customers represented approximately 63%, 62%, and
55% of revenue in 1998, 1997, and 1996, respectively. One customer based in
Japan, Fuji America Corporation, accounted for approximately 14%, 18%, and
11% of revenue in 1998, 1997, and 1996, respectively. Information about
operating segments and geographic areas, as well as foreign currency and
related
6
<PAGE> 9
risk may be found in the Notes to the Consolidated Financial Statements,
appearing on page 37 and pages 24 through 26 of the Annual Report to
Stockholders for the year ended December 31, 1998, which is Exhibit 13
hereto, and is incorporated herein by reference. Although international sales
may from time to time be subject to federal technology export regulations,
the Company to date has not suffered delays or prohibitions in sales to any
of its foreign customers.
The Company's support offerings include vision solutions consulting
services, technical support, educational services, and product services. The
Company's vision solutions consulting services provides, for a fee, services
which range from a specific piece of programmed functionality to a completely
integrated machine vision application. The technical support group consists
of a team of vision experts ready to respond to questions that may arise
while customers are developing or deploying a Cognex machine vision
application. The educational services group offers more than 50 different
product courses which are held at its Customer Education Center in Natick,
Massachusetts, and at certain of its worldwide offices, as well as at
customer facilities when required. The product services group offers a
variety of software and hardware maintenance programs that provide updates on
the latest software releases and new software vision tools.
PATENTS AND LICENSES
Since the Company relies on the technical expertise, creativity, and
knowledge of its personnel, it utilizes patent, copyright, and trade secret
protection to safeguard its competitive position. The Company has obtained 39
patents on various innovations in the field of machine vision technology and
has over 100 pending patent applications. In addition, the Company makes use
of non-disclosure agreements with customers, suppliers, employees, and
consultants. The Company attempts to protect its intellectual property by
restricting access to its proprietary information by a combination of
technical and internal security measures. However, there can be no assurance
that any of the above measures will be adequate to protect the proprietary
technology of the Company. Effective patent, copyright, and trade secret
protection may be unavailable in certain foreign countries.
The Company's trademark portfolio includes various common-law and
registered marks, including but not limited to Cognex(R) , Checkpoint(R) ,
PatMax(TM), PatInspect(TM), Fine-Line(TM), and SmartView(TM). In addition,
the Company has sought and obtained a number of trademark registrations
outside of the United States. All third-party brand names, service marks, and
trademarks referenced in this document are the property of their respective
owners.
The Company's software products are primarily licensed to customers
pursuant to a license agreement that restricts the use of the products to the
customer's purposes on a designated Cognex machine vision engine. The Company
has made portions of the source code available to certain customers under
very limited circumstances and for restricted uses. If source code is
released to a customer, the customer is required by contract to maintain its
confidentiality and, in general, to use the source code solely for internal
purposes or for maintenance.
Numerous users of the Company's products have received notice of patent
infringement from the Lemelson Medical, Educational, & Research foundation,
Limited Partnership ("Partnership") alleging that their use of the Company's
products infringes certain patents transferred to the Partnership by the late
Jerome H. Lemelson. Certain of these users have notified the Company that, in
the event it is subsequently determined that their use of the Company's
products infringes any of the Partnership's patents, they may seek
indemnification from the Company for damages or expenses resulting from this
matter.
In July 1998, the Partnership filed a lawsuit against 26 semiconductor
device manufacturers asserting infringement upon numerous Lemelson patents
including certain machine vision patents. Several of the defendants are users
of the Company's products that were purchased primarily from the Company's
OEM customers whose equipment incorporate such products. As a result of this
action and the continuing assertions against other current and potential
Cognex customers, the Company decided to initiate action against the
Partnership in order to preserve its right to sell machine vision products
7
<PAGE> 10
without the threat of legal action against the Company or its customers.
Accordingly, on September 23, 1998, the Company filed a complaint against the
Partnership seeking a declaration that Lemelson's machine vision patents are
invalid, unenforceable, and not infringed by either Cognex or by any users of
Cognex products. The complaint was served on the Partnership on October 14,
1998. It will likely be several years before a decision is rendered by the
Court. The Company cannot predict the outcome of this litigation or any
similar litigation that may arise in the future, or the effect of such
litigation on the financial results of the Company. The Company does not
believe its products infringe any valid and enforceable claims of Lemelson's
patents. Furthermore, the Partnership has stated that it is not the Company's
products that infringe Lemelson's patents, but rather the use of those
products by the Company's customers.
COMPETITION
The Company competes with other vendors of machine vision systems, the
internal engineering efforts of the Company's current or prospective
customers, and the manufacturers of image processing systems. Any of these
competitors may have greater financial and other resources than the Company.
Although the Company considers itself to be one of the leading machine vision
companies in the world, reliable estimates of the machine vision market and
the number of competitors are almost non-existent, primarily because of
definitional confusion and a tendency toward double-counting of sales. The
primary competitive factors affecting the choice of a machine vision system
include product functionality and performance (e.g. speed, accuracy, and
reliability) under real-world operating conditions, flexibility,
programmability, and the availability of application support from the vendor.
More recently, ease-of-use has become a competitive factor and product price
has become a more significant factor with respect to simpler guidance and
gauging applications. The Company competes with the lower-cost, software-only
solutions being introduced by various competitors on the basis of superior
performance and price, rather than on price alone, through its MVS-8000
product family.
BACKLOG
At December 31, 1998, the Company's backlog totaled $17,216,000,
compared to $32,618,000 at December 31, 1997. Backlog reflects purchase
orders for products scheduled for shipment within three months. The level of
backlog at any particular date is not necessarily indicative of future
revenue of the Company. Delivery schedules may be extended and orders may be
canceled at any time subject to certain cancellation penalties.
EMPLOYEES
At December 31, 1998, the Company employed 575 persons, including 237 in
sales, marketing, and support activities; 152 in research, development, and
engineering; 73 in manufacturing and quality assurance; and 113 in
information technology, finance, and administration. Of the Company's 575
employees, 168 are located outside of the United States. None of the
Company's employees are represented by a labor union and the Company has
experienced no work stoppages. The Company believes that its employee
relations are good.
8
<PAGE> 11
ITEM 2: PROPERTIES
In 1994, the Company purchased and renovated a 100,000 square-foot
building located in Natick, Massachusetts which serves as its corporate
headquarters. In 1997, the Company completed construction of a 50,000
square-foot addition to this building.
In 1995, the Company purchased an 83,000 square-foot office building
adjacent to its corporate headquarters. The building is currently occupied
with tenants who have lease agreements that expire at various dates through
the year 2000, at which point, the Company may take occupancy of the
building.
In 1997, the Company purchased a three and one-half acre parcel of land
situated on Vision Drive, adjacent to the Company's corporate headquarters.
This land is anticipated to be used for future expansion.
ITEM 3: LEGAL PROCEEDINGS
To the Company's knowledge, there are no pending legal proceedings,
other than as described in "Business - Patents and Licenses," which are
material to the Company to which it is a party or to which any of its
property is subject. From time to time, however, the Company may be subject
to various claims and lawsuits by customers and competitors arising in the
normal course of business, including suits charging patent infringement.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of the year
ended December 31, 1998 to a vote of security holders through solicitation of
proxies or otherwise.
9
<PAGE> 12
ITEM 4A: EXECUTIVE OFFICERS AND OTHER MEMBERS OF THE MANAGEMENT TEAM OF THE
REGISTRANT
The following table sets forth the names, ages, and titles of the
Company's executive officers at December 31, 1998:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Robert J. Shillman 52 President, Chief Executive Officer, and Chairman of the
Board of Directors
Patrick Alias 53 Executive Vice President, Worldwide Sales and Marketing
Glenn Wienkoop 51 Executive Vice President, Chief Operating Officer
</TABLE>
Messrs. Shillman and Alias have been employed by the Company in their present
or other capacities for no less than the past five years.
Mr. Wienkoop joined the Company in 1997 as Executive Vice President of
Subsidiary Operations and was promoted to Executive Vice President and Chief
Operating Officer in January 1999. From 1975 to 1997, he served in a number
of capacities, most recently as Executive Vice President and Division
President at Measurex Corporation, a supplier of computer-integrated
measurement, control, and information systems for continuous manufacturing
processes.
Executive officers are elected annually by the Board of Directors. There are
no family relationships among the directors and the executive officers of the
Company.
OTHER MEMBERS OF THE MANAGEMENT TEAM
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
E. John McGarry 42 Vice President and General Manager - Portland Operations
William Silver 45 Vice President and Chief Technology Officer
</TABLE>
Mr. Silver has been employed by the Company in his present or other
capacities for no less than the past five years.
Mr. McGarry joined the Company in 1995 when the company he founded in 1991,
Acumen, Inc., was acquired by Cognex. From 1991 to 1995, he served as
President of Acumen, Inc., a developer of machine vision systems for
semiconductor wafer identification.
10
<PAGE> 13
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Certain information with respect to this item may be found in the
section captioned "Selected Quarterly Financial Data," appearing on page 42,
and the section captioned "Company Information," appearing on page 43 of the
Annual Report to Stockholders for the year ended December 31, 1998, which is
Exhibit 13 hereto, and is incorporated herein by reference.
The Company has never declared or paid cash dividends on shares of its
common stock. The Company currently intends to retain all of its earnings to
finance the development and expansion of its business and therefore does not
intend to declare or pay cash dividends on its common stock in the
foreseeable future. Any future declaration and payment of dividends will be
subject to the discretion of the Company's Board of Directors, will be
subject to applicable law, and will depend upon the Company's results of
operations, earnings, financial condition, contractual limitations, cash
requirements, future prospects, and other factors deemed relevant by the
Company's Board of Directors.
ITEM 6: SELECTED FINANCIAL DATA
Information with respect to this item may be found in the section
captioned "Five-Year Summary of Selected Financial Data," appearing on page
19 of the Annual Report to Stockholders for the year ended December 31, 1998,
which is Exhibit 13 hereto, and is incorporated herein by reference.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Information with respect to this item may be found in the section
captioned "Management's Discussion and Analysis of Financial Condition and
Results of Operations," appearing on pages 12 through 18 of the Annual Report
to Stockholders for the year ended December 31, 1998, which is Exhibit 13
hereto, and is incorporated herein by reference.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company faces exposure to financial market risks, including adverse
movements in foreign currency exchange rates and changes in interest rates.
These exposures may change over time as business practices evolve and could
have a material adverse impact on the Company's financial results. The
Company's primary exposure has been related to local currency revenue and
operating expenses in Japan, Europe, and Southeast Asia. Historically, the
Company has hedged currency exposures associated with certain intercompany
payables denominated in local currencies and certain foreign currency revenue
transactions. The goal of the Company's hedging activity is to offset the
impact of currency fluctuations on certain local currency intercompany
payables and foreign currency revenue transactions. The success of this
activity depends upon forecasts of transaction activity denominated in
various currencies. To the extent that these forecasts are overstated or
understated during periods of currency volatility, the Company could
experience unanticipated currency gains or losses.
Outstanding forward foreign exchange contracts in Japanese yen at
December 31, 1998 mature within six months. Indicators as of February 1,
1999, show that the dollar is expected to strengthen
11
<PAGE> 14
against the yen by June 30, 1999, to approximately 128 yen/USD. The
hypothetical gain in cash flows of these yen forward contracts is estimated
to be $976,000 using these assumptions.
The carrying amounts reflected in the consolidated balance sheets of
cash and cash equivalents, trade receivables, and trade payables approximate
fair value at December 31, 1998 due to the short maturities of these
instruments.
The Company maintains investment portfolio holdings of various issuers,
types, and maturities. The Company's cash and investments include cash
equivalents, which the Company considers to be investments purchased with
original maturities of three months or less. Investments having original
maturities in excess of three months are stated at amortized cost, which
approximates fair value, and are classified as available-for-sale. Given the
short maturities and investment grade quality of the portfolio holdings at
December 31, 1998, a sharp rise in interest rates should not have a material
adverse impact on the fair value of the Company's investment portfolio. As a
result, the Company does not currently hedge these interest rate exposures.
The following table (dollars in thousands) presents hypothetical changes
in fair value in the Company's financial instruments at December 31, 1998
that are sensitive to changes in interest rates. The modeling technique
measures the change in fair value arising from selected potential changes in
interest rates. Movements in interest rates of plus or minus 50 basis points
("BP") and 100 BP reflect immediate hypothetical shifts in the fair value of
these investments. Fair value represents the market principal plus accrued
interest and dividends of certain interest-rate-sensitive securities at
December 31, 1998.
<TABLE>
<CAPTION>
------------------------- ------------------------------- ---------------- ----------------------------------------
Valuation of securities given No change in Valuation of securities given an
Type of security an interest rate decrease interest rates interest rate increase
------------------------- ------------------------------- ---------------- ----------------------------------------
------------------------- -------------- ---------------- ---------------- -------------------- -------------------
(100 BP) (50 BP) 50 BP 100 BP
------------------------- -------------- ---------------- ---------------- -------------------- -------------------
------------------------- -------------- ---------------- ---------------- -------------------- -------------------
<S> <C> <C> <C> <C> <C>
Municipal obligations
with contractual $ 154,998 $ 156,016 $ 157,035 $ 158,054 $ 159,072
maturities no greater
than 3 years
------------------------- -------------- ---------------- ---------------- -------------------- -------------------
</TABLE>
A 50 BP move in the Federal Funds Rate has occurred in nine of the last
40 quarters. There has not been a 100 BP movement in the Federal Funds Rate
in any of the last 40 quarters.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this item, which includes the consolidated
financial statements and notes thereto, report of independent accountants,
and supplementary data, may be found on pages 19 through 42 of the Annual
Report to Stockholders for the year ended December 31, 1998, which is Exhibit
13 hereto, and is incorporated herein by reference.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on accounting
or financial disclosure during 1998 or 1997.
12
<PAGE> 15
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to Directors of the Company may be found in the
section captioned "Election of Directors," appearing in the definitive Proxy
Statement for the Special Meeting in Lieu of the 1999 Annual Meeting of
Stockholders to be held on April 27, 1999. Such information is incorporated
herein by reference. Information with respect to Executive Officers of the
Company may be found in the section captioned "Executive Officers and Other
Members of the Management Team of the Registrant," appearing in Part I of
this Annual Report on Form 10-K.
ITEM 11: EXECUTIVE COMPENSATION
Information with respect to this item may be found in the sections
captioned "Information Concerning the Board of Directors,"
"Compensation/Stock Option Committee Report on Executive Compensation,"
"Comparison of Five Year Cumulative Total Returns Performance Graph for
Cognex Corporation," and "Executive Compensation," appearing in the
definitive Proxy Statement for the Special Meeting in Lieu of the 1999 Annual
Meeting of Stockholders to be held on April 27, 1999. Such information is
incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item may be found in the sections
captioned "Principal Holders of Voting Securities" and "Security Ownership of
Directors and Officers," appearing in the definitive Proxy Statement for the
Special Meeting in Lieu of the 1999 Annual Meeting of Stockholders to be held
on April 27, 1999. Such information is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
13
<PAGE> 16
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The following consolidated financial statements of Cognex
Corporation and the report of independent accountants relating
thereto are included in the Company's Annual Report to
Stockholders for the year ended December 31, 1998, which is
Exhibit 13 hereto, and is incorporated herein by reference:
Report of Independent Accountants
Consolidated Statements of Income for the years ended
December 31, 1998, 1997, and 1996
Consolidated Balance Sheets at December 31, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997, and 1996
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule
Included at the end of this report are the following:
Report of Independent Accountants on the Financial Statement
Schedule
Schedule II - Valuation and Qualifying Accounts
Other schedules are omitted because of the absence of conditions
under which they are required or because the required
information is given in the consolidated financial statements or
notes thereto.
(3) Exhibits
The Exhibits filed as part of this Annual Report on Form 10-K
are listed in the Exhibit Index appearing on page 18,
immediately preceding such Exhibits.
(b) Reports on Form 8-K
There were no Reports on Form 8-K filed during the fourth
quarter of the year ended December 31, 1998.
14
<PAGE> 17
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.
COGNEX CORPORATION
/s/ Robert J. Shillman
----------------------
Robert J. Shillman
(President, Chief Executive Officer,
and Chairman of the Board of Directors)
March 26, 1999
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/ Robert J. Shillman President, Chief Executive Officer, March 26, 1999
------------------------------- and Chairman of the Board of Directors
Robert J. Shillman (principal executive and financial and
accounting officer)
/s/ Jerald Fishman Director March 26, 1999
-------------------------------
Jerald Fishman
/s/ William Krivsky Director March 26, 1999
-------------------------------
William Krivsky
/s/ Anthony Sun Director March 26, 1999
-------------------------------
Anthony Sun
/s/ Rueben Wasserman Director March 26, 1999
-------------------------------
Rueben Wasserman
</TABLE>
15
<PAGE> 18
REPORT OF INDEPENDENT ACCOUNTANTS
ON THE FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Cognex Corporation:
Our audits of the consolidated financial statements referred to in our
report dated January 26, 1999 in the 1998 Annual Report to Stockholders of
Cognex Corporation (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included
an audit of the financial statement schedule listed in Item 14 (a)(2) of this
Form 10-K. In our opinion, this financial statement schedule presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
January 26, 1999
16
<PAGE> 19
SCHEDULE II
COGNEX CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
<TABLE>
<CAPTION>
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
DESCRIPTION BEGINNING COSTS AND OTHER AT END
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ---------------------------------------------- --------- -------- -------- ----------------- ---------
Allowance for Doubtful Accounts
- ----------------------------------------------
<S> <C> <C> <C> <C>
1998 $1,940 $ 1,245 - $ (602)(a) $ 2,583
1997 968 1,268 - (296)(a) 1,940
1996 709 542 - (283)(a) 968
Reserve for Inventory Obsolescence
- ----------------------------------------------
1998 $1,873 $ 992 - $ (5)(b) $ 2,860
1997 2,273 278 (678)(b) 1,873
1996 541 4,361 - (2,629)(b) 2,273
(a) Specific write-offs
(b) Specific dispositions
</TABLE>
17
<PAGE> 20
EXHIBIT INDEX
EXHIBIT
NUMBER
=======
2 Agreement and Plan of Merger dated as of February 29, 1996 among
Cognex Corporation, Cognex Software Development, Inc., Isys
Controls, Inc., and Richard Rombach (incorporated by reference
to Exhibit 2 to the Report on Form 8-K filed on March 15, 1996)
3A Articles of Organization of the Company effective January 8,
1981, as amended June 8, 1982, August 19, 1983, May 15, 1984,
April 17, 1985, November 4, 1986, and January 21, 1987
(incorporated by reference to Exhibit 3A to the Registration
Statement Form S-1 [Registration No. 33-29020])
3B Restated Articles of Organization of the Company effective June
27, 1989, as amended April 30, 1991, April 21, 1992, April 25,
1995, and April 23, 1996 (filed as Exhibit 3B to the Company's
Annual Report of Form 10-K for the year ended December 31, 1996)
3C By-laws of the Company as amended February 9, 1990 (filed as
Exhibit 3C to the Company's Annual Report on Form 10-K for the
year ended December 31, 1990)
4 Specimen Certificate for Shares of Common Stock (incorporated by
reference to Exhibit 4 to the Registration Statement Form S-1
[Registration No. 33-29020])
10A Cognex Corporation Employee Stock Purchase Plan (incorporated by
reference to Exhibit 4A to Amendment No. 1 to the Registration
Statement Form S-8 [Registration No. 33-32815])
10B Cognex Corporation 1992 Director Stock Option Plan (filed as
Exhibit 10I to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992) Cognex Corporation 1993 Director
Stock Option Plan (filed as Exhibit 10J to the Company's Annual
10C Cognex Corporation 1993 Director Stock Option Plan (filed as
Exhibit 10J to the Company's Annual Report on Form 10-K for the
year ended December 31, 1993)
10D Cognex Corporation 1993 Employee Stock Option Plan, as amended
May 28, 1996 (incorporated by reference to Exhibit 4A to the
Registration Form S-8 [Registration No. 333-4621])
10E Cognex Corporation 1996 Long-Term Incentive Plan (incorporated
by reference to Exhibit 4A to the Registration Statement Form
S-8 [Registration No. 333-2151])
10F Amendment to the Cognex Corporation 1993 Director Stock Option
Plan (filed as Exhibit 10G to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997)
10G Amendment to the Cognex Corporation 1993 Employee Stock Option
Plan (filed as Exhibit 10H to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997)
10H Cognex Corporation 1998 Non-Employee Director Stock Option Plan
(incorporated by reference to Exhibit 4.1 to the Registration
Form S-8 [Registration No. 333-60807])
10I Cognex Corporation 1998 Stock Incentive Plan (incorporated by
reference to Exhibit 4.2 to the Registration Form S-8
[Registration No. 333-60807])
13 Annual Report to Stockholders for the year ended December 31,
1998 (which is not deemed to be "filed" except to the extent
that portions thereof are expressly incorporated by reference in
this Annual Report on Form 10-K) *
21 Subsidiaries of the registrant *
23 Consent of PricewaterhouseCoopers LLP *
27 Financial Data Schedule for the year ended December 31, 1998
(electronic filing only) *
* Filed herewith
18
<PAGE> 1
Exhibit 13
CHAPTER 7 ----------------------------------------------------------------------
FINANCIAL CONDITION
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Summary
- --------------------------------------------------------------------------------
The Company's results in 1998 were impacted by a reduction in capital spending
by manufacturers in the semiconductor and electronics industries, resulting in a
22% decrease in revenue from 1997. The decrease in revenue is due primarily to
decreased volume of modular vision systems sold to Original Equipment
Manufacturer (OEM) customers serving these two industries. Sales to OEM
customers decreased 34% from 1997. Sales to end-user customers, however,
increased 6% over the prior year due primarily to increased volume from
customers in general manufacturing industries.
During 1998, the Company implemented certain cost-containment measures to align
expense levels to the lower revenue trend, while also maintaining its commitment
to new product development and end-user market penetration. This continued
investment during a period of lower revenue resulted in a 50% decrease in net
income from 1997. Despite this challenging business environment, the Company
achieved a 17% net income margin in 1998.
The Company's financial position remained strong at December 31, 1998, with $248
million in total assets and $223 million in stockholders' equity. Working
capital was $184 million at December 31, 1998, representing an 8% decrease from
the prior year, as the Company used $40 million in cash to repurchase its common
stock during 1998.
The following table sets forth certain consolidated financial data as a
percentage of revenue:
- --------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
REVENUE 100% 100% 100%
COST OF REVENUE 31 27 32
- --------------------------------------------------------------------------------
GROSS MARGIN 69 73 68
RESEARCH, DEVELOPMENT, AND ENGINEERING EXPENSES 20 14 16
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 31 23 21
CHARGE FOR ACQUIRED IN-PROCESS TECHNOLOGY(1) 2 2
- --------------------------------------------------------------------------------
INCOME FROM OPERATIONS 16 34 31
INVESTMENT AND OTHER INCOME 6 4 5
- --------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 22 38 36
PROVISION FOR INCOME TAXES 5 12 11
- --------------------------------------------------------------------------------
NET INCOME 17% 26% 25%
================================================================================
(1) CHARGE FOR ACQUIRED IN-PROCESS TECHNOLOGY IS IN CONNECTION WITH THE
ACQUISITIONS OF CERTAIN TECHNOLOGIES FROM ALLEN-BRADLEY IN 1998 AND MAYAN
AUTOMATION, INC. IN 1997.
- --------------------------------------------------------------------------------
12
<PAGE> 2
Results of Operations
- --------------------------------------------------------------------------------
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenue for the year ended December 31, 1998 decreased 22% to $121,844,000 from
$155,340,000 for the year ended December 31, 1997. During 1998, the Company's
results were, and continue to be, impacted by a worldwide slowdown in capital
spending by manufacturers in the semiconductor and electronics industries, which
is an important source of revenue for the Company.
The decrease in revenue of $33,496,000, or 22%, from the prior year is due
primarily to decreased volume from the Company's OEM customers. Sales to OEM
customers, most of whom make capital equipment used by manufacturers in the
semiconductor and electronics industries, decreased $36,608,000, or 34%, from
the prior year.
Sales to end-user customers, however, increased $3,112,000, or 6%, from the
prior year due primarily to increased volume from customers in general
manufacturing industries, including sales of Fine-Line(a) products which the
Company acquired from Mayan Automation, Inc. in a purchase transaction on July
31, 1997. The increased end-user volume achieved from customers in general
manufacturing industries was partially offset by decreased volume to end-user
customers in the semiconductor and electronics industries. In recent years, the
Company has devoted additional sales and marketing resources to grow its
end-user customer base. As a result of these efforts, as well as the decline in
OEM revenue, end-user revenue grew to 43% of total revenue in 1998 from 32% of
total revenue in 1997.
Geographically, revenue decreased $13,982,000, or 23%, in North America and
$20,467,000, or 30%, in Japan from the prior year, as most of the Company's
large OEM customers are based in these regions. Revenue increased $3,095,000, or
14%, in Europe from the prior year due primarily to a large general
manufacturing customer base in this region, as well as increased volume to one
customer for a cellular telephone application in 1998.
The Company anticipates that its results for the next few quarters will continue
to be impacted by the worldwide slowdown in capital equipment spending. The
Company's customers continue to have limited visibility and a high level of
uncertainty as to the timing of a sustained business recovery. However, due to a
slight sequential improvement in revenue from the third quarter to the fourth
quarter of 1998 as well as a small increase in demand from a few large OEM
customers, the Company believes that it may have reached the bottom of this
industry cycle. Although the Company now expects sequential revenue growth
throughout 1999, it believes that this growth will be small to moderate during
at least the first half of the year.
Gross margin as a percentage of revenue for the year ended December 31, 1998 was
69% compared to 73% for the year ended December 31, 1997. The decrease in gross
margin as a percentage of revenue is due primarily to the lower product revenue
in 1998. As a result, service revenue, which has a lower gross margin than
product revenue, increased as a percentage of total revenue in 1998 and lowered
the overall gross margin. Gross margin as a percentage of revenue is expected to
increase slightly from the fourth quarter level of 66% during the next few
quarters due to the anticipated moderate revenue growth.
Research, development, and engineering expenses for the year ended December 31,
1998 increased 10% to $24,662,000 from $22,481,000 for the year ended December
31, 1997. The increase in aggregate expenses is due primarily to higher
personnel-related costs, as well as higher outside service costs, to support the
Company's continued investment in the research and development of new and
existing products. Expenses as a percentage of revenue were 20% in 1998 compared
to 14% in 1997. The increase in expenses as a percentage of revenue is due
primarily to the lower revenue base in 1998. Although the Company intends to
continue its product development efforts in 1999, the level of research,
development, and engineering expenses as a percentage of revenue over the next
few quarters is not expected to exceed the 24% experienced in the fourth quarter
of 1998.
Selling, general, and administrative expenses for the year ended December 31,
1998 increased 6% to $37,973,000 from $35,810,000 for the year ended December
31, 1997. The increase in aggregate expenses is due primarily to higher
personnel-related costs to support the Company's expanding worldwide
- --------------------------------------------------------------------------------
13 COGNEX
<PAGE> 3
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
operations, as well as depreciation expense for an addition to the Company's
corporate headquarters and new computer information systems, both placed in
service in January 1998. These increases were partially offset by
cost-containment measures the Company implemented during the second half of 1998
which included the elimination of employee bonuses and a two-week mandatory
shutdown in December. Expenses as a percentage of revenue were 31% in 1998
compared to 23% in 1997. The increase in expenses as a percentage of revenue is
due primarily to the lower revenue base in 1998. Although the Company intends to
continue its efforts to further penetrate the end-user market in 1999, the level
of selling, general, and administrative expenses as a percentage of revenue over
the next few quarters is not expected to exceed the 39% experienced in the
fourth quarter of 1998.
In July 1998, the Company acquired certain technology of Rockwell Automation's
Allen-Bradley machine vision business. The acquired technology related to
certain products under development. The technology was valued using a
risk-adjusted cash flow model, under which future cash flows were discounted
taking into account risks related to existing markets, the technology's life
expectancy, future target markets and potential changes thereto, and the
competitive outlook for the technology. This analysis resulted in an allocation
of $2,100,000 to in-process technology which had not reached technological
feasibility and had no alternative future use, and accordingly, was expensed
immediately.
The Company expects to incur additional costs to complete and integrate the
technology to the Company's product standards. These expenditures will be
completed in 1999 with anticipated funding from cash generated from operations
and are not expected to significantly impact the planned level of research and
development expenditures.
Investment income for the year ended December 31, 1998 increased 14% to
$6,756,000 from $5,947,000 for the year ended December 31, 1997. The increase in
investment income is due primarily to a higher average invested cash balance in
1998.
Other income for the year ended December 31, 1998 increased 2% to $733,000 from
$718,000 for the year ended December 31, 1997. Other income consists primarily
of rental income, net of related expenses, from leasing the building adjacent to
the Company's corporate headquarters.
The Company's effective tax rate for the year ended December 31, 1998 was 26%
compared to 30.5% for the year ended December 31, 1997. The decrease in the
effective tax rate is due primarily to the impact of the Company's use of
tax-free investments and the Company's lower profitability in 1998.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
The acquisition on July 31, 1997 of Mayan Automation, Inc. (Mayan), a developer
of low-cost machine vision systems used for surface inspection, was accounted
for under the purchase method of accounting. The results of operations of Mayan
since the acquisition date are included in the Company's results.
Revenue for the year ended December 31, 1997 increased 26% to $155,340,000 from
$122,843,000 for the year ended December 31, 1996. This increase in revenue over
the prior year represents a recovery from the slowdown in the semiconductor and
electronics industries which had previously impacted the Company's business. The
increase is due primarily to increased volume from OEM customers serving these
two industries. Sales to OEM customers increased $26,221,000, or 33%, over 1996,
and grew to 68% of revenue in 1997 from 65% of revenue in 1996. Additionally,
sales to end-user customers increased $6,276,000, or 15%, over 1996 due
primarily to increased volume resulting from additional sales and marketing
resources serving customers in this market, as well as the addition of Fine-Line
products from the acquisition of Mayan in the third quarter of 1997.
14
<PAGE> 4
Gross margin as a percentage of revenue for the year ended December 31, 1997 was
73% compared to 68% for 1996. Gross margin for 1996 included a $4,231,000
inventory charge to "Cost of Revenue," which reduced the margin by approximately
four percentage points. The charge reflected costs associated with excess
inventories resulting from product transition plans, as well as reduced
production plans caused by the slowdown in the semiconductor and electronics
industries. Excluding the 1996 inventory charge, the slight improvement in gross
margin as a percentage of revenue is due primarily to the Company's ability to
significantly increase the number of machine vision systems manufactured with
only small increases in manufacturing overhead expenses, thereby improving the
absorption rate of overhead expenses.
Research, development, and engineering expenses for the year ended December 31,
1997 increased 16% to $22,481,000 from $19,434,000 for the year ended December
31, 1996. The increase in aggregate expenses is due primarily to higher
personnel-related costs to support the Company's continued investment in the
research and development of new and existing products. Expenses as a percentage
of revenue were 14% in 1997 compared to 16% in 1996. The decrease in expenses as
a percentage of revenue results from demand from OEM customers increasing
revenue at a rate that outpaced the increase in expenses associated with the
addition of new engineers.
Selling, general, and administrative expenses for the year ended December 31,
1997 increased 36% to $35,810,000 from $26,261,000 for the year ended December
31, 1996. The increase in aggregate expenses is due primarily to higher
personnel-related costs, both domestically and internationally, to support the
Company's worldwide operations, as well as the reinstatement of company bonuses,
which were eliminated as part of an effort to control costs during 1996 in light
of the temporary downturn in the semiconductor and electronics industries.
Expenses as a percentage of revenue were 23% in 1997 compared to 21% in 1996.
Investment income for the year ended December 31, 1997 increased 26% to
$5,947,000 from $4,726,000 for the year ended December 31, 1996. The increase in
investment income is due primarily to an increase in the Company's invested cash
balance during 1997.
Other income for the year ended December 31, 1997 totaled $718,000 and remained
fairly consistent with other income of $678,000 in 1996. Other income consists
primarily of rental income, net of related expenses, from leasing the building
adjacent to the Company's corporate headquarters.
The Company's effective tax rate was 30.5% for each of the years ended December
31, 1997 and 1996.
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
The Company's cash requirements during the year ended December 31, 1998 were met
through cash generated from operations along with existing cash and investments
balances. Cash and investments decreased $19,556,000 from December 31, 1997
primarily as a result of $39,867,000 of cash used to repurchase the Company's
common stock and $7,239,000 of capital expenditures, partially offset by
$29,670,000 of cash generated from operations.
Capital expenditures for the year ended December 31, 1998 totaled $7,239,000 and
consisted primarily of expenditures for computer hardware and software, as well
as expenditures for furniture and fixtures primarily related to the occupancy of
an addition to the Company's corporate headquarters, and expenditures for
leasehold improvements related to a new office in Japan.
As discussed in the Notes to Consolidated Financial Statements, at December 31,
1998, the Company had unconditional obligations to purchase $3,670,000 of
inventory from third-party contractors within 60 days.
On April 21, 1998, the Company's Board of Directors authorized the repurchase of
up to $20,000,000 of the Company's common stock. A total of 882,000 shares were
repurchased through May 27, 1998 amounting to $19,937,000 which completed the
Company's stock repurchases under this program. On June 3, 1998, the Board
authorized the repurchase of up to an additional 1,500,000 shares of the
Company's common stock. As of December 31, 1998, 1,320,000 shares have been
repurchased under this second program amounting to
- --------------------------------------------------------------------------------
15 COGNEX
<PAGE> 5
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
$19,930,000. Funds for the stock repurchases came from the Company's existing
cash and investments balance along with cash generated from operations.
The Company believes that its existing cash and investments balance, together
with cash generated from operations, will be sufficient to meet the Company's
planned working capital and capital expenditure requirements through 1999,
including potential business acquisitions.
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 is effective for
all fiscal quarters of all fiscal years beginning after June 15, 1999. SFAS No.
133 requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company anticipates that, due to its limited use of
derivative instruments, the adoption of SFAS No. 133 will not have a material
impact on the Company's results of operations or financial position.
On January 1, 1999, eleven of the fifteen member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
and the euro, making the euro their common legal currency on that date. Based on
a recent assessment, the euro conversion is not anticipated to have a material
impact on the Company's business.
Year 2000 Update
- --------------------------------------------------------------------------------
The Company is aware of the potential for industry-wide business disruption
which could occur due to problems related to the "Year 2000" issue. Management
believes that it has a prudent plan in place to address this issue within the
Company and its supply chain. The components of this plan include: an assessment
of internal systems for modification and/or replacement; communication with
external vendors to determine their state of readiness to maintain an
uninterrupted supply of goods and services to the Company; and an evaluation of
products sold by the Company to customers as to the ability of the products to
work properly after the turn of the century.
Internal Systems
The Company's process for achieving Year 2000 compliance for internal systems is
as follows:
1. Develop an inventory of all internal systems
2. Determine the Year 2000 compliance status of each internal system
3. Prioritize the importance of Year 2000 compliance for each internal system
4. Determine the method to be used to achieve compliance (modify, replace,
cease use)
5. Complete the planned action
6. Test the system
The initial inventory, compliance status, and prioritization of all internal
systems in use throughout the Company have been completed. The Company has
identified five internal systems that are used for business transaction
processing as being critical to the uninterrupted operation of the business. Of
these five systems, the Company's initial assessment indicates that three are
Year 2000 compliant. The Company is on schedule to have the remaining two
systems Year 2000 compliant by June 30, 1999 through vendor-provided upgrades.
In addition, the Company has completed an initial assessment of its technology
infrastructure (servers, networks, phone systems) and expects to have all
non-compliant items remediated, replaced, or decommissioned by June 30, 1999.
16
<PAGE> 6
Vendors
The Company has initiated a program to survey the Year 2000 readiness of its
major vendors. The Company has sent letters to over 250 vendors outlining its
approach towards the Year 2000 issue and asking for either their certification
that their product is Year 2000 compliant or their commitment to resolve any
issues they may have. The Company has identified vendors it views as critical to
its business. Management has defined a critical vendor as one whose inability to
continue to provide goods and services would have a serious adverse impact on
the Company's ability to produce, deliver, and collect payment for its product.
To date, the Company has received responses from all critical vendors with the
exception of two. These two vendors have been contacted by the senior management
member responsible for the business relationship and have been requested to
respond to the Company's Year 2000 letter.
Products
Product testing is now complete and has confirmed that Cognex's core vision
functionality is not date sensitive or dependent on dates in any way, and is
therefore Year 2000 compliant. The Company's Year 2000 product compliance
verification methodology consisted of a review of the source code and functional
testing of the recent releases of Cognex products, which are believed to be
representative of earlier releases as well. Year 2000 compliance verification
included examination of the 1999/2000 date rollover, date sensitive
functionality with the year 2000, and leap year compliance.
Costs
Costs incurred in the Company's Year 2000 compliance effort are expensed as
incurred and funded with cash generated from operations. These costs are
included in the normal, recurring costs incurred for product development and
systems maintenance and are not material to the Company's results of operations,
nor are they expected to be in the future.
Risks and Contingency Plan
Although the Company believes it is taking prudent action related to the
identification and resolution of issues related to the Year 2000, its assessment
is still in progress. It may never be able to know with certainty whether
certain critical vendors are compliant. Failure of critical vendors to make
their computer systems Year 2000 compliant could result in delaying deliveries
of products and services to the Company. If such delays are extensive, they
could have a material adverse effect on the Company's business.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities. Such
failures could materially and adversely affect the Company's results of
operations, liquidity, and financial condition. Due to the general uncertainty
inherent in the Year 2000 issue, resulting in part from the uncertainty of the
Year 2000 readiness of third-party vendors, the Company is unable to determine
at this time whether the consequences of Year 2000 failures will have a material
impact on the Company's results of operations, liquidity, or financial position.
The Year 2000 compliance project is expected to reduce, but not eliminate, the
Company's level of uncertainty about the Year 2000 issue and, in particular,
about the Year 2000 compliance and readiness of its critical vendors. The
Company believes that, with the completion of the Year 2000 compliance project
as scheduled, the possibility of significant interruptions to normal operations
should be reduced.
The Company continues to evaluate the risks associated with potential Year 2000
related failures. As management better understands the risks within the
Company's unique set of internal systems, business partners, and products, a
formal contingency plan to alleviate the impact of high potential or serious
failures will be developed. The Company anticipates having this contingency plan
outlined by June 30, 1999. The components of this plan will likely include raw
material and finished goods inventory levels, alternative vendors, and backup
systems. Until the contingency plan is completed, the Company
- --------------------------------------------------------------------------------
17 COGNEX
<PAGE> 7
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
does not possess the information necessary to estimate the potential negative
impact of Year 2000 compliance issues related to internal systems, its vendors,
its customers, or other parties.
Forward-Looking Statements
- --------------------------------------------------------------------------------
Certain statements made in this report (including statements regarding the Year
2000 issue), as well as oral statements made by the Company from time to time,
which are prefaced with words such as "expects," "anticipates," "believes,"
"projects," "intends," "plans," and similar words and other statements of
similar sense, are forward-looking statements. These statements are based on the
Company's current expectations and estimates as to prospective events and
circumstances, which may or may not be in the Company's control and as to which
there can be no firm assurances given. These forward-looking statements, like
any other forward-looking statements, involve risks and uncertainties that could
cause actual results to differ materially from those projected or anticipated.
Such risks and uncertainties include: (1) the loss of, or a significant
curtailment of purchases by, any one or more principal customers; (2) the
cyclicality of the semiconductor and electronics industries; (3) the Company's
continued ability to achieve significant international revenue; (4) capital
spending trends by manufacturing companies; (5) inability to protect the
Company's proprietary technology and intellectual property; (6) inability to
attract or retain skilled employees; (7) technological obsolescence of current
products and the inability to develop new products; (8) inability to respond to
competitive technology and pricing pressures; and (9) reliance upon certain sole
source suppliers to manufacture or deliver critical components of the Company's
products. The foregoing list should not be construed as exhaustive and the
Company disclaims any obligation subsequently to revise forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events. Further
discussions of risk factors are also available in the Company's registration
statements filed with the Securities and Exchange Commission. The Company wishes
to caution readers not to place undue reliance upon any such forward-looking
statements, which speak only as of the date made.
18
<PAGE> 8
- --------------------------------------------------------------------------------
COGNEX CORPORATION -
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996(1)(2) 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF INCOME DATA:
REVENUE $121,844 $155,340 $122,843 $104,543 $62,484
COST OF REVENUE 37,296 42,273 38,855 22,543 13,884
- ----------------------------------------------------------------------------------------------
GROSS MARGIN 84,548 113,067 83,988 82,000 48,600
RESEARCH, DEVELOPMENT, AND ENGINEERING
EXPENSES 24,662 22,481 19,434 13,190 9,933
SELLING, GENERAL, AND ADMINISTRATIVE
EXPENSES 37,973 35,810 26,261 23,973 16,847
CHARGE FOR ACQUIRED IN-PROCESS TECHNOLOGY 2,100 3,115 10,189
- ----------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 19,813 51,661 38,293 34,648 21,820
INVESTMENT AND OTHER INCOME 7,489 6,665 5,404 2,965 1,462
- ----------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 27,302 58,326 43,697 37,613 23,282
PROVISION FOR INCOME TAXES 7,099 17,790 13,328 14,579 7,210
- ----------------------------------------------------------------------------------------------
NET INCOME $ 20,203 $ 40,536 $ 30,369 $ 23,034 $16,072
==============================================================================================
BASIC NET INCOME PER SHARE (3) $ .49 $ .98 $ .75 $ .60 $ .47
==============================================================================================
DILUTED NET INCOME PER SHARE (3) $ .47 $ .91 $ .69 $ .55 $ .43
==============================================================================================
BASIC WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING (3) 40,978 41,322 40,594 38,175 34,560
==============================================================================================
DILUTED WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING (3) 43,203 44,702 43,814 41,952 37,150
==============================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
December 31, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
WORKING CAPITAL $184,363 $199,570 $152,817 $119,402 $ 88,619
TOTAL ASSETS 247,928 261,840 201,253 162,172 112,946
LONG-TERM DEBT - - - - -
STOCKHOLDERS' EQUITY 222,875 236,142 182,689 143,916 103,608
</TABLE>
(1) 1996 RESULTS INCLUDE THE FULL YEAR RESULTS OF ISYS CONTROLS, INC. (ISYS), A
DEVELOPER OF MACHINE VISION SYSTEMS FOR HIGH-SPEED SURFACE INSPECTION
ACQUIRED IN FEBRUARY 1996. THE ISYS ACQUISITION WAS ACCOUNTED FOR AS A
POOLING OF INTERESTS; HOWEVER, BECAUSE THE RESULTS OF ISYS FOR PRIOR YEARS
WERE NOT MATERIAL TO THE COMPANY'S PREVIOUSLY REPORTED RESULTS, PRIOR YEARS
HAVE NOT BEEN RESTATED.
(2) COST OF REVENUE INCLUDES A $4,231,000 INVENTORY CHARGE FOR COSTS ASSOCIATED
WITH EXCESS INVENTORIES RESULTING FROM PRODUCT TRANSITION PLANS, AS WELL AS
REDUCED PRODUCTION PLANS.
(3) ADJUSTED FOR THE 2-FOR-1 STOCK SPLIT EFFECTIVE DECEMBER 18, 1995.
================================================================================
- --------------------------------------------------------------------------------
19 COGNEX
<PAGE> 9
- --------------------------------------------------------------------------------
COGNEX CORPORATION -
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998 1997 1996
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUE $121,844 $155,340 $122,843
COST OF REVENUE 37,296 42,273 38,855
- --------------------------------------------------------------------------------
GROSS MARGIN 84,548 113,067 83,988
RESEARCH, DEVELOPMENT, AND ENGINEERING EXPENSES 24,662 22,481 19,434
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 37,973 35,810 26,261
CHARGE FOR ACQUIRED IN-PROCESS TECHNOLOGY 2,100 3,115
- --------------------------------------------------------------------------------
INCOME FROM OPERATIONS 19,813 51,661 38,293
INVESTMENT INCOME 6,756 5,947 4,726
OTHER INCOME 733 718 678
- --------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 27,302 58,326 43,697
PROVISION FOR INCOME TAXES 7,099 17,790 13,328
- --------------------------------------------------------------------------------
NET INCOME $20,203 $40,536 $30,369
================================================================================
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE:
BASIC $ .49 $ .98 $ .75
================================================================================
DILUTED $ .47 $ .91 $ .69
================================================================================
WEIGHTED-AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
BASIC 40,978 41,322 40,594
================================================================================
DILUTED 43,203 44,702 43,814
================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
================================================================================
20
<PAGE> 10
- --------------------------------------------------------------------------------
COGNEX CORPORATION -
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
DECEMBER 31, 1998 1997
- --------------------------------------------------------------------------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
CASH AND INVESTMENTS $158,458 $178,014
ACCOUNTS RECEIVABLE, LESS RESERVES OF $2,583 AND $1,940
IN 1998 AND 1997, RESPECTIVELY 20,987 25,095
REVENUE IN EXCESS OF BILLINGS 4,945 3,723
INVENTORIES 10,812 7,784
DEFERRED INCOME TAXES 3,936 3,453
PREPAID EXPENSES AND OTHER 8,141 5,937
- --------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 207,279 224,006
================================================================================
PROPERTY, PLANT, AND EQUIPMENT, NET 34,255 32,995
DEFERRED INCOME TAXES 2,237 1,377
OTHER ASSETS 4,157 3,462
- --------------------------------------------------------------------------------
$247,928 $261,840
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $ 2,488 $ 3,332
ACCRUED EXPENSES 11,653 13,712
ACCRUED INCOME TAXES 916 2,684
CUSTOMER DEPOSITS 4,894 3,112
DEFERRED REVENUE 2,965 1,596
- --------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 22,916 24,436
- --------------------------------------------------------------------------------
OTHER LIABILITIES 2,137 1,262
COMMITMENTS (SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS)
STOCKHOLDERS' EQUITY:
COMMON STOCK, $.002 PAR VALUE-
AUTHORIZED: 120,000,000 SHARES, ISSUED: 42,453,980 AND
41,859,395 SHARES IN 1998 AND 1997, RESPECTIVELY 85 84
ADDITIONAL PAID-IN CAPITAL 97,531 91,082
TREASURY STOCK, AT COST, 2,307,140 AND 103,139 SHARES IN 1998
AND 1997, RESPECTIVELY (41,353) (1,436)
RETAINED EARNINGS 166,571 146,368
ACCUMULATED OTHER COMPREHENSIVE INCOME 41 44
- --------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 222,875 236,142
- --------------------------------------------------------------------------------
$247,928 $261,840
================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
================================================================================
21 COGNEX
<PAGE> 11
- --------------------------------------------------------------------------------
COGNEX CORPORATION - CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
--------------------- PAID-IN -------------------
(DOLLARS IN THOUSANDS) SHARES PAR VALUE CAPITAL SHARES COST
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 39,039,675 $78 $71,171 80,918 $ (889)
COMMON STOCK ISSUED TO ACQUIRE
ISYS CONTROLS, INC 1,331,927 3 2,469
ISSUANCE OF STOCK UNDER STOCK OPTION,
STOCK PURCHASE, AND BONUS PLANS 542,564 1 2,495
TAX BENEFIT FROM EXERCISE OF STOCK
OPTIONS 1,434
COMPREHENSIVE INCOME:
NET INCOME
TRANSLATION ADJUSTMENT
COMPREHENSIVE INCOME
------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 40,914,166 82 77,569 80,918 (889)
==================================================================
ISSUANCE OF STOCK UNDER STOCK OPTION,
STOCK PURCHASE, AND BONUS PLANS 945,229 2 5,504
TAX BENEFIT FROM EXERCISE OF STOCK
OPTIONS 8,009
COMMON STOCK RECEIVED FOR PAYMENT
OF STOCK OPTION EXERCISES 22,221 (547)
COMPREHENSIVE INCOME:
NET INCOME
TRANSLATION ADJUSTMENT
COMPREHENSIVE INCOME
------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 41,859,395 84 91,082 103,139 (1,436)
==================================================================
ISSUANCE OF STOCK UNDER STOCK OPTION,
STOCK PURCHASE, AND BONUS PLANS 594,585 1 4,385
TAX BENEFIT FROM EXERCISE OF STOCK
OPTIONS 2,064
COMMON STOCK RECEIVED FOR PAYMENT
OF STOCK OPTION EXERCISES 2,001 (50)
REPURCHASE OF COMMON STOCK 2,202,000 (39,867)
COMPREHENSIVE INCOME:
NET INCOME
TRANSLATION ADJUSTMENT
COMPREHENSIVE INCOME
------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 42,453,980 $85 $97,531 2,307,140 $(41,353)
==================================================================
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
RETAINED COMPREHENSIVE COMPREHENSIVE STOCKHOLDERS'
(DOLLARS IN THOUSANDS) EARNINGS INCOME INCOME EQUITY
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 73,516 $ 40 $143,916
COMMON STOCK ISSUED TO ACQUIRE
ISYS CONTROLS, INC 1,947 4,419
ISSUANCE OF STOCK UNDER STOCK OPTION,
STOCK PURCHASE, AND BONUS PLANS 2,496
TAX BENEFIT FROM EXERCISE OF STOCK
OPTIONS 1,434
COMPREHENSIVE INCOME:
NET INCOME 30,369 $30,369 30,369
TRANSLATION ADJUSTMENT 55 55 55
-----------
COMPREHENSIVE INCOME 30,424
-------------------------------===========----------------
BALANCE AT DECEMBER 31, 1996 105,832 95 182,689
=============================== ================
ISSUANCE OF STOCK UNDER STOCK OPTION,
STOCK PURCHASE, AND BONUS PLANS 5,506
TAX BENEFIT FROM EXERCISE OF STOCK
OPTIONS 8,009
COMMON STOCK RECEIVED FOR PAYMENT
OF STOCK OPTION EXERCISES (547)
COMPREHENSIVE INCOME:
NET INCOME 40,536 40,536 40,536
TRANSLATION ADJUSTMENT (51) (51) (51)
-----------
COMPREHENSIVE INCOME 40,485
-------------------------------===========----------------
BALANCE AT DECEMBER 31, 1997 146,368 44 236,142
=============================== ================
ISSUANCE OF STOCK UNDER STOCK OPTION,
STOCK PURCHASE, AND BONUS PLANS 4,386
TAX BENEFIT FROM EXERCISE OF STOCK
OPTIONS 2,064
COMMON STOCK RECEIVED FOR PAYMENT
OF STOCK OPTION EXERCISES (50)
REPURCHASE OF COMMON STOCK (39,867)
COMPREHENSIVE INCOME:
NET INCOME 20,203 20,203 20,203
TRANSLATION ADJUSTMENT (3) (3) (3)
-----------
COMPREHENSIVE INCOME $20,200
-------------------------------===========----------------
BALANCE AT DECEMBER 31, 1998 $166,571 $41 $222,875
=============================== ================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
22
================================================================================
<PAGE> 12
- --------------------------------------------------------------------------------
COGNEX CORPORATION --
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 20,203 $ 40,536 $ 30,369
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION OF PROPERTY, PLANT, AND EQUIPMENT 6,393 4,870 4,352
AMORTIZATION OF INTANGIBLE ASSETS 796 938 735
AMORTIZATION OF INVESTMENTS 1,525 1,399 1,426
TAX BENEFIT FROM EXERCISE OF STOCK OPTIONS 2,064 8,009 1,434
CHARGE FOR ACQUIRED IN-PROCESS TECHNOLOGY 2,100 3,115
INVENTORY PROVISION 4,231
DEFERRED INCOME TAX PROVISION (1,343) (2,581) (385)
CHANGES IN OTHER CURRENT ASSETS AND CURRENT LIABILITIES:
ACCOUNTS RECEIVABLE 5,052 (6,603) 6,276
INVENTORIES (3,627) (920) 2,523
ACCOUNTS PAYABLE (902) (421) 519
OTHER CURRENT ASSETS AND CURRENT LIABILITIES (3,498) 5,080 956
OTHER OPERATING ACTIVITIES 907 314 28
- ------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 29,670 53,736 52,464
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
PURCHASE OF INVESTMENTS (81,616) (94,581) (63,067)
MATURITY OF INVESTMENTS 89,256 38,943 42,793
PURCHASE OF PROPERTY, PLANT, AND EQUIPMENT (7,239) (10,852) (10,154)
CASH PAID FOR TECHNOLOGY ACQUISITIONS,
NET OF CASH ASSUMED, AND EQUITY INVESTMENTS (3,954) (2,999) (359)
- ------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (3,553) (69,489) (30,787)
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
ISSUANCE OF STOCK UNDER STOCK OPTION,
STOCK PURCHASE, AND BONUS PLANS 4,336 4,959 2,496
REPURCHASE OF COMMON STOCK (39,867)
- ------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (35,531) 4,959 2,496
- ------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (977) 569 339
- ------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (10,391) (10,225) 24,512
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 38,198 48,423 23,911
- ------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR 27,807 38,198 48,423
INVESTMENTS 130,651 139,816 85,577
- ------------------------------------------------------------------------------------------------------------------------
CASH AND INVESTMENTS $158,458 $178,014 $134,000
========================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
================================================================================
23
<PAGE> 13
- --------------------------------------------------------------------------------
COGNEX CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
The accompanying consolidated financial statements reflect the application of
certain accounting policies described below.
Nature of Operations
Cognex Corporation (the Company) designs, develops, and markets machine vision
systems, or computers that can "see." The Company's products are used to
automate a wide range of manufacturing processes where vision is required.
Use of Estimates in the Preparation of Financial Statements
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 at the balance sheet date
and the reported amounts of revenues and expenses during the year. Actual
results could differ from those estimates.
Basis of Consolidation
The consolidated financial statements include the accounts of Cognex Corporation
and its subsidiaries, all of which are wholly-owned. All intercompany accounts
and transactions have been eliminated. Certain amounts reported in prior years
have been reclassified to be consistent with the current year presentation.
Foreign Currency
The financial statements of the Company's foreign subsidiaries, where the local
currency is the functional currency, are translated using exchange rates in
effect at the end of the year for assets and liabilities and average exchange
rates during the year for results of operations. The resulting foreign currency
translation adjustments are reported as a separate component of stockholders'
equity.
Cash and Investments
Cash and investments include cash equivalents, which the Company considers to be
all investments purchased with original maturities of three months or less.
Investments having original maturities in excess of three months are stated at
amortized cost, which approximates fair value, and are classified as
available-for-sale. The Company considers all of its investments to be available
for current operations and maintains its investments in securities which are
highly liquid and would not result in significant losses if sold prior to
maturity.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined on the
first-in, first-out basis.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost and depreciated using the
straight-line method over the assets' estimated useful lives. Buildings' useful
lives are 39 years, building improvements' useful lives are 10 years, and the
useful lives of computer hardware, computer software, and furniture and fixtures
range from two to seven years. Leasehold improvements are depreciated over the
shorter of the estimated useful lives or the remaining terms of the leases.
Maintenance and repairs are expensed when incurred; additions and improvements
are capitalized. Upon retirement or disposition, the cost and related
accumulated depreciation of the assets disposed of are removed from the
accounts, with any resulting gain or loss included in current operations.
24
<PAGE> 14
- --------------------------------------------------------------------------------
COGNEX CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- --------------------------------------------------------------------------------
Intangible Assets
Intangible assets are stated at cost and amortized using the straight-line
method over the assets' estimated useful lives, which range from five to eight
years. The Company evaluates the possible impairment of long-lived assets,
including intangible assets, whenever events or circumstances indicate that the
carrying value of the assets may not be recoverable.
Warranty Obligations
The Company provides warranties for its products for periods ranging from six
months to two years from the date of shipment based upon the product being
purchased and the terms of the customer's contract. Estimated warranty
obligations are evaluated and recorded at the time of sale.
Revenue Recognition
Revenue from product sales and software licenses is recognized upon shipment.
Revenue from construction-type projects is recognized using the
percentage-of-completion method. Losses on projects, if any, are recognized when
identified. Service and maintenance revenue is recognized as earned.
Research and Development
Research and development costs for internally-developed products are expensed
when incurred until technological feasibility has been established for the
product. Thereafter, all software costs are capitalized until the product is
available for general release to customers. The cost of acquired software is
capitalized for products determined to have reached technological feasibility;
otherwise, the cost is expensed. Capitalized software costs are amortized using
the straight-line method over the economic life of the product, typically three
to five years, or based upon the anticipated revenues of the product.
Income Taxes
The Company accounts for income taxes under the liability method. Under this
method, a deferred tax asset or liability is determined based on the differences
between the financial statement and tax basis of assets and liabilities as
measured by the enacted tax rates which will be in effect when these differences
reverse. Tax credits are recorded as a reduction in income taxes. Valuation
allowances are provided if, based upon the weight of available evidence, it is
more likely than not that some or all of the deferred tax assets will not be
realized.
Net Income Per Share
Basic net income per share excludes dilution and is computed by dividing net
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted net income per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were issued, exercised, or converted into common stock. Dilutive
common equivalent shares consist of stock options, calculated using the treasury
stock method.
Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income," for the year ended December 31, 1998,
which requires that changes in comprehensive income be shown in a financial
statement that is displayed with the same prominence as other financial
statements. The Company has presented accumulated other comprehensive income and
comprehensive income on the Consolidated Statements of Stockholders' Equity in
accordance with this standard.
- --------------------------------------------------------------------------------
25
<PAGE> 15
- --------------------------------------------------------------------------------
COGNEX CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- --------------------------------------------------------------------------------
Segment Information
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," for the year ended December 31, 1998, which
requires companies to report selected information about operating segments, as
well as enterprise-wide disclosures about products and services, geographic
areas, and major customers. Operating segments are determined based on the way
that management organizes its business for making operating decisions and
assessing performance.
Financial Instruments
- --------------------------------------------------------------------------------
Fair Value
The Company's financial instruments consist primarily of cash and cash
equivalents, investments, trade receivables, trade payables, and forward
exchange contracts. The carrying amounts of cash and cash equivalents,
investments, trade receivables, and trade payables approximate fair value due to
the short maturity of these instruments. Based on year-end exchange rates and
the various maturity dates of the forward exchange contracts, the Company
estimates the aggregate contract value to be representative of the fair values
of these instruments.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents, investments, and
trade receivables.
The Company invests in debt instruments of U.S. and state government entities.
The Company has established guidelines relative to credit ratings,
diversification, and maturities that maintain safety and liquidity. The Company
has not experienced any significant losses on its cash equivalents and
investments.
A significant portion of the Company's sales and receivables are from customers
who are either in or who serve the semiconductor and electronics industries. The
Company performs ongoing credit evaluations of its customers and maintains
allowances for potential credit losses. The Company has not experienced any
significant losses related to the collection of its accounts receivable.
Off-Balance Sheet Risk
In certain instances, the Company enters into forward exchange contracts to
hedge commitments against foreign currency fluctuations. The forward exchange
contracts are for periods consistent with its committed exposure and require the
Company to exchange foreign currencies for U.S. dollars at maturity, at rates
agreed upon at the inception of the contracts. For contracts that are designated
and effective as hedges, the gain or loss on the forward exchange contract is
deferred and included in the measurement of the related foreign currency
transaction. The Company had $8,700,000 and $7,900,000 of foreign exchange
contracts outstanding, all of which were in Japanese yen, at December 31, 1998
and 1997, respectively.
Foreign Currency Risk
The Company enters into transactions denominated in foreign currencies and
includes the exchange rate gain or loss arising from such transactions in
current operations. The Company recorded an exchange rate gain of $127,000 in
1998, and exchange rate losses of $155,000 in 1997 and $1,027,000 in 1996.
26
<PAGE> 16
- --------------------------------------------------------------------------------
COGNEX CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH AND INVESTMENTS
- --------------------------------------------------------------------------------
Cash and investments consist of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
DECEMBER 31, 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
(IN THOUSANDS)
CASH $ 22,002 $ 19,868
MUNICIPAL OBLIGATIONS WITH CONTRACTUAL MATURITIES:
LESS THAN THREE MONTHS 5,805 18,330
- ----------------------------------------------------------------------------------
TOTAL CASH AND CASH EQUIVALENTS 27,807 38,198
GREATER THAN THREE MONTHS AND LESS THAN ONE YEAR 49,345 49,216
GREATER THAN ONE YEAR 81,306 90,600
- ----------------------------------------------------------------------------------
$158,458 $178,014
==================================================================================
</TABLE>
INVENTORIES
- --------------------------------------------------------------------------------
Inventories consist of the following:
- --------------------------------------------------------------------------------
DECEMBER 31, 1998 1997
- --------------------------------------------------------------------------------
(IN THOUSANDS)
RAW MATERIALS $ 6,195 $4,425
WORK-IN-PROCESS 1,262 1,355
FINISHED GOODS 3,355 2,004
- --------------------------------------------------------------------------------
$10,812 $7,784
================================================================================
27
<PAGE> 17
- --------------------------------------------------------------------------------
COGNEX CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PROPERTY, PLANT, AND EQUIPMENT
- --------------------------------------------------------------------------------
Property, plant, and equipment consist of the following:
- -------------------------------------------------------------------
DECEMBER 31, 1998 1997
- -------------------------------------------------------------------
(IN THOUSANDS)
LAND $ 3,051 $ 3,051
BUILDINGS 17,571 17,571
BUILDING IMPROVEMENTS 3,127 2,717
COMPUTER HARDWARE AND SOFTWARE 24,793 19,553
FURNITURE AND FIXTURES 3,351 2,429
LEASEHOLD IMPROVEMENTS 1,542 661
- -------------------------------------------------------------------
53,435 45,982
LESS: ACCUMULATED DEPRECIATION (19,180) (12,987)
- -------------------------------------------------------------------
$ 34,255 $ 32,995
===================================================================
ACCRUED EXPENSES
- --------------------------------------------------------------------------------
Accrued expenses consist of the following:
- -------------------------------------------------------------------
DECEMBER 31, 1998 1997
- -------------------------------------------------------------------
(IN THOUSANDS)
COMPENSATION AND RELATED COSTS $ 3,749 $ 6,075
WARRANTY 2,761 2,407
PROFESSIONAL FEES 1,407 1,027
ACQUISITION COSTS 912 1,237
OTHER 2,824 2,966
- -------------------------------------------------------------------
$ 11,653 $ 13,712
===================================================================
28
<PAGE> 18
- --------------------------------------------------------------------------------
COGNEX CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMITMENTS
- --------------------------------------------------------------------------------
The Company has agreements with third-party contractors to perform the majority
of component procurement, subassembly, final assembly, and initial testing for
the hardware portion of its vision systems. After the completion of initial
testing, the third-party contractors deliver the products to the Company to
perform final testing and assembly. At December 31, 1998, the Company had
unconditional obligations to purchase $3,670,000 of inventory from third-party
contractors within 60 days. These purchase commitments relate to expected sales
in 1999.
The Company conducts certain of its operations in leased facilities. These lease
agreements expire at various dates through the year 2003 and are accounted for
as operating leases. Annual rent expense totaled $2,366,000 in 1998, $1,637,000
in 1997, and $1,324,000 in 1996. Future minimum rental payments under these
agreements are as follows at December 31, 1998 (in thousands):
Year Amount
- ------------------
1999 $2,459
2000 2,201
2001 1,646
2002 542
2003 23
- ------------------
$6,871
==================
In June 1995, the Company purchased an 83,000 square-foot office building
adjacent to its corporate headquarters. The building is currently occupied with
tenants who have lease agreements that expire at various dates through the year
2000. Annual rental income totaled $1,499,000 in 1998, $1,428,000 in 1997, and
$1,326,000 in 1996. Rental income and related expenses are presented on the
Consolidated Statements of Income as "Other Income." Future minimum rental
receipts under non-cancelable lease agreements are as follows at December 31,
1998 (in thousands):
Year Amount
- ------------------
1999 $1,317
2000 994
- ------------------
$2,311
==================
- --------------------------------------------------------------------------------
29
<PAGE> 19
- --------------------------------------------------------------------------------
COGNEX CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Preferred Stock
The Company has 400,000 shares of authorized but unissued $.01 par value
preferred stock.
Stock Repurchase Program
On April 21, 1998, the Company's Board of Directors authorized the repurchase of
up to $20,000,000 of the Company's common stock. A total of 882,000 shares were
repurchased through May 27, 1998 amounting to $19,937,000 which completed the
Company's stock repurchases under this program. On June 3, 1998, the Board
authorized the repurchase of up to an additional 1,500,000 shares of the
Company's common stock. As of December 31, 1998, 1,320,000 shares have been
repurchased under this second program amounting to $19,930,000. Such repurchases
are part of the Company's ongoing program to replenish shares used for the
granting of stock options and are made from time to time in the open market or
in private transactions depending upon acceptable price levels and the
availability of shares.
Stock-Based Compensation Plans
The Company has adopted the disclosure requirements of SFAS No. 123, "Accounting
for Stock-Based Compensation." The Company continues to recognize compensation
costs using the intrinsic value based method described in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees." No
compensation costs were recognized in 1998, 1997, and 1996.
Net income and net income per share as reported in these consolidated financial
statements and on a pro forma basis, as if the fair value based method described
in SFAS No. 123 had been adopted, are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
NET INCOME AS REPORTED $20,203 $40,536 $30,369
PRO FORMA 13,861 34,380 25,204
BASIC NET INCOME PER SHARE AS REPORTED .49 .98 .75
PRO FORMA .34 .83 .62
DILUTED NET INCOME PER SHARE AS REPORTED .47 .91 .69
PRO FORMA .29 .74 .59
</TABLE>
The effects of applying SFAS No. 123 for the purpose of providing pro forma
disclosures may not be indicative of the effects on reported net income and net
income per share for future years, as the pro forma disclosures include the
effects of only those awards granted after January 1, 1995, and the Company
expects to grant options in future years.
30
<PAGE> 20
- --------------------------------------------------------------------------------
COGNEX CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCKHOLDERS' EQUITY (CONTINUED)
- --------------------------------------------------------------------------------
Stock Option Plans
At December 31, 1998, the Company had 10,622,000 shares approved by the Board of
Directors and stockholders for grant under the following stock option plans: the
1992 Director Plan, 352,000; the 1993 Director Plan, 320,000; the 1993 Employee
Plan, 8,000,000; the 1998 Director Plan, 250,000; and the 1998 Stock Incentive
Plan, 1,700,000. In April 1996, an amendment was adopted to increase the number
of shares of common stock reserved for issuance under the 1993 Employee Plan
from 5,000,000 shares to 8,000,000 shares.
On April 21, 1998, the stockholders approved the 1998 Stock Incentive Plan,
under which the Company may initially grant stock options and stock awards to
purchase up to 1,700,000 shares of common stock. Effective January 1, 1999 and
each January 1 thereafter during the term of the 1998 Stock Incentive Plan, the
number of shares of common stock available for grants of stock options and stock
awards shall be increased automatically to an amount equal to 4.5% of the total
number of issued shares of common stock (including shares held in treasury) as
of the close of business on December 31 of the preceding year.
In connection with the acquisition of Isys Controls, Inc. in February 1996, the
Company adopted the 1996 Long-Term Incentive Plan. This plan provided for the
grant of 321,589 shares of either restricted common stock or options to purchase
restricted stock. Other than restrictions that limit the sale and transfer of
the restricted stock within 20 years from the date of grant, participants are
entitled to all of the rights of a stockholder.
On July 30, 1996, the Company granted 1,177,830 options at the current fair
market value with similar terms and conditions to previously issued but
unexercised grants. In exchange for the new grants, employees agreed to forfeit
their prior options. On December 15, 1998, the Company granted 1,320,100 options
at the current fair market value with similar terms and conditions to previously
issued but unexercised grants. In exchange for the new grants, employees agreed
to forfeit their prior options.
Options vest over various periods, not exceeding 10 years, and expire no later
than 20 years from the date of grant.
- --------------------------------------------------------------------------------
31
<PAGE> 21
- --------------------------------------------------------------------------------
COGNEX CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCKHOLDERS' EQUITY (CONTINUED)
- --------------------------------------------------------------------------------
Stock Option Plans (Continued)
The following table summarizes the status of the Company's stock option plans at
December 31, 1998, 1997, and 1996, and changes during the years then ended:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OUTSTANDING AT BEGINNING OF YEAR 7,764,907 $ 11.85 8,014,386 $ 8.34 7,699,826 $ 9.10
GRANTED AT FAIR MARKET VALUE 3,587,535 16.63 1,450,521 24.55 933,915 16.80
GRANTED ABOVE FAIR MARKET VALUE 91,500 26.41 1,807,583 16.18
EXERCISED (604,714) 6.50 (996,965) 4.87 (518,925) 3.18
FORFEITED (2,425,393) 20.96 (794,535) 10.05 (1,908,013) 24.39
---------- ---------- -----------
OUTSTANDING AT END OF YEAR 8,322,335 11.65 7,764,907 11.85 8,014,386 8.34
========== ========== ===========
OPTIONS EXERCISABLE AT YEAR-END 2,502,865 7.45 2,140,956 6.14 2,128,058 4.40
WEIGHTED-AVERAGE GRANT-DATE FAIR
VALUE OF OPTIONS GRANTED DURING
THE YEAR AT FAIR MARKET VALUE $ 5.65 $ 12.48 $ 11.78
WEIGHTED-AVERAGE GRANT-DATE FAIR
VALUE OF OPTIONS GRANTED DURING
THE YEAR ABOVE FAIR MARKET VALUE $ 11.50 $ 4.46
</TABLE>
32
<PAGE> 22
- --------------------------------------------------------------------------------
COGNEX CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCKHOLDERS' EQUITY (CONTINUED)
- --------------------------------------------------------------------------------
Stock Option Plans (Continued)
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------------------------------------
WEIGHTED-AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$.50 - 6.00 1,126,115 4.4 $ 3.48 1,077,666 $3.55
6.06 - 7.50 2,348,965 9.5 7.46 742,465 7.39
7.94 - 14.50 1,365,930 6.9 13.40 569,133 12.69
14.56 - 15.88 1,149,740 9.4 15.58 22,319 14.82
16.00 1,671,435 9.2 16.00 1,476 16.00
16.50 - 32.81 658,150 8.5 18.97 89,606 19.60
36.31 2,000 8.6 36.31 200 36.31
--------- ---------
.50 - 36.31 8,322,335 8.2 11.65 2,502,865 7.45
--------- ---------
</TABLE>
For the purpose of providing pro forma disclosures, the fair values of options
granted were estimated using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1998, 1997, and 1996,
respectively: a risk-free interest rate of 5.1%, 6.3%, and 6.3%; an expected
life of 4.1, 5.1, and 4.4 years; expected volatility of 50%; and no expected
dividends.
Employee Stock Purchase Plan
Under the Company's Employee Stock Purchase Plan (ESPP), employees who have
completed six months of continuous employment with the Company may purchase
common stock semi-annually at the lower of 85% of the fair market value of the
stock at the beginning or end of the six-month payment period, through
accumulation of payroll deductions. Employees are required to hold stock
purchased under the ESPP for a period of one year from the date of purchase.
Common stock reserved for future sales totaled 432,864 shares at December 31,
1998. Shares purchased under the ESPP totaled 30,670 in 1998, 22,436 in 1997,
and 27,215 in 1996. The weighted-average fair value of shares purchased under
the ESPP was $7.52 in 1998, $5.08 in 1997, and $6.82 in 1996.
For the purpose of providing pro forma disclosures, the fair values of shares
purchased were estimated using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for purchases in 1998, 1997, and
1996: a risk-free interest rate of 5.3%; an expected life of six months;
expected volatility of 50%; and no expected dividends.
- --------------------------------------------------------------------------------
33
<PAGE> 23
- --------------------------------------------------------------------------------
COGNEX CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EMPLOYEE SAVINGS PLAN
- --------------------------------------------------------------------------------
Under the Company's Employee Savings Plan, a defined contribution plan,
employees who have attained age 21 may contribute 1% to 15% of their salary on a
pre-tax basis. Employer contributions are made at the discretion of management
and vest after five years of continuous employment with the Company. Employer
contributions approximated $230,000 in 1998, $400,000 in 1997, and $300,000 in
1996.
Income Taxes
- --------------------------------------------------------------------------------
The provision for income taxes consists of the following:
- -------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------
(IN THOUSANDS)
CURRENT:
FEDERAL $ 5,468 $17,048 $13,169
STATE 1,617 2,850 128
FOREIGN 1,357 473 392
- -------------------------------------------------------------------
8,442 20,371 13,689
DEFERRED:
FEDERAL (1,582) (1,552) (902)
STATE 239 (1,029) 541
- -------------------------------------------------------------------
$ 7,099 $17,790 $13,328
===================================================================
A reconciliation of the provision for income taxes to the federal statutory rate
is as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
PROVISION FOR INCOME TAXES AT FEDERAL STATUTORY RATE 35% 35% 35%
STATE INCOME TAXES, NET OF FEDERAL BENEFIT 1 2 2.5
FOREIGN SALES CORPORATION BENEFIT (3) (3) (3)
TAX-EXEMPT INVESTMENT INCOME (8) (3) (3)
TAX CREDIT UTILIZATION (1) (1)
OTHER 1 0.5
- ---------------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES 26% 30.5% 30.5%
=======================================================================================
</TABLE>
34
<PAGE> 24
- --------------------------------------------------------------------------------
COGNEX CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES (CONTINUED)
- --------------------------------------------------------------------------------
Deferred income taxes reflect the tax impact of temporary differences between
the amount of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws and regulations. The tax effects of the
principal items making up deferred income taxes are as follows:
- --------------------------------------------------------------------------
DECEMBER 31, 1998 1997
- --------------------------------------------------------------------------
(IN THOUSANDS)
CURRENT DEFERRED TAX ASSETS:
VACATION, BAD DEBT, AND OTHER $1,370 $1,296
INVENTORY, WARRANTY, AND OTHER 2,298 1,833
OTHER 268 324
- --------------------------------------------------------------------------
TOTAL NET CURRENT DEFERRED TAX ASSET $3,936 $3,453
==========================================================================
NONCURRENT DEFERRED TAX ASSETS (LIABILITIES):
STATE CREDIT CARRYFORWARDS $ 999 $ 888
ACQUIRED COMPLETE TECHNOLOGY AND OTHER (156) (376)
ACQUIRED IN-PROCESS TECHNOLOGY 1,615 1,099
DEPRECIATION (221) (234)
- --------------------------------------------------------------------------
TOTAL NET NONCURRENT DEFERRED TAX ASSET $2,237 $1,377
==========================================================================
The Company's state credit carryforwards, net of federal tax impact, are
approximately $999,000, a portion of which will begin to expire in the year
2010.
- --------------------------------------------------------------------------------
35
<PAGE> 25
- --------------------------------------------------------------------------------
COGNEX CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NET INCOME PER SHARE
- --------------------------------------------------------------------------------
Net income per share is calculated as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NET INCOME $20,203 $40,536 $30,369
======================================================================================
BASIC:
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING 40,978 41,322 40,594
======================================================================================
NET INCOME PER COMMON SHARE $ .49 $ .98 $ .75
======================================================================================
DILUTED:
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING 40,978 41,322 40,594
EFFECT OF DILUTIVE SECURITIES:
STOCK OPTIONS 2,225 3,380 3,220
- --------------------------------------------------------------------------------------
WEIGHTED-AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 43,203 44,702 43,814
======================================================================================
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE $ .47 $ .91 $ .69
======================================================================================
</TABLE>
Stock options to purchase 151,550, 545,386, and 66,500 shares of common stock
were outstanding during the years ended December 31, 1998, 1997, and 1996,
respectively, but were not included in the calculation of diluted EPS because
the option's exercise price was greater than the average market price of the
Company's common shares during those years. Although these options were
antidilutive in 1998, 1997, and 1996, because they were still outstanding at
December 31, 1998, they may be dilutive in future years' calculations. The
151,550 options in 1998 consisted of grants with exercise prices ranging from
$18.94 - $36.31. The 545,386 options in 1997 consisted of grants with exercise
prices ranging from $26.50 - $36.31. The 66,500 options in 1996 consisted of
grants with exercise prices ranging from $24.00 - $26.50.
36
<PAGE> 26
- --------------------------------------------------------------------------------
COGNEX CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEGMENT INFORMATION
- --------------------------------------------------------------------------------
The Company operates in a single segment: the sale of machine vision systems.
During the years ended December 31, 1998, 1997, and 1996, one customer accounted
for $17,083,000, $27,292,000, and $13,765,000, or 14%, 18%, and 11%,
respectively, of revenue.
The following table summarizes information about geographic areas (in
thousands):
<TABLE>
<CAPTION>
UNITED
YEAR ENDED DECEMBER 31, 1998 STATES JAPAN OTHER ELIMINATIONS CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUE:
UNAFFILIATED CUSTOMERS $104,321 $17,523 $121,844
INTERCOMPANY 5,493 $ (5,493)
LONG-LIVED ASSETS 33,807 2,035 $2,570 38,412
</TABLE>
<TABLE>
<CAPTION>
UNITED
YEAR ENDED DECEMBER 31, 1997 STATES JAPAN OTHER ELIMINATIONS CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUE:
UNAFFILIATED CUSTOMERS $137,887 $17,453 $155,340
INTERCOMPANY 10,336 $(10,336)
LONG-LIVED ASSETS 34,010 674 $1,773 36,457
</TABLE>
37
<PAGE> 27
- --------------------------------------------------------------------------------
COGNEX CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEGMENT INFORMATION (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNITED
YEAR ENDED DECEMBER 31, 1996 STATES JAPAN OTHER ELIMINATIONS CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUE:
UNAFFILIATED CUSTOMERS $107,626 $15,217 $122,843
INTERCOMPANY 9,755 $(9,755)
LONG-LIVED ASSETS 30,310 528 $1,027 31,865
</TABLE>
Revenue is presented geographically based on the country in which the sale is
recorded. Inventories are transferred to the Company's Japanese subsidiary at
previously established transfer prices, resulting in intercompany revenue and
receivables for the United States operation.
"Other" represents all long-lived assets in other countries, none of which were
significant, and certain deposits which are included in "Other Assets" on the
Consolidated Balance Sheets.
Deferred tax assets recorded in Japan are not material compared to the Company's
consolidated financial position, and therefore, are not presented.
38
<PAGE> 28
- --------------------------------------------------------------------------------
COGNEX CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACQUISITION OF ALLEN-BRADLEY TECHNOLOGY
- --------------------------------------------------------------------------------
In July 1998, the Company acquired certain technology of Rockwell Automation's
Allen-Bradley machine vision business. The acquired technology related to
certain products under development. The technology was valued using a
risk-adjusted cash flow model, under which future cash flows were discounted
taking into account risks related to existing markets, the technology's life
expectancy, future target markets and potential changes thereto, and the
competitive outlook for the technology. This analysis resulted in an allocation
of $2,100,000 to in-process technology which had not reached technological
feasibility and had no alternative future use, and accordingly, was expensed
immediately.
ACQUISITION OF MAYAN AUTOMATION, INC.
- --------------------------------------------------------------------------------
On July 31, 1997, the Company acquired selected assets and assumed selected
liabilities of Mayan Automation, Inc. (Mayan), a developer of low-cost machine
vision systems used for surface inspection, for $4,800,000 in cash. At December
31, 1998, $900,000 of the purchase price remained to be paid in cash in 1999,
contingent upon the attainment of certain performance milestones. The
acquisition was accounted for under the purchase method of accounting.
Accordingly, Mayan's results of operations have been included in the Company's
consolidated results of operations since the date of acquisition. Mayan's
historical results of operations were not material compared to the Company's
consolidated results of operations, and therefore, pro forma results are not
presented.
The purchase price was allocated among the identifiable assets of Mayan. After
allocating the purchase price to the net tangible assets, acquired technology
was valued using a risk-adjusted cash flow model, under which future cash flows
were discounted taking into account risks related to existing markets, the
technology's life expectancy, future target markets and potential changes
thereto, and the competitive outlook for the technology. This analysis resulted
in an allocation of $400,000 to complete technology, to be amortized over five
years, and $3,115,000 to in-process technology which had not reached
technological feasibility and had no alternative future use, and accordingly,
was expensed immediately. Up to an additional $900,000 of contingent
consideration will be recorded as purchase price when paid and will be allocated
to goodwill to be amortized over the remaining period of expected benefit.
ACQUISITION OF ISYS CONTROLS, INC.
- --------------------------------------------------------------------------------
On February 29, 1996, the Company acquired Isys Controls, Inc. (Isys), a
developer of machine vision systems for high-speed surface inspection. The
acquisition was accounted for as a pooling of interests, and therefore the
results of operations of Isys for the full year are included in the consolidated
financial statements of the Company for the year ended December 31, 1996.
- --------------------------------------------------------------------------------
39
<PAGE> 29
- --------------------------------------------------------------------------------
COGNEX CORPORATION -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL STATEMENT OF CASH FLOWS DISCLOSURE
- --------------------------------------------------------------------------------
Cash paid for income taxes totaled $10,710,000 in 1998, $12,564,000 in 1997, and
$11,218,000 in 1996.
Common stock received as payment for stock option exercises totaled $50,000 in
1998 and $547,000 in 1997.
The Company retired certain fully-depreciated property, plant, and equipment
totaling $1,056,000 in 1997.
In 1996, the Company exchanged 1,078,380 shares of Cognex common stock for Isys
common shares, and 253,547 shares of Cognex common stock for Isys restricted
common shares, with similar restrictions, in connection with the acquisition of
Isys.
40
<PAGE> 30
- --------------------------------------------------------------------------------
COGNEX CORPORATION --
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Cognex Corporation:
- --------------------------------------------------------------------------------
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Cognex
Corporation and its subsidiaries 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.
Boston, Massachusetts /s/ PricewaterhouseCoopers LLP
January 26, 1999 PricewaterhouseCoopers LLP
- --------------------------------------------------------------------------------
41
<PAGE> 31
- --------------------------------------------------------------------------------
COGNEX CORPORATION --
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
APRIL 5, JULY 5, OCTOBER 4, DECEMBER 31,
QUARTER ENDED 1998 1998 1998 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
REVENUE $40,056 $32,036 $24,659 $25,093
GROSS MARGIN 29,129 22,562 16,382 16,475
CHARGE FOR ACQUIRED IN-PROCESS TECHNOLOGY 2,100
INCOME (LOSS) FROM OPERATIONS 12,955 7,219 (1,095) 734
NET INCOME 10,542 6,517 951 2,193
BASIC NET INCOME PER SHARE .25 .16 .02 .05
DILUTED NET INCOME PER SHARE .24 .15 .02 .05
COMMON STOCK PRICES:
HIGH 27.000 24.690 19.250 20.000
LOW 19.500 15.500 11.250 10.125
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
MARCH 30, JUNE 29, SEPTEMBER 28, DECEMBER 31,
QUARTER ENDED 1997 1997 1997 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
REVENUE $28,143 $36,271 $43,936 $46,990
GROSS MARGIN 20,448 26,331 32,476 33,812
CHARGE FOR ACQUIRED IN-PROCESS TECHNOLOGY 3,115
INCOME FROM OPERATIONS 7,850 12,069 13,976 17,766
NET INCOME 6,491 9,372 10,941 13,732
BASIC NET INCOME PER SHARE .16 .23 .26 .33
DILUTED NET INCOME PER SHARE .15 .21 .24 .31
COMMON STOCK PRICES:
HIGH 21.750 27.500 38.500 34.375
LOW 17.500 19.000 26.375 22.250
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
================================================================================
42
<PAGE> 32
- --------------------------------------------------------------------------------
COGNEX CORPORATION --
COMPANY INFORMATION
TRANSFER AGENT
- --------------------------------------------------------------------------------
BankBoston, N.A. c/o EquiServe
P.O. Box 8040
Boston, Massachusetts 02266-8040
Telephone (800) 736-3001
GENERAL COUNSEL
- --------------------------------------------------------------------------------
Hutchins, Wheeler & Dittmar -- Boston, Massachusetts
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP -- Boston, Massachusetts
FORM 10-K
- --------------------------------------------------------------------------------
A copy of the annual report filed with the Securities and Exchange Commission on
Form 10-K is available to stockholders, without charge, upon request to:
Department of Investor Relations
Cognex Corporation
One Vision Drive
Natick, MA 01760
Additional copies of this annual report are also available, without charge, upon
request to the above address.
The Company's common stock is traded on The NASDAQ Stock Market, under the
symbol CGNX. As of February 11, 1999, there were approximately 14,000 registered
and non-registered holders of the Company's common stock.
No dividends on the Company's common stock were paid during 1998 and 1997.
43
<PAGE> 1
EXHIBIT 21
COGNEX CORPORATION
SUBSIDIARIES OF THE REGISTRANT
At December 31, 1998, the registrant had the following subsidiaries, the
financial statements of which are all included in the consolidated financial
statements of the registrant:
<TABLE>
<CAPTION>
NAME OF STATE/COUNTRY OF PERCENT
SUBSIDIARY INCORPORATION OWNERSHIP
- -------------------------------- ---------------- ---------
<S> <C> <C>
Cognex Technology and Investment
Corporation California 100%
Cognex Canada Technology, Inc. California 100%
Cognex Foreign Sales Corporation Barbados 100%
Vision Drive, Inc. Delaware 100%
Isys Controls, Inc. California 100%
Cognex K.K. Japan 100%
Cognex Europe, Inc. Delaware 100%
Cognex International, Inc. Delaware 100%
Cognex Germany, Inc. Massachusetts 100%
Cognex Singapore, Inc. Delaware 100%
Cognex Korea, Inc. Delaware 100%
Cognex Taiwan, Inc. Delaware 100%
Cognex Canada, Inc. Delaware 100%
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Cognex Corporation on Form S-8 (File Nos. 33-31657, 33-32815, 33-36263,
33-72634, 33-72636, 33-72638, 33-81150, 33-81152, 333-2151, 333-4621, and
333-60807) of our reports dated January 26, 1999, on our audits of the
consolidated financial statements and financial statement schedule of Cognex
Corporation as of December 31, 1998 and 1997, and for each of the three years in
the period ended December 31, 1998, which reports are incorporated by reference
or included in this Annual Report on Form 10-K.
Boston, Massachusetts /s/ PricewaterhouseCoopers LLP
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONSOLIDATED FINANCIAL STATEMENTS OF COGNEX CORPORATION FOR THE YEAR
ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH (B) CONSOLIDATED FINANCIAL STATEMENTS
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 27,807,000
<SECURITIES> 130,651,000
<RECEIVABLES> 23,570,000
<ALLOWANCES> 2,583,000
<INVENTORY> 10,812,000
<CURRENT-ASSETS> 207,279,000
<PP&E> 53,435,000
<DEPRECIATION> 19,180,000
<TOTAL-ASSETS> 247,928,000
<CURRENT-LIABILITIES> 22,916,000
<BONDS> 0
0
0
<COMMON> 85,000
<OTHER-SE> 222,790,000
<TOTAL-LIABILITY-AND-EQUITY> 247,928,000
<SALES> 121,844,000
<TOTAL-REVENUES> 121,844,000
<CGS> 37,296,000
<TOTAL-COSTS> 37,296,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 27,302,000
<INCOME-TAX> 7,099,000
<INCOME-CONTINUING> 20,203,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,203,000
<EPS-PRIMARY> .49
<EPS-DILUTED> .47
</TABLE>
