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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, 1999 or
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[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from
to --------------------------
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COMMISSION FILE NUMBER 0-17869
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COGNEX CORPORATION
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2713778
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE VISION DRIVE
NATICK, MASSACHUSETTS 01760-2059
(508) 650-3000
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(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 27, 2000: $1,911,742,000
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$.002 par value common stock outstanding as of February 27, 2000:
42,542,247 shares
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Documents incorporated by reference:
Specifically identified information in the Annual Report to Stockholders for the
year ended December 31, 1999, 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 2000 Annual Meeting of Stockholders to be held on
May 8, 2000, 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.
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COGNEX CORPORATION ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999
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 14 of the Annual Report to Stockholders for the year ended
December 31, 1999, 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, manufactures, 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
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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>
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<TABLE>
<S> <C> <C>
IDENTIFICATION
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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
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How good is it? Inspecting an object for flaws or Inspecting the quality of printing on
defects. pharmaceutical labels and packaging.
GAUGING
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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.
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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 that 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
revenue. However, the Company believes that end users have the potential in the
long term to generate more revenue than OEMs. Consequently, the Company has
invested in developing and acquiring products that 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 1999, approximately 69% 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 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, manufactures, 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.
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GENERAL-PURPOSE SYSTEMS
Vision Software Library
The Company offers an extensive library of 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
PatMax(R), 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 PatInspect(TM), 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. In early 2000, the Company introduced a new tool called PatFind(TM) for
the In-Sight(TM) 2000 product. PatFind is a part location tool based on the
Company's industry-leading Search and PatMax software technologies.
MVS-8000 product family
The MVS-8000 product family of programmable machine vision systems combines
Cognex's unique algorithms with Intel's new MMX instruction set. Prior to the
MVS-8000 product family, all of the Company's software ran on its own
proprietary hardware that was based on the Motorola 68k line of microprocessors.
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.
The MVS-8200 Series of embedded CPU machine 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 user 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 machine vision systems into manufacturing
equipment for the semiconductor and electronics industries. These machine 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
Checkpoint(R) is a family of PC-based machine vision systems for complex
precision guidance, gauging, and defect inspection applications. Although
Checkpoint features a graphical user interface, it does require some knowledge
of programming and machine vision to configure a vision application. Deployment
of Checkpoint on the factory floor requires the services of trained system
integrators to mechanically and electrically integrate Checkpoint into
manufacturing lines. Checkpoint is ideal for vision applications requiring
multiple cameras or color image analysis.
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.
In-Sight 2000
In early 2000, the Company entered the fast-growing market for low-cost
vision sensors with its new In-Sight 2000 product. In-Sight is an innovative,
low-cost machine vision sensor that provides Cognex's industry-leading vision
technology in an affordable, stand-alone package that does not require
programming skills or a PC to deploy. Because In-Sight is so compact and
affordable, it can be deployed in multiple points throughout the manufacturing
process where value is being added. In-Sight includes a comprehensive library of
Cognex vision software tools, including the new PatFind part location tool, and
an easy-to-use vision spreadsheet environment enabling anyone with basic
spreadsheet skills to configure a vision application. Users navigate through the
spreadsheet with a hand-held control pad.
In-Sight is sold primarily to end users located in North America, Japan,
Europe, and Southeast Asia in similar industries to the Checkpoint product
family.
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Other General-Purpose Systems
The Company continues to offer programmable machine vision systems 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 runs on
the PC.
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 machine 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(TM)/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 II (BGA) 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(TM) 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.
SmartView(TM) Modular Camera Network (MCN) detects, measures, and
classifies defects on products made in continuous processes. SmartView MCN
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(R) Intelligent Camera System, and has enabled the Company to expand
into more complex applications, including the inspection of high-end plastics
and non-wovens.
SmartView Imaging Camera Network (icn), introduced in early 2000,
detects, measures, and classifies defects on products made in continuous
processes. SmartView icn has the same basic features as SmartView MCN systems
and provides grayscale imaging capability to visualize the defects and visual
quality of the inspected web or surface. SmartView icn also offers more power
and expandability than SmartView MCN. SmartView icn will enable the Company to
expand into more complex vision applications previously only achievable with iS
systems.
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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, 1999, the Company employed 163 professionals in R, D & E,
most of whom are software developers. The Company's R, D & E expenses totaled
$27,669,000, $24,662,000, and $22,481,000, or 18%, 20%, and 14% of revenue, in
1999, 1998, and 1997, respectively.
MANUFACTURING
The majority of the Company's machine 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, SmartView MCN
systems, and SmartView icn systems are manufactured at its Alameda, California
facility. The manufacturing processes at the Alameda facility consist of
systems design, configuration management and control, component procurement,
subassembly, integration and final test, quality control, and shipment. System
installation and commissioning are performed by either the Company, its
customers, or system integrators. Certain products are manufactured by
third-party contractors using documentation created and controlled by the
Company. Certain components 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, 1999, the Company's direct sales and service force
consisted of 155 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 69%, 63%, and
62% of revenue in 1999, 1998, and 1997, respectively. One customer based in
Japan, Fuji America Corporation, accounted for approximately 13%, 14%, and 18%
of revenue in 1999, 1998, and 1997, respectively. Information about operating
segments and geographic areas, as well as foreign currency and related risk may
be found in the Notes to the Consolidated Financial Statements, appearing on
page 31 and
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pages 20 through 22 of the Annual Report to Stockholders for the
year ended December 31, 1999, 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 group provides, for a fee, services that
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 a variety of product courses that 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, trademark, copyright, and trade
secret protection to safeguard its competitive position. The Company has
obtained 68 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, trademark, 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), acuReader(TM),
Checkpoint(R), DisplayInspect(TM), Fine-Line(R), In-Sight(TM), PatMax(R),
PatInspect(TM), PatFind(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, as well as
imposes strict limitations on the customer's use of the Company's trade secret,
proprietary, and other confidential business information to which the customer
may have access. 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 incorporates such products. As a result of this action
and the continuing assertions against other current and potential Cognex
customers, the Company decided
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to initiate action against the Partnership in order to preserve its right to
sell machine vision products 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. The Company refiled the lawsuit in Reno, Nevada
on September 27, 1999, after the Judge in Massachusetts ruled that Massachusetts
is not the proper jurisdiction. While the Company believes that Massachusetts is
an appropriate jurisdiction, it decided not to appeal the Judge's decision but
rather to refile in Nevada where several other Lemelson lawsuits are in progress
and where no jurisdiction controversy exists. 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 low-cost smart camera and image sensor solutions being introduced by various
competitors on the basis of superior performance and price, rather than on price
alone, through its In-Sight 2000 product.
BACKLOG
At December 31, 1999, the Company's backlog totaled $36,788,000, compared
to $17,216,000 at December 31, 1998. 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, 1999, the Company employed 608 persons, including 272 in
sales, marketing, and support activities; 163 in research, development, and
engineering; 60 in manufacturing and quality assurance; and 113 in information
technology, finance, and administration. Of the Company's 608 employees, 183 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.
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ITEM 2: PROPERTIES
In 1994, the Company purchased and renovated a 100,000 square-foot building
located in Natick, Massachusetts that serves as it's 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 2001, 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, 1999 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, 1999:
NAME AGE TITLE
- ---- --- -----
Robert J. Shillman 53 President, Chief Executive Officer, and Chairman of
the Board of Directors
Patrick Alias 54 Executive Vice President, Worldwide Sales and
Marketing
Glenn Wienkoop 52 Executive Vice President and Chief Operating Officer
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
NAME AGE TITLE
- ---- --- -----
E. John McGarry 43 Vice President and General Manager - Portland Operations
Richard Morin 50 Vice President of Finance, Chief Financial Officer,
and Treasurer
William Silver 46 Senior Vice President and Chief Technology Officer
Mr. Silver has been employed by the Company in his present or other capacities
for no less than the past five years.
Mr. Morin joined the Company in 1999 after ten years as Chief Financial Officer
for C&K Components, Inc., an international manufacturer of electronic components
and security systems. Mr. Morin also served as Corporate Controller and Vice
President of Finance for the Jamesbury Corporation. Mr. Morin is a Certified
Public Accountant.
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 34, and the
section captioned "Company Information," appearing on page 35 of the Annual
Report to Stockholders for the year ended December 31, 1999, 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 15 of the
Annual Report to Stockholders for the year ended December 31, 1999, 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 10 through 14 of the Annual Report to
Stockholders for the year ended December 31, 1999, 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, 1999 mature within six months. Indicators as of February 18, 2000, show that
the dollar is expected to strengthen
11
<PAGE> 14
against the yen by June 30, 2000, to approximately 116 yen/USD. The hypothetical
gain in cash flows of these yen forward contracts is estimated to be $2,345,000
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, 1999 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, 1999, 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, 1999 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 value of the principal plus accrued interest
and dividends of certain interest-rate-sensitive securities at December 31,
1999.
<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 $ 202,881 $ 201,862 $ 200,608 $ 199,471 $ 198,335
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 15 through 34 of the Annual Report to
Stockholders for the year ended December 31, 1999, 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 1999 or 1998.
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 2000 Annual Meeting of
Stockholders to be held on May 8, 2000. 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 2000 Annual Meeting of Stockholders to be held on
May 8, 2000. 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 2000 Annual Meeting of Stockholders to be held on
May 8, 2000. 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, 1999, 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, 1999, 1998, and 1997
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997
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, 1999.
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 24, 2000
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 24, 2000
- -------------------------- and Chairman of the Board of Directors
Robert J. Shillman (principal executive officer)
/s/ Richard Morin Vice President of Finance, Chief Financial March 24, 2000
- -------------------------- Officer, and Treasurer
Richard Morin (principal financial and accounting officer)
/s/ Jerald Fishman Director March 24, 2000
- --------------------------
Jerald Fishman
/s/ William Krivsky Director March 24, 2000
- --------------------------
William Krivsky
/s/ Anthony Sun Director March 24, 2000
- --------------------------
Anthony Sun
/s/ Reuben Wasserman Director March 24, 2000
- --------------------------
Reuben 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 27, 2000 in the 1999 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.
Boston, Massachusetts /s/ PricewaterhouseCoopers LLP
January 27, 2000
16
<PAGE> 19
SCHEDULE II
COGNEX CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
<TABLE>
<CAPTION>
ADDITIONS
------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ------------------------------------- ------------- ------------- --------------- -------------- ------------
<S> <C> <C> <C> <C> -
Allowance for Doubtful Accounts
- -------------------------------
1999 $2,583 $ 1,050 - $ (797) (a) $2,836
1998 1,940 1,245 - (602) (a) 2,583
1997 968 1,268 - (296) (a) 1,940
Reserve for Inventory Obsolescence
- ----------------------------------
1999 $2,860 $ 1,545 - $ (450) (b) $3,955
1998 1,873 992 - (5) (b) 2,860
1997 2,273 278 - (678) (b) 1,873
</TABLE>
(a) Specific write-offs
(b) Specific dispositions
17
<PAGE> 20
EXHIBIT INDEX
EXHIBIT NUMBER
- --------------
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)
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, 1999 (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, 1999
(electronic filing only) *
* Filed herewith
18
<PAGE> 1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SUMMARY
During 1999, the Company experienced an increase in demand as its customers
recovered from the 1998 slowdown in capital spending by manufacturers in the
semiconductor and electronics industries, resulting in a 25% increase in
revenue. Sales to original equipment manufacturer (OEM) customers, most of whom
make capital equipment used by manufacturers in these industries, increased 34%
from the prior year. Sales to end-user customers also increased from 1998 by
13%.
During the year, the Company continued to invest in new product development and
end-user market penetration. This spending was outpaced, however, by the growth
in revenue, resulting in an 80% increase in operating income from 1998. Net
income increased 51% from the prior year and represented 20% of revenue in 1999.
The Company's financial position remained strong at December 31, 1999, with $315
million in total assets and $277 million in stockholders' equity. Working
capital was $231 million at December 31, 1999, representing an increase of 26%
from the prior year.
The following table sets forth certain consolidated financial data as a
percentage of revenue:
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Revenue 100% 100% 100%
Cost of revenue 30 31 27
--------------------------------------------------------------------
Gross margin 70 69 73
Research, development, and engineering expenses 18 20 14
Selling, general, and administrative expenses 29 31 23
Charge for acquired in-process technology 2 2
--------------------------------------------------------------------
Operating income 23 16 34
Investment and other income 5 6 4
--------------------------------------------------------------------
Income before provision for income taxes 28 22 38
Provision for income taxes 8 5 12
--------------------------------------------------------------------
Net income 20% 17% 26%
--------------------------------------------------------------------
</TABLE>
10
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenue for the year ended December 31, 1999 increased 25% to $152,125,000 from
$121,844,000 for the year ended December 31, 1998. During the year, the Company
experienced an increase in demand as its customers recovered from the 1998
slowdown in capital spending by manufacturers in the semiconductor and
electronics industries. The increase in revenue of $30,281,000, or 25%, from
1998 is due primarily to a higher volume of machine vision systems sold to the
Company's core OEM customers who serve these industries. Sales to OEM customers
increased $23,575,000, or 34%, from the prior year and represented 61% of total
revenue in 1999 compared to 57% of total revenue in 1998. Sales to end-user
customers increased $6,706,000, or 13%, from the prior year as a result of
increased volume from customers in general manufacturing industries, such as
automotive and consumer products.
While revenue increased in all of the Company's worldwide regions from 1998, the
most significant increase was in Japan, where most of the Company's core OEM
customers are located. Sales to customers located in Japan increased
$18,615,000, or 38%, from the prior year. Sales to customers located in Europe
increased $7,816,000, or 31%, from 1998 due primarily to a large general
manufacturing customer base in this region. Sales to customers located in the
United States increased $1,857,000, or 4%, from the prior year.
Based on increasing order trends in both the OEM and end-user markets
experienced early in the first quarter of 2000, the Company anticipates
sequential revenue growth to continue for at least the first half of 2000.
Gross margin as a percentage of revenue for 1999 was 70% compared to 69% for
1998. The increase in gross margin as a percentage of revenue is due primarily
to manufacturing efficiencies that resulted from increased product sales without
a significant increase in manufacturing overhead, as well as a lower percentage
of service revenue which carries a lower gross margin than product revenue.
Research, development, and engineering expenses for the year ended December 31,
1999 increased 12% to $27,669,000 from $24,662,000 for the year ended December
31, 1998. 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 declined from 20% in 1998 to 18% in 1999 as a result of revenue
increasing at a faster rate than spending. The Company anticipates that
aggregate expenses will continue to increase in 2000 due to planned continuing
investment in product development.
Selling, general, and administrative expenses for the year ended December 31,
1999 increased 15% to $43,655,000 from $37,973,000 for the year ended December
31, 1998. The increase in aggregate expenses is due primarily to higher
personnel-related costs to support the Company's expanding worldwide operations,
including employee bonuses which were reinstated in 1999. Expenses as a
percentage of revenue declined from 31% in 1998 to 29% in 1999 as a result of
revenue increasing at a faster rate than spending . The Company anticipates that
aggregate expenses will continue to increase in 2000 due to additional resources
required to support the anticipated higher level of demand and to further
penetrate the end-user market.
Investment income for the year ended December 31, 1999 decreased 3% to
$6,572,000 from $6,756,000 for the year ended December 31, 1998. The decrease in
investment income is due primarily to lower average interest rates on the
Company's portfolio of investments, which consists principally of debt
securities.
Other income for the year ended December 31, 1999 remained relatively consistent
at $728,000 compared to $733,000 for the year ended December 31, 1998. 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 1999 was 29% compared to 26% for 1998. The
increase in the effective tax rate is due primarily to the higher operating
income in 1999 and the diminishing effect of tax-free investments.
11
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
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 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 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.
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.
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.
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 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 off set 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.
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.
12
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
(CONTINUED)
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 remained relatively
consistent at $733,000 compared to $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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements during the year ended December 31, 1999 were met
through cash generated from operations. Cash and investments increased
$58,489,000 from December 31, 1998 as a result of $55,386,000 of cash generated
from operations and $13,931,000 of proceeds from the issuance of common stock
under stock option and stock purchase plans. Capital expenditures for the year
ended December 31, 1999 totaled $3,443,000 and consisted primarily of
expenditures for computer hardware and software.
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 2000,
including potential business acquisitions.
On June 15, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. 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 operations or
other comprehensive income, depending upon whether the 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 its results of
operations or financial position.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." SAB No.
101 sets forth guidelines for accounting and disclosures related to revenue
recognition. SAB No. 101 does not require registrants that have not applied this
accounting to restate prior financial statements, provided they report a change
in accounting principle in accordance with Accounting Principles Board Opinion
No. 20, "Accounting Changes," no later than the first fiscal quarter of the
fiscal year beginning after December 15, 1999. The Company is evaluating the
accounting and disclosure requirements of SAB No. 101 and will report the
effect, if any, in the first quarter of 2000.
YEAR 2000 UPDATE
The Company has not experienced any business disruptions related to the "Year
2000" issue. Nevertheless, the Company is continuing to evaluate the risks
associated with a potential delayed impact of Year 2000 failures. Any such
failure could materially and adversely impact the Company's results of
operations, liquidity, and financial position. The Company believes that its
Year 2000 compliance project has reduced, but not eliminated, the possibility
that its operations in the future will encounter any significant interruptions
related to the Year 2000 issue.
13
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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.
14
<PAGE> 6
COGNEX CORPORATION - FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands, except per share amounts)
Statement of Income Data:
Revenue $152,125 $121,844 $155,340 $122,843 $104,543
Cost of revenue 45,221 37,296 42,273 38,855 22,543
-----------------------------------------------------------------------------------------------------
Gross margin 106,904 84,548 113,067 83,988 82,000
Research, development, and engineering
expenses 27,669 24,662 22,481 19,434 13,190
Selling, general, and administrative
expenses 43,655 37,973 35,810 26,261 23,973
Charge for acquired in-process technology 2,100 3,115 10,189
-----------------------------------------------------------------------------------------------------
Operating income 35,580 19,813 51,661 38,293 34,648
Investment and other income 7,300 7,489 6,665 5,404 2,965
-----------------------------------------------------------------------------------------------------
Income before provision for income taxes 42,880 27,302 58,326 43,697 37,613
Provision for income taxes 12,435 7,099 17,790 13,328 14,579
-----------------------------------------------------------------------------------------------------
Net income $ 30,445 $ 20,203 $ 40,536 $ 30,369 $ 23,034
=====================================================================================================
Basic net income per share $ .74 $ .49 $ .98 $ .75 $ .60
=====================================================================================================
Diluted net income per share $ .69 $ .47 $ .91 $ .69 $ .55
=====================================================================================================
Basic weighted-average common shares
outstanding 40,932 40,978 41,322 40,594 38,175
=====================================================================================================
Diluted weighted-average common shares
outstanding 43,986 43,203 44,702 43,814 41,952
=====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands)
Balance Sheet Data:
Working capital $231,327 $183,277 $199,570 $152,817 $119,402
Total assets 314,822 247,928 261,840 201,253 162,172
Long-term debt -- -- -- -- --
Stockholders' equity 276,624 222,875 236,142 182,689 143,916
</TABLE>
15
<PAGE> 7
COGNEX CORPORATION - CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Revenue $152,125 $121,844 $155,340
Cost of revenue 45,221 37,296 42,273
--------------------------------------------------------------------------------
Gross margin 106,904 84,548 113,067
Research, development, and engineering expenses 27,669 24,662 22,481
Selling, general, and administrative expenses 43,655 37,973 35,810
Charge for acquired in-process technology 2,100 3,115
--------------------------------------------------------------------------------
Operating income 35,580 19,813 51,661
Investment income 6,572 6,756 5,947
Other income 728 733 718
--------------------------------------------------------------------------------
Income before provision for income taxes 42,880 27,302 58,326
Provision for income taxes 12,435 7,099 17,790
--------------------------------------------------------------------------------
Net income $ 30,445 $ 20,203 $ 40,536
================================================================================
Net income per common and common
equivalent share:
Basic $ .74 $ .49 $ .98
================================================================================
Diluted $ .69 $ .47 $ .91
================================================================================
Weighted-average common and common
equivalent shares outstanding:
Basic 40,932 40,978 41,322
================================================================================
Diluted 43,986 43,203 44,702
================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE> 8
COGNEX CORPORATION - CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
ASSETS
Current assets:
Cash and investments $ 216,947 $ 158,458
Accounts receivable, less reserves of $2,836 and $2,583
in 1999 and 1998, respectively 28,742 20,987
Revenue in excess of billings 654 4,945
Inventories 10,872 10,812
Deferred income taxes 6,082 3,936
Prepaid expenses and other 5,495 8,141
---------------------------------------------------------------------------------------------
Total current assets 268,792 207,279
---------------------------------------------------------------------------------------------
Property, plant, and equipment, net 31,857 34,255
Deferred income taxes 7,051 2,237
Other assets 7,122 4,157
---------------------------------------------------------------------------------------------
$ 314,822 $ 247,928
=============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,237 $ 2,488
Accrued expenses 18,536 11,653
Accrued income taxes 7,470 2,002
Customer deposits 2,714 4,894
Deferred revenue 4,508 2,965
---------------------------------------------------------------------------------------------
Total current liabilities 37,465 24,002
---------------------------------------------------------------------------------------------
Other liabilities 733 1,051
Stockholders' equity:
Common stock, $.002 par value-
Authorized: 120,000,000 shares, issued: 44,220,434 and
42,453,980 shares in 1999 and 1998, respectively 88 85
Additional paid-in capital 122,522 97,531
Treasury stock, at cost, 2,381,032 and 2,307,140 shares in 1999
and 1998, respectively (43,550) (41,353)
Retained earnings 197,016 166,571
Accumulated other comprehensive income 548 41
---------------------------------------------------------------------------------------------
Total stockholders' equity 276,624 222,875
---------------------------------------------------------------------------------------------
$ 314,822 $ 247,928
=============================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE> 9
COGNEX CORPORATION - CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated Total
Common Stock Additional Treasury Stock Compre- Compre- Stock-
----------------- Paid-in --------------- Retained hensive hensive holders'
(Dollars in thousands) Shares Par Value Capital Shares Cost Earnings Income Income Equity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 40,914,166 $82 $ 77,569 80,918 $ (889) $105,832 $ 95 $182,689
Issuance of common stock under stock option,
stock purchase, and bonus plans 945,229 2 5,504 5,506
Tax benefit from exercise of stock
options 8,009 8,009
Common stock received for payment
of stock option exercises 22,221 (547) (547)
Comprehensive income:
Net income 40,536 $40,536 40,536
Foreign currency translation adjustment (51) (51) (51)
---------
Comprehensive income 40,485
-------------------------------------------------------------------=========---------
Balance at December 31, 1997 41,859,395 84 91,082 103,139 (1,436) 146,368 44 236,142
=================================================================== =========
Issuance of common stock under stock option,
stock purchase, and bonus plans 594,585 1 4,385 4,386
Tax benefit from exercise of stock
options 2,064 2,064
Common stock received for payment
of stock option exercises 2,001 (50) (50)
Repurchase of common stock 2,202,000 (39,867) (39,867)
Comprehensive income:
Net income 20,203 20,203 20,203
Foreign currency translation adjustment (3) (3) (3)
---------
Comprehensive income 20,200
-------------------------------------------------------------------=========---------
Balance at December 31, 1998 42,453,980 85 97,531 2,307,140 (41,353) 166,571 41 222,875
=================================================================== =========
Issuance of common stock under stock option
and stock purchase plans 1,766,454 3 16,125 16,128
Tax benefit from exercise of stock
options 8,866 8,866
Common stock received for payment
of stock option exercises 73,892 (2,197) (2,197)
Comprehensive income:
Net income 30,445 30,445 30,445
Unrealized gain on investment,
net of tax of $279 471 471 471
Foreign currency translation adjustment 36 36 36
---------
Comprehensive income $30,952
-------------------------------------------------------------------=========---------
Balance at December 31, 1999 44,220,434 $88 $122,522 2,381,032 $(43,550) $197,016 $548 $276,624
=================================================================== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE> 10
COGNEX CORPORATION - CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Cash flows from operating activities:
Net income $ 30,445 $ 20,203 $ 40,536
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of property, plant, and equipment 6,360 6,393 4,870
Amortization of intangible assets 1,179 796 938
Amortization of investments 1,752 1,525 1,399
Tax benefit from exercise of stock options 8,866 2,064 8,009
Charge for acquired in-process technology 2,100 3,115
Deferred income tax provision (6,960) (1,343) (2,581)
Changes in other current assets and current liabilities:
Accounts receivable (6,997) 5,052 (6,603)
Inventories (419) (3,627) (920)
Accounts payable 1,723 (902) (421)
Accrued expenses 7,394 (1,454) 6,403
Accrued income taxes 5,117 (687) 661
Other current assets and current liabilities 6,303 (271) (1,984)
Other operating activities 623 (179) 314
---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 55,386 29,670 53,736
---------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of investments (97,773) (81,616) (94,581)
Maturity of investments 55,566 89,256 38,943
Purchase of property, plant, and equipment (3,443) (7,239) (10,852)
Cash paid for technology acquisitions,
net of cash assumed, and equity investments (1,723) (3,954) (2,999)
---------------------------------------------------------------------------------------------------------
Net cash used in investing activities (47,373) (3,553) (69,489)
---------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of common stock under stock option,
stock purchase, and bonus plans 13,931 4,336 4,959
Repurchase of common stock (39,867)
---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 13,931 (35,531) 4,959
---------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (1,086) (977) 569
---------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 20,858 (10,391) (10,225)
Cash and cash equivalents at beginning of year 27,807 38,198 48,423
---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year 48,665 27,807 38,198
Investments 168,282 130,651 139,816
---------------------------------------------------------------------------------------------------------
Cash and investments $ 216,947 $ 158,458 $ 178,014
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE> 11
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, manufactures, 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 adjustment is recorded as other comprehensive income.
CASH AND INVESTMENTS
Cash and investments include cash equivalents, which the Company considers to be
all debt securities purchased with original maturities of three months or less.
Debt securities having original maturities in excess of three months are stated
at amortized cost, which approximates fair value, and are classified as
available-for-sale. Equity securities are stated at fair value and are also
classified as available-for-sale. Changes in unrealized gains or losses on
equity securities are recorded as other comprehensive income. The Company
considers all of its investments to be available for current operations and
maintains substantially all of its investments in securities that 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 five 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.
20
<PAGE> 12
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 two 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 warrants hardware products of its manufacture to be free from
defects in material and workmanship 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
The Company's revenue is derived primarily from two sources: (1) product sales
to both original equipment manufacturer (OEM) customers who incorporate the
Company's product into their product for resale and end-user customers, and (2)
service revenue derived principally from providing maintenance and support,
education, and consulting services to OEM and end-user customers.
The Company recognizes revenue from product sales upon shipment if a signed
purchase order exists, the fee is fixed or determinable, and collection of the
resulting receivable is probable. The Company recognizes revenue from
maintenance and support programs ratably over the program period. Revenue from
education and consulting services is recognized as the related services are
performed. Revenue from construction-type projects is recognized using the
percentage-of-completion method. Losses on projects, if any, are recognized when
identified.
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, which is
typically three to five years.
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 bases 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.
21
<PAGE> 13
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity of a company during a
period from transactions and other events and circumstances, excluding
transactions resulting from investments by owners and distributions to owners.
Other comprehensive income consists of unrealized gains and losses on
investments and foreign currency translation adjustments.
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, the
Company estimates the aggregate contract value of the forward exchange contracts
to be representative of the fair value of these instruments.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents, investments, and
trade receivables.
The Company primarily invests in debt securities of federal 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 against foreign currency fluctuations. These contracts are used to reduce
the Company's risk associated with exchange rate movements, as the gains or
losses on these contracts are intended to offset the exchange rate losses or
gains on the underlying exposures. The Company does not engage in foreign
currency speculation. The Company had $16,138,000 and $8,700,000 of foreign
exchange contracts outstanding, all of which were in Japanese yen, at December
31, 1999 and 1998, respectively.
FOREIGN CURRENCY RISK
The Company enters into transactions denominated in foreign currencies and
includes the exchange rate gains or losses arising from such transactions in
current operations. The Company recorded net exchange rate gains of $955,000 in
1999 and $127,000 in 1998, and a net exchange rate loss of $155,000 in 1997.
22
<PAGE> 14
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CASH AND INVESTMENTS
Cash and investments consist of the following:
<TABLE>
<CAPTION>
December 31, 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Cash $ 19,545 $ 22,002
Municipal obligations with contractual maturities:
Less than three months 29,120 5,805
-------------------------------------------------------------------------------
Total cash and cash equivalents 48,665 27,807
Greater than three months and less than one year 62,890 49,345
Greater than one year 105,392 81,306
-------------------------------------------------------------------------------
$216,947 $158,458
===============================================================================
</TABLE>
The Company has not experienced any significant realized gains or losses on the
sale of its investments in 1999, 1998, and 1997.
INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, 1999 1998
- --------------------------------------------
<S> <C> <C>
(In thousands)
Raw materials $ 5,451 $ 6,195
Work-in-process 1,987 1,262
Finished goods 3,434 3,355
---------------------------------------
$10,872 $10,812
=======================================
</TABLE>
23
<PAGE> 15
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, 1999 1998
- --------------------------------------------------------------
<S> <C> <C>
(In thousands)
Land $ 3,051 $ 3,051
Buildings 17,571 17,571
Building improvements 3,236 3,127
Computer hardware and software 28,230 24,793
Furniture and fixtures 3,446 3,351
Leasehold improvements 1,638 1,542
---------------------------------------------------------
57,172 53,435
Less: accumulated depreciation (25,315) (19,180)
---------------------------------------------------------
$ 31,857 $ 34,255
=========================================================
</TABLE>
"Buildings" include property held for lease with a cost basis of $4,950,000 and
accumulated depreciation of $571,000 at December 31, 1999.
OTHER ASSETS
Other assets include intangible assets which consist primarily of acquired
complete technology, non-compete agreements, and goodwill. Intangible assets had
a cost basis of $5,697,000 and $4,725,000 and accumulated amortization of
$3,930,000 and $2,756,000 at December 31, 1999 and 1998, respectively.
Other assets also include an equity security with a cost basis of $2,824,000 and
an unrealized gain of $750,000 at December 31, 1999.
ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31, 1999 1998
- ---------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Bonus $ 4,560 $ 300
Warranty 3,820 2,761
Salaries, commissions, and payroll taxes 2,737 1,943
Professional fees 1,963 1,407
Vacation 1,753 1,296
Other 3,703 3,946
----------------------------------------------------------------
$18,536 $11,653
================================================================
</TABLE>
24
<PAGE> 16
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LEASES
The Company conducts certain of its operations in leased facilities. These lease
agreements expire at various dates through 2003 and are accounted for as
operating leases. Annual rent expense totaled $2,620,000 in 1999, $2,366,000 in
1998, and $1,637,000 in 1997. Future minimum rental payments under these
agreements are as follows at December 31, 1999 (in thousands):
Year Amount
---------------
2000 $2,723
2001 2,019
2002 705
2003 31
---------------
$5,478
===============
The Company owns 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 2001. Annual rental income
totaled $1,581,000 in 1999, $1,499,000 in 1998, and $1,428,000 in 1997. Rental
income and related expenses are included in "Other income" on the Consolidated
Statements of Income. Future minimum rental receipts under non-cancelable lease
agreements are as follows at December 31, 1999 (in thousands):
Year Amount
---------------
2000 $1,207
2001 183
---------------
$1,390
===============
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. A total of 1,320,000 shares were repurchased through
November 6, 1998 amounting to $19,930,000, which completed the Company's stock
repurchases under this second program.
25
<PAGE> 17
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCKHOLDERS' EQUITY (CONTINUED)
STOCK-BASED COMPENSATION PLANS
The Company has adopted the disclosure requirements of Statement of Financial
Accounting Standard (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 1999, 1998, and 1997.
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, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands, except per share amounts)
Net income As reported $ 30,445 $ 20,203 $ 40,536
Pro forma 20,203 13,500 34,380
Basic net income per share As reported .74 .49 .98
Pro forma .49 .33 .83
Diluted net income per share As reported .69 .47 .91
Pro forma .48 .33 .79
</TABLE>
STOCK OPTION PLANS
At December 31, 1999, the Company had 10,832,453 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, 1,910,453.
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 1st 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 31st of the preceding year.
On December 15, 1998, the Company granted 1,320,100 stock 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 stock options.
Stock options generally vest over five years and generally expire no later than
ten years from the date of grant.
26
<PAGE> 18
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
The following table summarizes the status of the Company's stock option plans at
December 31, 1999, 1998, and 1997, and changes during the years then ended:
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
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 8,322,335 $ 11.65 7,764,907 $ 11.85 8,014,386 $ 8.34
Granted at fair market value 2,058,463 28.50 3,587,535 16.63 1,450,521 24.55
Granted above fair market value 91,500 26.41
Exercised (1,764,353) 9.00 (604,714) 6.50 (996,965) 4.87
Forfeited (569,605) 18.02 (2,425,393) 20.96 (794,535) 10.05
--------- --------- ---------
Outstanding at end of year 8,046,840 16.09 8,322,335 11.65 7,764,907 11.85
--------- --------- ---------
Options exercisable at year-end 2,091,171 9.47 2,502,865 7.45 2,140,956 6.14
========= ========= =========
Weighted-average grant-date fair
value of options granted during
the year at fair market value $ 14.06 $ 5.65 $ 12.48
Weighted-average grant-date fair
value of options granted during
the year above fair market value $ 11.50
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<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
- ----------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$ .50 - 7.00 616,683 4.1 $ 3.29 575,134 $ 3.38
7.38 - 7.50 1,750,625 8.8 7.50 626,625 7.50
8.06 - 15.88 1,944,932 7.3 14.63 593,220 13.45
16.00 1,340,390 8.3 16.00 197,275 16.00
16.50 - 26.19 941,577 8.6 21.90 67,792 17.69
26.50 - 36.38 1,452,633 10.8 30.12 31,125 26.58
--------- ---------
8,046,840 8.3 16.09 2,091,171 9.47
========= =========
</TABLE>
For the purpose of providing pro forma disclosures, the fair values of stock
options granted were estimated using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants in 1999, 1998, and
1997, respectively: a risk-free interest rate of 5.6%, 5.1%, and 6.3%; an
expected life of 4.5, 4.1, and 5.1 years; an expected volatility of 54%, 50%,
and 50%; and no expected dividends.
27
<PAGE> 19
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCKHOLDERS' EQUITY (CONTINUED)
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 common stock
purchased under the ESPP for a period of one year from the date of purchase.
Common stock reserved for future sales totaled 408 ,746 shares at December 31,
1999. Shares purchased under the ESPP totaled 24,118 in 1999, 30,670 in 1998,
and 22,436 in 1997. The weighted-average fair value of shares purchased under
the ESPP was $17.59 in 1999, $7.52 in 1998, and $5.08 in 1997.
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 1999, 1998, and
1997: a weighted-average risk-free interest rate of 5.3%; an expected life of
six months; an expected volatility of 54%, 50%, and 50%, respectively; and no
expected dividends.
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 $490,000 in 1999, $230,000 in 1998, and $400,000 in
1997.
INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997
- ----------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Current:
Federal $ 12,838 $ 5,468 $ 17,048
State 2,390 1,617 2,850
Foreign 1,154 1,357 473
-----------------------------------------------------------
16,382 8,442 20,371
Deferred:
Federal (2,167) (1,582) (1,552)
State (1,515) 239 (1,029)
Foreign (265) -- --
-----------------------------------------------------------
(3,947) (1,343) (2,581)
-----------------------------------------------------------
$ 12,435 $ 7,099 $ 17,790
===========================================================
</TABLE>
28
<PAGE> 20
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES (CONTINUED)
A reconciliation of the provision for income taxes to the federal statutory rate
is as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for income taxes at federal statutory rate 35% 35% 35%
State income taxes, net of federal benefit 2 1 2
Foreign Sales Corporation benefit (3) (3) (3)
Tax-exempt investment income (5) (8) (3)
Other 1 (0.5)
----------------------------------------------------------------------------------
Provision for income taxes 29% 26% 30.5%
==================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
December 31, 1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
(In thousands)
Current deferred tax assets:
Vacation, bad debt, and other $1,686 $ 1,370
Inventory, warranty, and other 3,750 2,298
Other 646 268
--------------------------------------------------------------------
Total net current deferred tax asset $6,082 $ 3,936
====================================================================
Noncurrent deferred tax assets (liabilities):
Federal and state credit carryforwards $4,918 $ 999
Acquired complete technology and other 25 (156)
Acquired in-process technology 1,685 1,615
Depreciation 423 (221)
--------------------------------------------------------------------
Total net noncurrent deferred tax asset $7,051 $ 2,237
====================================================================
</TABLE>
The Company's state credit carryforwards, net of federal tax impact, are
approximately $1,933,000, a portion of which will begin to expire in 2010. The
Company's federal credit carryforwards are approximately $2,985,000 and have an
unlimited life. Approximately $3,000,000 of the Company's credit carryforwards
relate to deductions for stock option exercises and, as a result, will be
recorded as a benefit to additional paid in capital when realized.
29
<PAGE> 21
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NET INCOME PER SHARE
Net income per share is calculated as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands, except per share amounts)
Net income $30,445 $20,203 $40,536
===================================================================================
Basic:
Weighted-average common shares outstanding 40,932 40,978 41,322
===================================================================================
Net income per common share $ .74 $ .49 $ .98
===================================================================================
Diluted:
Weighted-average common shares outstanding 40,932 40,978 41,322
Effect of dilutive securities:
Stock options 3,054 2,225 3,380
-----------------------------------------------------------------------------------
Weighted-average common and common
equivalent shares outstanding 43,986 43,203 44,702
===================================================================================
Net income per common and common
equivalent share $ .69 $ .47 $ .91
===================================================================================
</TABLE>
Stock options to purchase 97,672, 151,550, and 545,386 shares of common stock
were outstanding during the years ended December 31, 1999, 1998, and 1997,
respectively, but were not included in the calculation of diluted net income per
share because the options' exercise price was greater than the average market
price of the Company's common stock during those years. Although these stock
options were antidilutive in 1999, 1998, and 1997, they may be dilutive in
future years' calculations.
30
<PAGE> 22
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEGMENT INFORMATION
The Company has one reportable segment that designs, develops, and markets
machine vision systems. Operating segments are determined based on the way that
management organizes its business for making operating decisions and assessing
performance.
During the years ended December 31, 1999, 1998, and 1997, one customer accounted
for $19,611,000, $17,083,000, and $27,292,000, or 13%, 14%, and 18%,
respectively, of revenue.
The following table summarizes information about geographic areas (in
thousands):
<TABLE>
<CAPTION>
UNITED
Year Ended December 31, 1999 STATES JAPAN OTHER ELIMINATIONS CONSOLIDATED
- -----------------------------------------------------------------------------------------------
Revenue:
<S> <C> <C> <C> <C> <C>
Unaffiliated customers $ 130,618 $ 21,507 $ 152,125
Intercompany 10,162 $ (10,162)
Long-lived assets 30,614 2,089 $ 2,702 35,405
UNITED
Year Ended December 31, 1998 STATES JAPAN OTHER ELIMINATIONS CONSOLIDATED
- -----------------------------------------------------------------------------------------------
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
UNITED
Year Ended December 31, 1997 STATES JAPAN OTHER ELIMINATIONS CONSOLIDATED
- -----------------------------------------------------------------------------------------------
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>
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 that 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.
31
<PAGE> 23
COGNEX CORPORATION - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. 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. An additional $839,000 of contingent consideration was
recorded as purchase price when paid in 1999 and was allocated to goodwill to be
amortized over the remaining period of expected benefit, which is three years.
SUPPLEMENTAL STATEMENT OF CASH FLOWS DISCLOSURE
Cash paid for income taxes totaled $2,347,000 in 1999, $10,710,000 in 1998, and
$12,564,000 in 1997.
Common stock received as payment for stock option exercises totaled $2,197,000
in 1999, $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.
32
<PAGE> 24
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, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. 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 auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
January 27, 2000
33
<PAGE> 25
COGNEX CORPORATION - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
APRIL 4, JULY 4, OCTOBER 3, DECEMBER 31,
QUARTER ENDED 1999 1999 1999 1999
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands, except per share amounts)
Revenue $ 27,485 $ 35,271 $ 41,046 $ 48,323
Gross margin 18,757 24,329 29,097 34,721
Operating income 2,455 7,024 10,579 15,522
Net income 3,104 6,189 8,966 12,186
Basic net income per share .08 .15 .22 .29
Diluted net income per share .07 .14 .20 .27
Common stock prices:
High 28.3750 33.5000 35.8750 39.0625
Low 19.0000 23.6250 28.5000 26.1250
</TABLE>
<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
Operating income 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 27.0000 24.6875 19.2500 20.0000
Low 19.5000 15.5000 11.2500 10.1250
</TABLE>
34
<PAGE> 26
COGNEX CORPORATION - COMPANY INFORMATION
TRANSFER AGENT
BankBoston, N.A. c/o EquiServe, L.P.
P.O. Box 8040
Boston, Massachusetts 02266-8040
Telephone (781) 575-3100
www.equiserve.com
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 18, 2000, there were approximately 12,000 registered
and non-registered holders of the Company's common stock.
No dividends on the Company's common stock were paid during 1999 and 1998.
35
<PAGE> 1
EXHIBIT 21
COGNEX CORPORATION
SUBSIDIARIES OF THE REGISTRANT
At December 31, 1999, 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%
Cognex K.K. Japan 100%
Cognex Europe, b.v. Netherlands 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 27, 2000, on our audits of the
consolidated financial statements and financial statement schedule of Cognex
Corporation as of December 31, 1999 and 1998, and for each of the three years in
the period ended December 31, 1999, which reports are incorporated by reference
or included in this Annual Report on Form 10-K.
Boston, Massachusetts /s/ PricewaterhouseCoopers LLP
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFROMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF COGNEX CORPORATION FOR THE YEAR ENDED
DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 48,665,000
<SECURITIES> 168,282,000
<RECEIVABLES> 31,578,000
<ALLOWANCES> 2,836,000
<INVENTORY> 10,872,000
<CURRENT-ASSETS> 268,792,000
<PP&E> 57,172,000
<DEPRECIATION> 25,315,000
<TOTAL-ASSETS> 314,822,000
<CURRENT-LIABILITIES> 37,465,000
<BONDS> 0
0
0
<COMMON> 88,000
<OTHER-SE> 276,536,000
<TOTAL-LIABILITY-AND-EQUITY> 314,822,000
<SALES> 152,125,000
<TOTAL-REVENUES> 152,125,000
<CGS> 45,221,000
<TOTAL-COSTS> 45,221,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 42,880,000
<INCOME-TAX> 12,435,000
<INCOME-CONTINUING> 30,445,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,445,000
<EPS-BASIC> .74
<EPS-DILUTED> .69
</TABLE>
