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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended: December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ___________ to ___________
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Commission File Number: 0-26462
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PERCON INCORPORATED
(Exact name of small business issuer as specified in its charter)
91-1486560
Washington (I.R.S. Employer
(State of Incorporation) Identification No.)
1720 Willow Creek Circle, Suite 530
Eugene, OR 97402-9171
(Address of principal executive offices)
Registrant's telephone number, including area code (541) 344-1189
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: Common Stock
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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-B is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in the definitive proxy statement incorporated
by reference in Part III of this Form 10-KSB or any amendment to this Form
10-KSB. [X]
Issuer's revenues for its most recent fiscal year ended December 31, 1996 were
$22,128,172.
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Documents Incorporated by Reference
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Proxy Statement for 1997 Annual Meeting of Shareholders incorporated into Part
III of Form 10-KSB.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 21, 1997, was $25,173,258. The number of shares of Common
Stock outstanding on March 21, 1997 was 3,961,261.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Company Overview
Percon Incorporated ("Percon" or the "Company") develops, manufactures and
markets bar code reading products, including fixed-station and integrated
decoders, hand-held laser scanners, portable data terminals and data management
application software, for the automatic identification and data collection
("Auto ID") market. The Company also markets bar code input devices manufactured
by others for use with the Company's fixed-station decoders and portable data
terminals. The Company's products provide a rapid, accurate and efficient means
to collect, process, transmit, record and manage data. The Company's products
are used principally in point-of-sale, point-of-service and inventory management
applications in a wide variety of industries, including retail, education,
manufacturing, health care and package delivery.
Percon markets its products through a network of Auto ID distributors,
value-added resellers ("VARs") and systems integrators, which allows the
Company's products to reach efficiently small and mid-size end users. The
Company believes these end users will account for most of the future growth of
the Auto ID industry because the use of Auto ID equipment is not as widespread
among these organizations as it is among larger companies. The Company believes
end users find the ease of use, durability and price/performance characteristics
of its products, together with its excellent customer service, particularly
attractive. In addition, Percon markets its products to mid-size and large end
users through its strategic relationships as an original equipment manufacturer
("OEM") with other sales organizations. Percon also distributes its products
internationally primarily through VARs in Europe, Latin America and Asia.
In 1996, the Company introduced a number of new products including SnapShotTM,
the PowerWedgeTM decoder family, new versions of IntelliTrack(R) software
including ToolRoom and Check In/Out as well as new versions of all IntelliTrack
software which operate on other leading portable data terminals. SnapShot is
Percon's first manufactured hand-held laser scanner and is available in decoded
and undecoded models as well as three scanning options including standard,
enhanced and high density. Percon's PowerWedge family replaced the Series Plus
decoder family and has many new features including a small footprint form
factor, additional symbologies and increased reading performance.
In the first quarter of 1997, Percon introduced several new products including
FalconTM, Universal Program Generator ("UPG"), Symphony and international
versions of IntelliTrack. Falcon is Percon's new 386 DOS-based portable which
features PC-card capabilities for radio frequency ("RF") communications, memory
cards and modems. UPG is a WindowsTM-based program generator which allows
greater ease of programming and customizing of Percon's DOS-based portable data
terminal and other leading DOS-based portables. Symphony is a narrow band radio
product sold exclusively in Europe which supports wireless scanning
applications. The Company's international versions of IntelliTrack include six
modules available in French and international English.
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Percon's goal is to be a leading provider of innovative, high-quality Auto ID
products that are easy to use and offer superior price/performance backed by
exceptional customer service. Key elements of the Company's strategy to achieve
this goal include: (i) focusing on users in small and mid-size organizations;
(ii) leveraging third party Auto ID distribution channels; (iii) emphasizing
superior price/performance and customer service; (iv) enhancing and diversifying
product lines; (v) expanding the Company's sales channels to support
relationships as an original equipment manufacturer for companies who sell to
large end user customers; (vi) expanding the Company's international sales
channels; and (vii) expanding through strategic acquisitions.
Since Percon's initial public offering ("IPO") in July 1995, the Company has:
-- increased and diversified its product offering to include data
management application software through the acquisition of
IntelliScan, Inc. ("IntelliScan"), a Menlo Park, California based
developer of Microsoft(R) Access based software which includes
applications for inventory, fixed assets, shipping, receiving,
tool room and stock room management and check-in/out
-- increased its sales outside of the United States and Canada from 9% in
1995 to 35% in 1996
-- acquired STI S.A. (STI), a Paris based decoder manufacturer, in March
1996 which greatly increased Percon's international revenue and
expanded its fixed-station decoder and integrated decoder product
lines and provides existing European channels to increase sales of
Percon's portables and application software
-- introduced SnapShot, the first hand-held input device manufactured by
the Company, in October 1996. SnapShot took the Company six months to
develop from product inception to delivery of the first production
units
-- entered the wireless portable data terminal market and began competing
for the rapidly growing demand for open systems architecture DOS-based
portable data terminals, with its introduction of Falcon and UPG in
the first quarter of 1997
-- expanded its management team to support its rapid growth in
revenues and earnings, both domestically and internationally
The statements concerning the expected expansion of the Auto ID market and the
segments thereof, new product introductions and the markets into which these
products will be sold, and anticipated sales of the Company's products, research
and development expense and working capital needs constitute forward-looking
statements that are subject to risks and uncertainties. Factors that could
adversely affect the expected expansion of the domestic and international Auto
ID market and the portable data terminal and input device segments thereof
include, but are not limited to, business conditions and growth in the
electronics industry and general economies, both domestic and international.
Factors that could cause the new product introductions to be delayed include,
but are not limited to, any inability by a contract manufacturer of the Company
to assemble the new products in volume quantities and any failure to resolve
promptly any defects in the software incorporated into the new products or
otherwise pass an OEM's product tests. Factors that could adversely affect the
market for the new products include, but are not limited to, a longer than
expected period to achieve market acceptance of the new products and delays in,
or lower than expected, customer orders. Factors that could adversely affect
sales of the Company's products include, but are not limited to, lower than
expected customer orders, competitive
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factors (including increased competition, new product offerings by competitors
and price pressures), the availability of third party parts and supplies at
reasonable prices and product shipment interruptions due to manufacturing
difficulties. Factors that could materially increase the Company's research and
development expense include, but are not limited to, the competitive factors
noted above and the availability of third party parts and supplies at reasonable
prices, changes in proposed product mix, and technological difficulties and
resource constraints encountered in developing new products. Factors that could
adversely affect the Company's working capital needs include, but are not
limited to, each of the factors noted above, as well as the receipt of a
significant portion of customer orders and product shipments in the last month
of each quarter.
Industry Background
Auto ID encompasses the automatic recognition, decoding, processing,
transmission and recording of data, most commonly through the printing and
reading of information encoded in bar codes. Bar codes allow for rapid, simple
and accurate reading and transmission of data for items that need to be tracked
or managed. Bar codes can be printed directly on mailing tubes, envelopes,
boxes, cans, bottles, packages, books, files and other paperwork, furniture,
cards and many other items for identification.
The emergence of Auto ID systems, including bar codes and the related printers,
scanners, decoders and software, has significantly increased the speed,
efficiency and accuracy of data collection and entry. Early applications of bar
code scanning, which included retail point-of-sale, item tracking and inventory
control, have been expanded to include more advanced applications such as time
and attendance, work-in-process, quality control, sorting, order entry, document
tracking, shipping and receiving, and controlling access to secure areas. These
expanded systems have measurably increased productivity by linking production,
warehousing, distribution, sales and service to management information systems
on a batch or real-time basis. Consequently, opportunities to improve
operational efficiencies and customer responsiveness have developed for
retailers, transportation and package delivery companies, manufacturers,
wholesale distributors and service providers.
The Company believes the Auto ID market will expand to a broadening base of
applications as the cost of Auto ID technology continues to decrease and
customer acceptance of the technology increases. In addition, the Company
believes improvements in scanning technology and wireless capability and
industry mandated standardization of bar coding will further expand the Auto ID
market. The Company believes European countries and, to a lesser degree, Pacific
Rim and Latin American countries are expanding their use of Auto ID technology
and may represent significant future growth opportunities.
The Company believes portable data terminals that support wireless
communications will be a rapidly growing segment of the Auto ID market.
Furthermore, the Company believes the increased availability and use of systems
that require real time information, such as just-in-time inventory and
electronic data interchange, will provide the basis for this growth. These
systems, which are designed to shorten inventory reorder and sales cycle times,
are consistent with the increased focus on business productivity exemplified by
corporate downsizing and other measures.
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Products
Product Lines
The Company offers a range of bar code reading, decoding and data management
products, including fixed-station and integrated decoders, hand-held laser
scanners, portable data terminals and data management application software that
provide rapid, accurate and efficient means for gathering and tracking
information in a wide variety of applications.
Fixed-Station Decoders. Fixed-station decoders ("decoders") are bar code readers
designed to be connected in series with the keyboard (a "keyboard wedge") of
either a personal computer ("PC") or a computer terminal or attached to a serial
port on a host computer (a "serial decoder"). Bar codes scanned by the decoders
are translated into data used by the PC or terminal as if the data originated
from the keyboard. Decoders permit computers to read bar codes without requiring
special programming of the application software. Products in this category
include fixed-station decoders such as the PowerWedge 10, PowerWedge 20, Mini
PowerWedge, Master BB+ and Master B+. Products incorporating the base decoder
technology into other form factors, thereby creating integrated decoder
products, include the EasyKey Plus(TM), which is a 101 keyboard with an
integrated decoder and magnetic stripe reader, the SnapShot, which is a
hand-held scanner with an integrated decoder and the Decoder Communications
Card, which is an ISA Bus card incorporating the decoder technology with four
high-speed serial ports. Decoder products which incorporate narrow band RF
support include the Maestro base station and Player radio unit with belt clip;
collectively this system is called Symphony. Suggested list prices in this
product family range from $225 to $1,280. The Company also licenses its decode
and interface technology to other manufacturers.
Hand-held Input Devices. SnapShot, the Company's family of hand-held laser
scanners, are input devices which utilize scanning technology for data
collection. The Company's input devices allow for non-contact scanning of bar
code labels on flat, curved and irregular surfaces up to distances of 36 inches.
These devices come in undecoded and decoded models. The decoded models can be
connected to any supported PC or terminal as either a keyboard wedge or a serial
device. Undecoded models must be used with Percon PowerWedge decoders (or
similar decoders) or with portable data collection terminals, such as the Percon
PT 2000. These devices support all popular bar code symbologies, four types
of programming methods and full keyboard support. Suggested list prices for
these products range from $695 to $1,545.
Portable Data Terminals. Portable data terminals ("PDTs") are hand-held,
battery-powered durable computers that typically employ application-specific
software. The Company's portable data terminals may be operated for up to 12
hours of continuous operation without recharging. Data can be entered either
manually through an input device such as an integrated keypad or automatically
through a wand, CCD or hand-held laser scanner. Products offered in this
category include the PT 2000, which is a 12 ounce terminal with 34
splash-resistant alphanumeric keys, up to two megabytes of data storage and a
separate bank erasable flash ROM memory, the TopGunTM, which is a PT 2000 with
an integrated laser that allows one-handed scanning, the PocketReaderTM, which
has 19 splash-resistant keys and an integrated wand input device, and the PT
Dock, which permits data transmission to and from the host computer as well as
battery recharging. The Company also offers the Falcon, which is a 32-bit, 386
microprocessor DOS-based unit. The terminal supports 8 lines by 21 characters on
a backlit graphics LCD, weighs 14 ounces and has 41 splash-resistant
alphanumeric keys. Batch versions of the Falcon were introduced in February 1997
and the Company expects to ship RF models
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that support wireless LAN technologies through a user accessible PC-card slot in
April 1997. Through this PC-card support the unit supports RF communications,
memory cards and modems. Suggested list prices in this product family range from
$795 to $3,295.
Application Software. Application software products are PC-based computer
programs that are runtime versions of Microsoft Access. These programs, which
are available in both stand alone and networked versions, allow for the storing,
management and reporting of data. Data can be uploaded or downloaded into these
programs using the Company's portable data terminals. Products offered in this
category include the full line of IntelliTrack software, including applications
for fixed assets, inventory, shipping, receiving, tool room management, check-in
and check-out applications, and stock room management. Other software offered,
which can be used with the PDT application software, include the Portable
Application Library ("PAL") which includes seven standard applications, Percon
Program Generator ("PPG") and the Universal Program Generator ("UPG"). PPG and
UPG, our Windows(TM)-based program generators allow greater ease of programming
and customizing of Percon's portable terminals. UPG also allows custom
programming of other leading DOS-based portable data terminals. Suggested list
prices in this product family range from $995 to $4,995.
Percon also markets input devices manufactured by others, including
laser scanners, CCD scanners, wands, ID badge scanners and magnetic stripe
scanners.
Product Development
Percon's strategy is to introduce products with substantially all of the most
popular features demanded by its customers at prices below those charged by its
primary competitors. The Company continuously seeks to improve the value,
pricing, reliability, ergonomics and performance of its existing products. The
Company also seeks to shorten and reduce product development cycles and reduce
manufacturing and support costs. Substantially all of the Company's research and
development is performed by the Company's own staff.
The Company's new portable data terminals are based on open systems architecture
that will support wireless communication of collected data directly to the host
computer. The Company believes this type of terminal enhances its ability to
market products more broadly in the manufacturing and wholesaling segments of
the Auto ID market and permits users to mix and match equipment from various
vendors. The Company also has developed international versions of the
IntelliTrack software line as well as a new program generator for use in
creating software applications used in its portable data terminals. The Company
also plans to broaden its low-end portable product offering and also plans to
develop an industrial, 386-based fixed-station data terminal. There is no
assurance that the Company will be successful in developing and bringing to
market any products as a result of these efforts.
The Company spent approximately $1,755,000 and $735,000 in 1996 and 1995,
respectively, on research and product development. Company engineers are
experienced in the specialty disciplines of industrial, electronic and software
engineering.
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Sales, Distribution and Marketing
Sales and Distribution
The Company's products are used primarily by retail and service industry
companies with fewer than 500 employees. The Company markets its products to
these end users primarily through indirect distribution channels, comprised
principally of Auto ID distributors, VARs and systems integrators. Auto ID
distributors serve various vertical markets through sales to VARs and systems
integrators. VARs integrate the Company's hardware products with their
proprietary application software to provide turnkey solutions for specific
vertical markets. Systems integrators typically integrate the Company's products
with products of other manufacturers to design and create a complete Auto ID
system for a particular end user. The Company sells its products on an OEM basis
to larger companies, primarily in the Auto ID industry, that sell these products
to mid-size and large end user customers through their direct end user sales
forces. By selling its products through these indirect distribution channels,
the Company is able to target vertical markets for its products while avoiding
the expense of supporting a large end user sales force. In 1996, sales of
Company products to Auto ID distributors, VARs, systems integrators, and OEM's
accounted for approximately 28%, 28%, 20% and 10% of the Company's net sales,
respectively, and in 1995, 38%, 27%, 11% and 1% of the Company's net sales,
respectively. Sales to one distributor accounted for approximately 11% and 10%
of net sales in 1996 and 1995, respectively. No other customer accounted for
more than 10% of net sales in 1996 or 1995.
The Company also sells its products directly to a limited number of end users.
These end users typically are companies with 500 or more employees that require
specially designed Auto ID products and additional customer service and support
not provided by distributors, VARs or systems integrators. In 1996 and 1995,
sales of the Company's products directly to end users accounted for
approximately 14% and 23% of net sales, respectively.
The Company believes foreign countries are expanding their use of Auto ID
technology and may represent significant future sales and marketing
opportunities for the Company. The Company intends to continue its focus on
international sales and provide additional sales and marketing support for its
international operations. Sales outside of the U.S. and Canada accounted for
approximately $7.8 million or 35% of net sales, and $1.1 million or 9% of net
sales, in 1996 and 1995, respectively.
Marketing
Percon's marketing operations include product marketing, marketing
communications and market development functions. The product marketing staff
identifies new product opportunities and manages product positioning and
introductions through regularly consulting with distributors, VARs, systems
integrators, OEMs and end users. Additionally, the marketing staff creates and
coordinates advertising in domestic and international trade publications,
develops brochures and documentation, manages domestic and international trade
show exhibits, places articles highlighting applications of the Company's
products in trade and industry publications and is responsible for the
development of new market opportunities. These marketing efforts are augmented
by the Company's cooperative advertising and sales incentives programs which
promote greater visibility of the Company's products in the domestic
distribution channel.
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Customer Service
The Company maintains a highly responsive sales and technical support staff. The
Company provides each customer with toll-free telephone sales and technical
support and a personal account representative for orders, shipping and general
information.
The Company's fixed-station decoders carry five-year limited warranties, its
hand-held input devices and its portable data terminals carry one-year limited
warranties and input devices manufactured by others carry warranties offered by
their manufacturers. The Company's application software carry a 90-day free
technical support agreement. Quick replacement warranties may be purchased by a
customer when the product is purchased. Under a quick replacement warranty, a
customer receives a replacement unit before the defective equipment is actually
returned to Percon for repair. Extended warranties and quick replacement
warranties are available to add up to two years to the original warranty on
portable data terminals and input devices. Software maintenance agreements can
be purchased which provide the user with upgrades during the term of the
agreement and free technical support. The Company also provides custom
programming service for its line of portable data terminals.
Manufacturing and Suppliers
The Company's internal manufacturing operations consist primarily of the
production of prototypes, test engineering, material purchasing, final assembly
and testing, quality control and service and are performed at its Eugene, Oregon
and Paris, France facilities. The Company outsources manufacturing for the
production of circuit boards and subassemblies to unrelated companies near each
of the respective facilities.
The Company is dependent on a number of suppliers for components and
subassemblies. Certain of these components and subassemblies are obtained from a
single supplier or a limited number of suppliers. The Company has contracted
with an electronics component distributor for the supply of a single source
microprocessor used in its portable data collection terminals. The agreement
requires the Company to take deliveries for a fixed total quantity of the
microprocessor, with variable delivery dates, through the end of 1997. The
Company has entered into a five-year purchase agreement expiring December 31,
1997 with the supplier of a principal component of one of its decoder families.
At December 31, 1996, the Company has committed to make approximately $155,000
of purchases before the expiration of the agreement. The Company expects this
purchase commitment to be fulfilled in the normal course of business. The
Company has no other long-term contracts with component suppliers. Component or
subassembly shortages, production delays or work stoppages experienced by these
suppliers or any other circumstances resulting in the failure by any of those
suppliers to supply the Company could have a material adverse effect on the
Company's financial condition and results of operations. While to date the
Company has not experienced significant restrictions in the supply of components
and subassemblies, there is no assurance that supply restrictions will not occur
in the future.
Backlog
The Company typically ships its products within five days after receipt of an
order and thus does not normally have a significant backlog. As a result,
backlog is not meaningful to the Company's business.
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Competition
The market for Auto ID products is highly competitive, and the Company expects
this competition to increase as open systems architecture in Auto ID products
becomes more common. The strength of certain of the Company's competitors may
increase as a result of consolidation of manufacturers.
If other bar code technologies were to evolve or become available to the
Company, it is possible that those technologies would be incorporated into its
products. Alternatively, if such technologies were to evolve or become available
to the Company's competitors, the Company's products may become obsolete, which
would have a material adverse affect on the Company's results of operations.
Intellectual Property
The Company attempts to protect its intellectual property rights through a
combination of copyrights, trademarks, trade secrets and other intellectual
property law, nondisclosure agreements and other measures. The Company believes,
however, that its results of operations will depend more upon the innovation,
technological expertise, marketing and customer service abilities of its
employees than upon such protection. The Company has no patents.
Government Regulation
Certain products of the Company must comply with regulations promulgated by the
U.S. Food and Drug Administration's Center for Devices and Radiological Health
and the U.S. Federal Communications Commission, as well as the Canadian
Standards Association, the European Community Standards and TUV Rheinland, which
are corresponding agencies for certain foreign countries. The Company's
operations are also subject to certain federal, state and local requirements
relating to environmental, waste management, health and safety regulations. The
Company believes its business is operated in compliance with applicable
government, environmental, waste management, health and safety regulations.
There can be no assurance that future regulations will not require the Company
to modify its products to meet revised energy output or other requirements.
Failure to comply with future regulations could result in a material adverse
effect on the Company's results of operations.
Employees
As of March 21, 1997, the Company employed 114 people worldwide, of which 113
were full-time and 1 was part time. Of these employees, 19 were engaged in sales
and marketing, 17 in customer service support, 23 in engineering, 39 in
manufacturing and 16 in management and administrative functions. The Company
believes its future success will depend, in part, on its ability to recruit and
maintain highly qualified management, marketing, technical and administrative
personnel. None of the Company's employees is represented by a labor union. The
Company believes its relationship with its employees is good.
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ITEM 2. DESCRIPTION OF PROPERTIES
The Company's corporate headquarters, manufacturing and research and development
facility is located in Eugene, Oregon and consists of approximately 17,250
square feet of leased space. The lease expires December 31, 1997. Lease payments
are approximately $16,000 per month which includes the Company's proportionate
share of property taxes on the facility and improvement costs. The Company
intends to lease additional office space in the Eugene area once its current
lease expires and is currently negotiating a lease for this new location.
The Company's Menlo Park, California office is primarily used for sales and
research and development. It consists of 1,900 square feet of leased space.
The Company's facility located near Paris, France is used for manufacturing,
customer service, research and development, and administration. The Company owns
a 16,000 square foot building on land leased from others. The Company does not
have an option to purchase the land or extend the lease. Ownership of the
building passes to the landowner at the end of the lease term in December 2010.
The land lease payments are approximately $18,000 per year.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Price Range of Common Stock
The Common Stock began trading on the Nasdaq National Market on July 28,
1995 under the symbol "PRCN." The following table sets forth for the periods
indicated the high and low last sale prices of the Common Stock as reported on
the Nasdaq National Market.
Year Ended December 31, 1996
High Low
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Fourth Quarter $13 $9 1/4
Third Quarter $14 1/4 $7 3/4
Second Quarter $16 1/2 $11 1/2
First Quarter $19 1/8 $11 1/2
Year Ended December 31, 1995
High Low
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Fourth Quarter $13 1/4 $9
Third Quarter (since July 28, 1995) $12 1/4 $7 3/4
As of March 21, 1997, there were approximately 50 holders of record of the
Company's Common Stock. The Company believes the number of beneficial owners is
substantially greater than the number of record holders because a large portion
of the Company's outstanding Common Stock is held of record in broker "street
names" for the benefit of individual investors.
The Company has not paid cash dividends on its Common Stock since the IPO and
does not anticipate that it will do so in the foreseeable future. The Company
plans to retain earnings to finance the Company's operations.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION
Overview
Percon develops, manufactures and markets bar code reading products, including
fixed-station and integrated decoders, hand-held laser scanners, portable data
terminals and data management application software, for the worldwide automatic
identification and data collection ("Auto ID") market. The Company also markets
bar code input devices manufactured by others for use with the Company's
fixed-station decoders and portable data terminals. The Company's products
provide a rapid, accurate and efficient means to collect, process, transmit and
record data. The Company's products are used principally in point-of-sale and
point-of-service applications in a wide variety of industries, including retail,
education, manufacturing, health care and package delivery.
The Company markets its products through a network of Auto ID distributors,
value-added resellers ("VARs") and systems integrators, which allows the
Company's products to reach efficiently small and mid-size end users. In
addition, Percon markets its products to mid-size and large end users through
its strategic relationships as an original equipment manufacturer ("OEM") with
other sales organizations. The Company also distributes its products
internationally primarily through VARs in Europe, Latin America and Asia. In
addition, the Company sells its products directly to a limited number of end
users.
The Company was formed in 1983 and was acquired by the current executive
management team and a small group of private investors in July of 1990. In 1990,
the Company's product line consisted only of fixed-station decoders which were
marketed primarily through trade publications. In 1991, the Company acquired
portable data terminal technology and introduced the first product of that
product family in 1992. Sales growth through 1993 was primarily driven by
increased decoder product family sales and the creation of the distributor, VAR
and systems integrator sales channels.
The Company believes the increases in its net sales in 1996 and 1995 were due in
part to the rapid growth of portable data terminals and to the continued
expansion of its distributor, VAR and systems integrator customer base and, to a
limited extent in 1996, its activities as an OEM.
In November 1995, the Company broadened its product offering through the
acquisition of IntelliScan, Inc. and its IntelliTrack application software line.
In March 1996, the Company further broadened its product offering and
international markets through the acquisition of STI S.A. ("STI"), a French
company which develops, manufactures and markets a full line of fixed-station
decoders and integrated decoder reading products. The acquisition allows the
Company to rapidly expand its sales of portable data terminals and application
software into STI's (recently renamed Percon Europe) existing European
customer-base. During 1997 management intends to continue efforts to broaden the
Company's market opportunities through its current acquisition strategy and
through continued expansion of the Company's product offering, primarily through
the introduction of DOS-based portable products and other products which feature
open systems architecture.
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Results of Operations
Comparison of Years Ended December 31, 1996 and 1995
Net sales. Net sales for 1996 increased $9.5 million (74.7%) to $22.1 million
from $12.7 million for 1995. The increase was primarily due to increased unit
sales volume of the Company's portable data terminals and application software,
and the inclusion of the operations of STI, acquired on March 7, 1996.
International sales represented approximately 35% of net sales in 1996 compared
to 9% of net sales in 1995. The increase in international sales is primarily the
result of increased sales of product manufactured by STI. Sales of input devices
manufactured by others decreased $1.0 million as a result of the Company's
larger customers buying these products directly from the manufacturer. The
Company believes sales of input devices manufactured by others should remain at
a similar level in 1997 while sales of input devices manufactured by the Company
should increase.
Gross profit. Gross profit for 1996 increased $4.6 million (71.6%) to $11.1
million from $6.5 million for 1995, representing 50.2% and 51.1% of net sales,
respectively. The dollar increase in gross profit was primarily due to the
increase in net sales. The percentage decrease was primarily due to a decrease
in sales of high-end fixed-station decoders which carry higher gross margins and
the increased mix of products manufactured by STI, which traditionally have
lower gross margins.
Selling, marketing and customer service. Selling, marketing and customer service
expense for 1996 increased $1.3 million (60.8%) to $3.5 million from $2.2
million for 1995, representing 16.0% and 17.4% of net sales, respectively. The
dollar increase primarily resulted from activities to support the growth in net
sales. The percentage decrease primarily resulted from planned increases in
marketing activities in the first and second quarter of 1995 which were not
repeated in the first half of 1996 and operating efficiencies achieved by
spreading fixed costs over a larger revenue base.
General and administrative expense. General and administrative expense for 1996
increased $950,000 (75.1%) to $2.2 million from $1.3 million for 1995,
representing 10.0% of net sales for each year. The increase in dollar amount was
primarily a result of administrative costs associated with increased sales
volume and costs associated with being a publicly traded company.
Research and product development expense. Research and product development
expense for 1996 increased $1.0 million (138.8%) to $1.8 million from $735,000
for 1995, representing 7.9% and 5.8% of net sales, respectively. These dollar
and percentage increases were primarily due to the inclusion of STI and planned
increases in personnel and prototyping expenses to support 1996 research and
product development projects. The Company anticipates that research and product
development expenses will decrease as a percentage of sales in 1997.
Acquired in-process research and product development. A portion ($2.1 million)
of the purchase price for the acquisition of STI was allocated to acquired
in-process research and product development and accordingly was expensed as of
the acquisition date (March 7, 1996). The amount allocated to in-process
research and product development represents the estimated fair values related to
these projects. Current valuation procedures and techniques were utilized by
management in determining the respective fair market values. The development
technologies were evaluated to determine that there were no alternative future
uses. Such evaluation consisted of a specific review of the efforts, including
the overall objectives of the projects, progress toward the objectives and
uniqueness of developments to these objectives. To
13
<PAGE>
bring these projects to fruition, high risk developmental issues need to be
resolved which will require substantial additional effort and testing.
Therefore, technological feasibility of these new products has not yet been
achieved. As these projects have not reached technological feasibility and
alternative future use of these developmental technologies, apart from the
objectives of the individual projects, do not exist, these costs were expensed
as of the acquisition date. The costs reduced 1996 net income by $2.1 million or
$.51 per share.
Interest. Net interest expense of $2,000 for 1996 compared to net interest
income of $94,000 for 1995 was the result of interest expense on the long term
debt related to the building purchase at STI compared to the net interest income
in 1995 from the proceeds at the time of the initial public offering and the
subsequent investment of the proceeds therefrom.
Provision for income taxes. The provision for income taxes for 1996 was $1.3
million which represents an effective tax rate of 84.3%. The most significant
items that caused this rate to differ from the U.S. federal statutory rate of
34% was that no tax benefit was realized from the acquired in-process research
and product development expense or the amortization of goodwill. Other items
that caused the rate to differ included benefits from research and development
tax credits, both domestic and international, benefits from the Percon
Incorporated Foreign Sales Corporation and state and international taxes.
Prior to August 1995 the Company operated as an S corporation not subject to
federal and state income taxes. Pro forma provision for income taxes reflects
federal and state income taxes as if the Company had been a C corporation, based
on the rates that would have been in effect during the periods reported.
Liquidity and Capital Resources
The Company financed its operations during 1996 through net cash provided by
operations and proceeds from its initial public offering.
The Company's domestic line of credit permits it to borrow up to 80% of eligible
accounts receivable and 25% of eligible inventory (as defined by the credit
agreement) to a maximum of $1.0 million. Outstanding principal amounts
thereunder bear interest at the Bank's prime rate, which was 8.25% at December
31, 1996. No amounts were outstanding under the line of credit at December 31,
1996. With the acquisition of STI, the Company's other line of credit and
short-term borrowing arrangements with two other banks allow for additional
borrowing of up to an aggregate of approximately $260,000. These facilities bear
interest at the banks' current rates; each of which were 8.55% at December 31,
1996. No amounts were outstanding under either of these facilities at December
31, 1996.
In 1996, net cash provided by operations was $2.3 million compared to $818,000
for 1995. Significant changes included increases in accounts receivable,
inventories, accounts payable, accrued expenses and non-cash charges for
acquired in-process research and product development and amortization.
14
<PAGE>
For 1996, net cash used in investing activities totaled $4.8 million compared to
$2.2 million for 1995. In March 1996, the Company increased its in-process
research and product development and expanded its product line and distribution
channels by purchasing all of the outstanding common stock of STI in a
transaction accounted for as a purchase for financial reporting purposes. Percon
paid approximately $4.7 million in cash for STI. Cash provided by investing
activities of $998,000 for 1996 was the result of the sale of short-term
commercial paper which was purchased in 1995 and which matured in 1996. The
Company made capital expenditures and technology acquisitions toalling $1.1
million in 1996 compared to $1.0 million in 1995.
During 1996, net cash provided by financing activities totaled $36,000. Cash
from financing activities was primarily provided through proceeds from stock
issued upon exercise of stock options. Cash used in financing activities was
primarily related to the repayment of bank debt. During 1995, net cash provided
by financing activities totaled $5.3 million. Cash from financing activities was
provided by the sale of 1,273,000 shares of the Company's Common Stock in its
initial public offering which generated net proceeds of approximately $7.2
million. Cash of $302,000 was used to repay bank debt. The Company paid cash
dividends to its shareholders in the aggregate amounts of $1,508,000, of which
$508,000 was distributed for the pro-rata share of S corporation income taxes
and $1.0 million was distributed to the shareholders of record prior to the
Company's initial public offering to distribute previously taxed S corporation
earnings.
The Company believes that cash provided by operating activities, cash on hand
and cash available in the existing credit agreements will be sufficient to meet
the Company's working capital requirements for at least the next 12 months. The
Company may seek or require additional financing for growth opportunities
including any expansion that the Company may undertake. There is no assurance
that any such financing will be available on terms acceptable to the Company,
if at all.
New Accounting Pronouncements
New accounting pronouncements are discussed in Note 1 of Notes to
Financial Statements.
ITEM 7. FINANCIAL STATEMENTS
The financial statements and supplementary data required by this item are
included on pages F-1 to F-19 of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
15
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16 (A) OF THE EXCHANGE ACT
Directors, Executive Officers and Key Employees. Information with respect to
executive officers and directors of the Company is included under this Item 9 of
Part III of this Report. Information with respect to Section 16(a) of the
Securities and Exchange Act is included under "Compliance with Section 16(a) of
the Exchange Act" in the Company's definitive proxy statement for its 1997
Annual Meeting of Shareholders filed or to be filed not later than 120 days
after the end of the fiscal year covered by this Report and is incorporated
herein by reference.
<TABLE>
<CAPTION>
Name Age Position
---------------------------------------------------------------------------
<S> <C> <C>
Michael P. Coughlin 42 President, Chief Executive Officer and
Director
Andy J. Storment 34 Executive Vice President, Secretary,
Treasurer and Director
Brad West 39 Chief Operating Officer, Vice President,
Operations and Corporate Quality
G. Scott Purcell 34 Chief Financial Officer
Matt D. Schler 41 Vice President, Engineering
Thomas W. Burke 38 Vice President, Application Software
Jean-Francois Codron 38 Vice President, European Operations
Arlen I. Prentice (1)(2) 59 Chairman of the Board
Donald K. Skinner (1)(2) 56 Director
---------------------------------------------------------------------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
</TABLE>
Michael P. Coughlin was a member of a private investor group that acquired the
Company in July 1990 and has served as its President, Chief Executive Officer
and Director since the acquisition. From March 1989 to June 1990 Mr. Coughlin
was a private business consultant performing merger and acquisition services for
private and corporate clients. From February 1988 to February 1989 Mr. Coughlin
was Vice President, Finance for Bellevue Acquisition Corporation, a holding
company for several travel related entities. From January 1986 to February 1988
Mr. Coughlin was employed by Ernst & Young as a Manager in its Consulting
Division. From January 1980 to January 1986 Mr. Coughlin was employed by Coopers
& Lybrand L.L.P., where he most recently served as a Tax Manager in its Emerging
Business Services Division.
Andy J. Storment was a member of a private investor group that acquired the
Company in July 1990 and has served as its Vice President, Secretary, Treasurer
and Director since the acquisition. Mr. Storment served as the Company's Chief
Operating Officer from July 1990 to January 1997. In June 1995 Mr. Storment was
promoted to Executive Vice President. From March 1990 to June 1990 Mr. Storment
was a private business consultant performing merger and acquisition services for
private and corporate clients. From March 1986 to March 1990 Mr. Storment was a
Division Manager for Timber Products Co., a wood products manufacturing company.
From September 1984 to March 1986 Mr. Storment was employed by Coopers & Lybrand
L.L.P., where he most recently served as a Senior Associate.
16
<PAGE>
Brad West joined the Company in April 1996 as Vice President, Operations and
Corporate Quality, and was appointed Chief Operating Officer in January 1997.
From July 1984 to March 1996 Mr. West was employed by Spectra-Physics Scanning
Systems, Inc., a manufacturer of laser based scanning equipment, where he held
several management positions including New Products Operations Manager,
Production Manager, Master Scheduler, and most recently was the corporate
Quality and Reliability Manager. While at Spectra-Physics Mr. West was a key
architect of many of the company's processes and systems including the ISO-9001
quality system and the new product introduction process.
G. Scott Purcell became Chief Financial Officer of the Company in June 1995.
From June 1990 to June 1995 Mr. Purcell was employed by Coopers & Lybrand
L.L.P., where he most recently served as Senior Associate in the Entrepreneurial
Advisory Services Division. Mr. Purcell is a certified public accountant.
Matt D. Schler joined the Company in January 1997 as Vice President,
Engineering. From July 1978 to November 1983 and from January 1986 to December
1996 Mr. Schler was employed by Spectra-Physics Scanning Systems, Inc., a
manufacturer of laser based scanning equipment, where he held several management
positions including Project Manager, Engineering Business Area Manager and most
recently as New Products Engineering Manager. Mr. Schler is an active member of
the I.E.E.E.
Thomas W. Burke joined the Company in October 1995 as Vice President,
Application Software. From August 1989 to September 1995 Mr. Burke was a
co-founder and Chief Executive Officer of IntelliScan, Inc., a company which
developed application software and provided Auto ID integration services. From
July 1979 to July 1989 Mr. Burke held several management positions with AT&T,
where he most recently served as an Engineering Manager overseeing that
company's national inventory management system.
Jean-Francois Codron joined the Company in August 1996 as Vice President,
European Operations and also serves as President Director General of STI S.A.
From February 1989 to July 1996 Mr. Codron was employed by Spectra-Physics
France, a European distributor of laser based scanning equipment, where he most
recently served as Southern Europe Director. From January 1982 to January 1989
Mr. Codron held several sales and marketing positions with Intercontrole, a
French based electronics and energy company.
Arlen I. Prentice was a member of an investment group that acquired the Company
in July 1990 and has served as Director since the acquisition. In October 1993
he became Chairman of the Board. Mr. Prentice is a founder of Kibble & Prentice,
Inc., a financial services firm. Mr. Prentice has served as Co-Chairman and
Chief Executive Officer of Kibble & Prentice, Inc. since June 1972. Mr. Prentice
currently serves as a director of Starbucks Coffee Corporation, Western Drug
Distributors (dba Drug Emporium Northwest), Northland Telecommunications
Corporation and Flow International, Inc., a manufacturer and distributor of high
pressure water jet cutting systems.
Donald K. Skinner joined the Company's Board of Directors in March 1995. Mr.
Skinner is President, Chief Executive Officer and Board Chairman of Eltron
International, Inc., a company that designs, manufactures and markets bar code
label printers, software and related products. Mr. Skinner founded Eltron
International, Inc. in January of 1991, and served as Executive Vice President
and Chief Operating Officer before assuming his current positions in December
1992. In September 1989, Mr. Skinner founded Eltron Incorporated, a manufacturer
of custom thermal printers, and served as its President from that time to
January 1991.
17
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Information with respect to executive compensation is included under "Executive
Compensation" in the Company's definitive proxy statement for its 1997 Annual
Meeting of Shareholders filed or to be filed not later than 120 days after the
end of the fiscal year covered by this Report and is incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Information with respect to security ownership of certain beneficial owners and
management is included under "Security Ownership of Certain Beneficial Owners
and Management" in the Company's definitive proxy statement for its 1997 Annual
Meeting of Shareholders filed or to be filed not later than 120 days after the
end of the fiscal year covered by this Report and is incorporated herein by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transactions with
management is included under "Certain Transactions" in the Company's definitive
proxy statement for its 1997 Annual Meeting of Shareholders filed or to be filed
not later than 120 days after the end of the fiscal year covered by this Report
and is incorporated herein by reference.
18
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. The Financial Statements are listed in the Index of
Financial Statements on page 22 of this report.
(a)(2) Exhibits:
**2.1 Agreement and Plan of Reorganization dated November 1, 1995, by and
among the Registrant, IntelliScan, Inc., Mark Hayes and Thomas Burke.
***2.2 Share Purchase Agreement, dated February 13, 1996, between the
Registrant and Mr. Gerard Le Corre.
*3.1 Amended and Restated Articles of Incorporation.
*3.2 Amended and Restated Bylaws.
**4.1 See Articles II, III, IV and V of Exhibit 3.1 and Sections 1 and 4 of
Exhibit 3.2.
+*10.1 1995 Stock Incentive Plan, as amended.
+*10.2 Form of Nonqualified Stock Option Agreement.
+*10.3 Form of Incentive Stock Option Agreement.
*10.4 Business Loan Agreement with Key Bank of Oregon dated September 1,
1995.
*10.5 Form of Representative's Warrants.
21.1 Subsidiaries of the Registrant
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule
- --------------
* Incorporated by reference to Exhibits to Registrant's Registration
Statement on Form SB-2, as amended, effective July 27, 1995 (Commission
Registration Nos. 33-93598-LA and 33-95076).
** Incorporated by reference to Exhibits to Registrant's Current Report on
Form 8-K, as amended, dated November 2, 1995.
*** Incorporated by reference to Exhibits to Registrant's Current Report on
Form 8-K, as amended, dated March 7, 1996.
+ This Exhibit constitutes a management contract or compensatory plan or
arrangement.
(b) Reports on Form 8-K.
None
19
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1934, the
Registrant has duly caused this annual report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PERCON INCORPORATED
By /s/ MICHAEL P. COUGHLIN
Michael P. Coughlin
President and
Chief Executive Officer
Dated: March 31, 1997
In accordance with the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and dates indicated.
Signature Title Date
- --------------------------------------------------------------------------------
Principal Executive Officer:
/s/ MICHAEL P. COUGHLIN President, Chief Executive
Michael P. Coughlin Officer and Director March 31, 1997
- --------------------------------------------------------------------------------
Principal Financial and Accounting Officer:
/s/ G. SCOTT PURCELL Chief Financial Officer March 31, 1997
G. Scott Purcell
- --------------------------------------------------------------------------------
/s/ ANDY J. STORMENT Executive Vice President,
Andy J. Storment Secretary, Treasurer and
Director March 31, 1997
- --------------------------------------------------------------------------------
/s/ ARLEN I. PRENTICE Chairman of the Board March 31, 1997
Arlen I. Prentice
- --------------------------------------------------------------------------------
/s/ DONALD K. SKINNER Director March 31, 1997
Donald K. Skinner
20
<PAGE>
1996 Financial Report
21
<PAGE>
Percon Incorporated
Index to Financial Statements
Page
Report of Independent Accountants F-1
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-2
Consolidated Statements of Income for the years ended
December 31, 1996 and 1995 F-3
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1996 and 1995 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1995 F-5
Notes to Consolidated Financial Statements for the years
ended December 31, 1996 and 1995 F-6
22
<PAGE>
Report of Independent Accountants
To the Board of Directors
Percon Incorporated and Subsidiary
Eugene, Oregon
We have audited the accompanying consolidated balance sheets of Percon
Incorporated and subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the years then ended. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Percon
Incorporated and subsidiary as of December 31, 1996 and 1995, and the
consolidated results of their operations and cash flows for the years then ended
in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Coopers & Lybrand L.L.P.
Eugene, Oregon
January 24, 1997
F-1
<PAGE>
<TABLE>
<CAPTION>
Percon Incorporated
Consolidated Balance Sheets
December 31
1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,600,623 $ 4,006,597
Investments held-to-maturity 998,125
Accounts receivable, net 3,908,412 1,876,374
Inventories 3,618,120 1,884,366
Prepaid expenses and other 470,594 200,960
Deferred income taxes 167,325 109,730
- ------------------------------------------------------------------------------------
Total current assets 9,765,074 9,076,152
Property and equipment, net 2,850,029 680,057
Goodwill and intangibles, net 1,898,213 1,697,719
- ------------------------------------------------------------------------------------
$ 14,513,316 $ 11,453,928
- ------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 93,163
Accounts payable 1,809,735 $ 735,493
Accrued expenses 687,410 303,755
Income taxes payable 230,051 27,591
- ------------------------------------------------------------------------------------
Total current liabilities 2,820,359 1,066,839
Long-term debt, less current portion 973,547
Deferred income taxes 596,160 595,176
Other 21,083
- ------------------------------------------------------------------------------------
4,411,149 1,662,015
- ------------------------------------------------------------------------------------
Commitments and contingencies (Note 12)
Shareholders' equity:
Common stock, 20,000,000 shares authorized,
3,958,541 and 3,921,167 shares issued and
outstanding at 1996 and 1995, respectively 8,824,775 8,699,247
Preferred stock, 5,000,000 shares authorized,
none issued
Cumulative foreign currency translation adjustment (48,870)
Retained earnings 1,326,262 1,092,666
- ------------------------------------------------------------------------------------
10,102,167 9,791,913
- ------------------------------------------------------------------------------------
$ 14,513,316 $ 11,453,928
- ------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
Percon Incorporated
Consolidated Statements of Income
Years Ended
December 31
1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 22,128,172 $ 12,664,390
Cost of goods sold 11,029,933 6,195,700
- ---------------------------------------------------------------------------------------
Gross profit 11,098,239 6,468,690
Operating expenses:
Selling, marketing and customer service 3,549,779 2,207,135
General and administrative 2,215,048 1,264,755
Research and product development 1,754,598 734,895
Acquired in-process research and product development 2,090,696
- ---------------------------------------------------------------------------------------
Operating income 1,488,118 2,261,905
Interest income 86,895 120,567
Interest expense (88,762) (26,382)
Other expense, net (1,808) (2,156)
- ---------------------------------------------------------------------------------------
Income before taxes 1,484,443 2,353,934
Provision for income taxes 1,250,847 553,732
- ---------------------------------------------------------------------------------------
Net income $ 233,596 $ 1,800,202
- ---------------------------------------------------------------------------------------
Net income per share $0.06 $0.56
- ---------------------------------------------------------------------------------------
Pro Forma Data (Unaudited):
Income before income taxes $ 2,353,934
Provision for income taxes 858,662
- ---------------------------------------------------------------------------------------
Net income $ 1,495,272
- ---------------------------------------------------------------------------------------
Net income per share $0.46
- ---------------------------------------------------------------------------------------
Weighted average shares outstanding 4,089,120 3,215,754
- ---------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
Percon Incorporated
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended December 31, 1996 and 1995
Cumulative
Foreign
Common Stock Currency
-------------------------- Translation Retained
Shares Amount Adjustment Earnings Total
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 2,547,245 $ 328,200 $1,371,004 $1,699,204
Distributions to S
corporation shareholders (1,507,801) (1,507,801)
Reclassify S corporation
earnings 570,739 (570,739)
Proceeds of public offering,
net of offering costs
of $416,505 1,273,164 7,235,785 7,235,785
Issuance for the
purchase of IntelliScan 52,802 552,440 552,440
Proceeds from exercise of
stock options 47,956 12,083 12,083
Net income:
As an S corporation 707,536 707,536
As a C corporation 1,092,666 1,092,666
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 3,921,167 8,699,247 1,092,666 9,791,913
Proceeds from exercise
of stock options 37,374 106,512 106,512
Income tax benefits from
stock options exercised 19,016 19,016
Foreign currency
translation adjustment $ (48,870) (48,870)
Net income 233,596 233,596
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 3,958,541 $ 8,824,775 $ (48,870) $1,326,262 $10,102,167
- -----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
Percon Incorporated
Consolidated Statements of Cash Flows
Years Ended
December 31
1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Cash flows from operating activities:
Net income $ 233,596 $ 1,800,202
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 986,241 307,697
Deferred income taxes (206,522) (100,923)
Acquired in-process research and product development 2,090,696
Other (24,145) 2,156
Changes in operating assets and liabilities, net of
effects of acquisitions of businesses:
Receivables (408,038) (715,663)
Inventories (456,564) (1,045,282)
Prepaid expenses and other (137,899) (86,389)
Accounts payable and accrued expenses 119,625 629,059
Income taxes payable 121,544 27,591
- -----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,318,534 818,448
- -----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of businesses, net of cash acquired (Note 14) (4,650,463) (174,305)
Equipment purchases (1,018,637) (505,322)
Purchases of technology (87,928) (474,632)
Proceeds on maturity of short-term investments 998,125
Purchase of short-term investments (998,125)
- -----------------------------------------------------------------------------------------------------
Net cash used in investing activities (4,758,903) (2,152,384)
- -----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Principal paid on long-term debt (70,879) (446,015)
Distributions to shareholders (1,507,801)
Proceeds from exercise of stock options 106,512 12,083
Proceeds from issuance of common stock, net 7,235,785
- -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 35,633 5,294,052
- -----------------------------------------------------------------------------------------------------
Effect of exchange rates on cash and cash equivalents (1,238)
- -----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (2,405,974) 3,960,116
Cash and cash equivalents at beginning of year 4,006,597 46,481
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,600,623 $ 4,006,597
- -----------------------------------------------------------------------------------------------------
Interest paid $ 89,302 $ 28,132
Taxes paid 1,302,034 626,264
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
F-5
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1996 and 1995
1. Summary of Significant Accounting Policies:
Organization: Percon Incorporated (the "Company") develops, manufactures and
markets bar code reading products, including fixed-station and integrated
decoders, hand-held laser scanners, portable data terminals and data management
application software for the automatic identification and data collection
market. The Company also markets bar code input devices manufactured by others
for use with the Company's fixed-station decoders and portable data terminals.
Principles of Consolidation: The consolidated financial statements include the
accounts of Percon Incorporated and its wholly-owned subsidiary, STI S.A.
("STI"), since the date of its acquisition on March 7, 1996. All significant
intercompany transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents: All highly liquid investments purchased with a
remaining maturity of three months or less at the date acquired are cash
equivalents. These investments, consisting of money market funds, are stated at
cost, which approximates market.
Investments: All investments have been classified as held-to-maturity and are
carried at amortized cost, which approximates fair value, because the Company
has both the positive intent and ability to hold the individual securities to
their respective maturities.
Inventories: Inventories are stated at the lower of cost or market, with cost
determined by the average cost method, which approximates the first-in,
first-out method.
Property and Equipment: Property and equipment, including significant
improvements thereto, are stated at cost. Expenditures for repairs and
maintenance are charged to expense as incurred. The cost of equipment is
depreciated on the straight-line method over their estimated useful lives
(generally three to seven years). Gains or losses realized on assets retired or
disposed of are included in current income. Tooling costs are capitalized and
amortized over the lesser of the estimated useful life of the tool or the
product life (generally two to five years).
Building on Land Leased from Others: A building owned by STI is
on leased land. The Company does not have an option to purchase the land or
extend the lease, and ownership of the building passes to the landowner at the
end of the lease term in December 2010. Accordingly, the cost of the building is
being amortized over the 16-year term of the lease.
Goodwill and Intangibles: Goodwill resulting from business acquisitions (the
excess cost of acquired subsidiaries over the fair value of net assets acquired)
is amortized using the straight-line method over seven years, the current
estimated useful life.
Continued
F-6
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1996 and 1995
1. Summary of Significant Accounting Policies, Continued:
Intangibles include the cost of software, technologies acquired in connection
with business combinations, and certain noncompete agreements. Amortization of
capitalized software cost, which is included in cost of goods sold, is provided
on a product-by-product basis of the greater of (a) the ratio the current gross
revenues for a product bears to the total of current and anticipated future
gross revenues for that product, or (b) the straight-line method over the
remaining estimated economic life of the product, including the period being
reported on, which approximates five years. It is reasonably possible that those
estimates of anticipated future gross revenues, the remaining estimated economic
life of the products, or both, may be reduced significantly due to competitive
pressures or other factors.
Amortization of capitalized technologies cost, which is included in cost of
goods sold, is provided on the straight-line method over the estimated economic
life of the technologies (one to two years).
Noncompete agreements are stated at cost. These agreements are amortized on a
straight-line basis over the terms of the agreements (three to five years).
The Company has adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of". This Statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The adoption of this
Standard did not affect the Company's results of operations.
Stock Options: Statement of Financial Accounting Standards No. 123 (SFAS No.
123), "Accounting for Stock-Based Compensation", which is effective for all
companies in 1996, encourages, but does not require the recording of
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation under the
provisions of Accounting Principles Opinion No. 25, "Accounting for Stock Issued
to Employees", and related Interpretations. Accordingly, the adoption of this
Standard did not affect the Company's results of operations, financial position
or liquidity.
Revenue Recognition: Revenue from product sales to customers is recognized upon
shipment. All products have a warranty generally for one to five years from date
of sale covering product defects. Certain sales agreements provide for a right
of return on unsold merchandise. The Company provides for estimated costs of
warranty and returns when products are shipped.
Continued
F-7
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
For the Years Ended December 31, 1996 and 1995
1. Summary of Significant Accounting Policies, Continued:
Sales and Concentration of Credit Risk: Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of
accounts receivable. The Company's accounts receivable are primarily with a
small number of distributors, VARs and system integrators, substantially in the
United States and Europe. The Company believes any risk of loss is significantly
reduced by its ongoing credit evaluations of its customers.
The Company considers current and historical loss experience and general
economic conditions in determining the allowance for uncollectible accounts
receivable of approximately $135,000 and $104,000 as of December 31, 1996 and
1995, respectively. Ultimate losses may vary from the current estimates, and any
adjustments are reported in earnings in the periods in which they become known.
Research and Development: Research and development costs are charged to expense
as incurred. Acquired in-process research and product development for which
technological feasibility has not been achieved is expensed at the date of
purchase.
Advertising: Advertising costs are charged to operations as incurred.
Income taxes: Effective with its Initial Public Offering on August 1, 1995, the
Company records deferred income tax assets and liabilities based upon the
differences between the financial statements and income tax bases of assets and
liabilities using enacted income tax rates. Valuation allowances are established
when necessary to reduce deferred income tax assets to the amount more likely
than not to be realized. Income tax expense is the tax payable for the period
and the tax effect of the change during the period in net deferred tax assets
and liabilities.
Earnings Per Share: Earnings per share are based on the weighted average number
of shares of common stock and common stock equivalents, using the treasury stock
method, including options and warrants, outstanding during each period
presented.
Foreign Currency Translation: Assets and liabilities are translated at the rate
of exchange in effect as of the balance sheet date. The gains and losses that
result from this process are shown in the cumulative translation adjustment
account in the shareholders' equity section of the balance sheet. Operating
transactions are translated at weighted average rates during the period.
Transaction gains and losses are reflected in net income.
Continued
F-8
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
For the Years Ended December 31, 1996 and 1995
1. Summary of Significant Accounting Policies, Continued:
Estimates and Industry Factors:
Estimates - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Technology - The market for the Company's products is characterized by rapidly
changing technology, evolving industry standards and changing customer needs.
The Company believes that its futures success will depend, in part, upon its
ability to enhance its current products, to develop new products and systems on
a timely and cost-effective basis, and to respond to changing customer needs and
technological developments. A substantial portion of the Company's revenues is
derived from sales of fixed-station and integrated decoders, hand-held laser
scanners, portable data terminals and related software products. A decline in
the demand for these products, whether as a result of competition, technological
change or other factors, or a decrease in their prices could have a material
adverse effect on the Company's financial condition and results of operations.
Intellectual Property - The nature of the industry is characterized by
substantial litigation regarding patent and other intellectual property rights.
While the Company is not involved in any such litigation, there can be no
assurance that future claims will not be brought against the Company. Any such
litigation could result in significant costs and changes in the Company's
products.
Dependence on Suppliers - The Company is dependent on several suppliers for
components and subassemblies. Certain of these components and subassemblies are
obtained from a single supplier or a limited number of suppliers. The Company
has contracted with an electronic component distributor for the supply of a
single source microprocessor used in its portable data collection terminals. The
agreement requires the Company to take deliveries for a fixed total quantity of
the microprocessor, with variable delivery dates, through the end of 1997. The
Company has no other long-term contracts with suppliers of components. Component
or subassembly shortages, production delays or work stoppages experienced by
these suppliers or any other circumstances resulting in the failure of any of
these suppliers to supply to Company could have a material adverse effect on the
Company's financial condition and results of operations. While to date the
Company has not experienced significant restrictions in the supply of components
and subassemblies, there is no assurance that supply restrictions will not occur
in the future.
Reclassifications: Certain prior-period amounts have been reclassified to
conform with the December 31, 1996 presentation. Such reclassification did not
affect previously reported net income or cash flows.
Continued
F-9
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
For the Years Ended December 31, 1996 and 1995
1. Summary of Significant Accounting Policies, Continued:
New Accounting Pronouncement: In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard No.
128--"Earnings per Share", which is required to be adopted in 1997. The
following table presents unaudited pro forma earnings per share, calculated in
accordance with the provisions of this new standard:
1995
---------------------
Unaudited
1996 Actual Pro forma(1)
--------------------------------------------------------------------
Basic $0.06 $0.58 $0.48
Diluted $0.06 $0.56 $0.46
(1) Assuming the company had been a C corporation for the entire year.
2. Initial Public Offering:
The Company issued 1,273,164 shares of common stock at $6.75 per share in an
initial public offering, which became effective August 1, 1995. Of the net
proceeds of approximately $7.2 million, $1 million was utilized to pay dividends
reflecting a portion of undistributed S corporation earnings and $0.3 million
was utilized to repay indebtedness.
3. Acquisition:
On March 7, 1996, the Company purchased all of the outstanding stock of STI for
approximately $4.7 million in cash. STI, located near Paris, France, is a
leading manufacturer of fixed-station and integrated decoders. The results of
STI's operations have been combined with those of the Company since the date of
acquisition.
The acquisition was accounted for using the purchase method of accounting.
Accordingly, a portion of the purchase price was allocated to the net assets
acquired based on their estimated fair values. The fair value of tangible assets
acquired and liabilities assumed was $4.8 million and $2.8 million,
respectively. In addition, $2.1 million was allocated to in-process research and
product development that had not yet reached technological feasibility and had
no probable alternative uses, which the Company expensed at the date of
purchase. The balance of the purchase price, $0.6 million, was recorded as
excess of cost over net assets acquired and is being amortized over seven years
on the straight-line basis.
Additionally, in consideration for continuing employment, the Company issued
options to purchase 60,000 shares of the Company's common stock at an exercise
price of $13.125 per share, the market price of the Company's stock on the date
of grant, to STI's founder who was to remain president and managing director of
STI. The options were exercisable if the founder remained with STI for one full
year. The founder retired in August 1996; therefore, these options have expired
unexercised.
Continued
F-10
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
For the Years Ended December 31, 1996 and 1995
3. Acquisitions, Continued:
The following unaudited pro forma condensed consolidated results of operations
presents information as if the acquisition had occurred as of the beginning of
the period presented, and with respect to the period ended December 31, 1995, as
if the Company had been subject to tax. The pro forma information is presented
after giving effect to certain adjustments for amortization and interest expense
to reflect the effects of the acquisition. The pro forma information is provided
for informational purposes only. It is based on historical information and does
not necessarily reflect the actual results of operations that would have
occurred, nor is it necessarily indicative of future results of operations. The
1996 pro forma information includes a one-time charge of $2.1 million associated
with expensing of acquired in-process research and product development. Without
this charge, pro forma net income and pro forma income per share at December 31,
1996 would have been $2.3 million and $0.57, respectively. The charge for
acquired in-process research and product development expense did not have a tax
benefit and reduced income per share by $0.51. The 1995 pro forma information
excludes the one-time charge of $2.1 million associated with expensing of
acquired in-process research and product development. With this charge, pro
forma net loss and pro forma net loss per share at December 31, 1996 would have
been $50,000 and $.02, respectively.
Pro forma (in thousands, except per share data):
1996 1995
-----------------------------------------------------------
Net sales $ 23,280 $ 19,258
Net income 254 2,041
Net income per share 0.06 $ 0.63
-----------------------------------------------------------
Weighted average shares 4,089 3,216
-----------------------------------------------------------
4. Inventories:
Inventories consist of the following:
December 31
1996 1995
--------------------------------------------------------
Finished goods $ 1,586,657 $ 659,250
Materials 2,031,463 1,225,116
--------------------------------------------------------
$ 3,618,120 $ 1,884,366
--------------------------------------------------------
Continued
F-11
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
For the Years Ended December 31, 1996 and 1995
5. Property and Equipment, Net:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31
1996 1995
------------------------------------------------------------------------------------
<S> <C> <C>
Building on land leased from others $ 1,333,292
Equipment 1,452,909 $ 815,819
Tooling 729,755 259,879
Leasehold improvements 100,691 19,089
------------------------------------------------------------------------------------
3,616,647 1,094,787
Less accumulated depreciation and amortization 766,618 414,730
------------------------------------------------------------------------------------
$ 2,850,029 $ 680,057
------------------------------------------------------------------------------------
</TABLE>
6. Goodwill and Intangibles, Net:
Goodwill and intangibles consist of the following:
<TABLE>
<CAPTION>
December 31
1996 1995
------------------------------------------------------------------------------------
<S> <C> <C>
Acquired software and technology $ 1,796,829 $ 1,636,840
Noncompete agreements 832,129 832,129
Goodwill and other 564,642 31,776
------------------------------------------------------------------------------------
3,193,600 2,500,745
Less accumulated amortization 1,295,387 803,026
------------------------------------------------------------------------------------
$ 1,898,213 $ 1,697,719
------------------------------------------------------------------------------------
</TABLE>
7. Accrued Expenses:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31
1996 1995
------------------------------------------------------------------------------------
<S> <C> <C>
Accrued payroll and payroll liabilities $ 517,067 $ 167,321
Accrued employee bonuses 45,500 41,375
Accrued warranty 59,559 65,557
Other liabilities 65,284 29,502
------------------------------------------------------------------------------------
$ 687,410 $ 303,755
------------------------------------------------------------------------------------
</TABLE>
Continued
F-12
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
For the Years Ended December 31, 1996 and 1995
8. Bank Line of Credit:
The Company has a revolving line of credit with one domestic bank of up to
$1,000,000, collateralized by accounts receivable and inventories. The interest
rate is the bank's prime rate (8.25% at December 31, 1996). No amounts were
outstanding as of December 31, 1996.
The Company has overdraft and line of credit facilities with a foreign bank for
up to 300,000 French francs (approximately $60,000) at the bank's current
overdraft interest rate (8.55% at December 31, 1996). No amounts were
outstanding at December 31, 1996.
The Company also has a credit facility with a foreign bank to borrow up to
1,000,000 French francs (approximately $200,000), collateralized by accounts
receivable. Borrowings under the facility bear interest at the bank's current
interest rate (8.55% at December 31, 1996). No amounts were outstanding at
December 31, 1996.
9. Long-term Debt:
December 31
1996
--------------------------------------------------------------------
Bank loan, monthly payments of 82,840 French
francs (approximately $17,000), including interest
at 9.6%, maturing December 31, 2004 $ 1,066,710
Less current portion (93,163)
--------------------------------------------------------------------
$ 973,547
--------------------------------------------------------------------
The bank loan is collateralized by a preferential lien on the building owned by
STI and matures as follows:
1998 $ 102,511
1999 112,791
2000 124,119
2001 136,568
2002-2004 497,558
--------------------------------------------------------------------
$ 973,547
--------------------------------------------------------------------
Continued
F-13
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
For the Years Ended December 31, 1996 and 1995
10. Income Taxes
Prior to July 31, 1995, the Company was treated for federal income tax purposes
as an S corporation under Subchapter S of the Internal Revenue Code of 1986, as
amended, and has been treated as an S corporation for state income tax purposes
under comparable state tax laws. As a result, the Company's earnings through the
day preceding the date of termination of the Company's S corporation status (the
Termination Date) have been or will be, for federal and state income tax
purposes, taxed directly to the Company's shareholders, at their individual
federal and state income tax rates, rather than to the Company. Subsequent to
the Termination Date, the Company is no longer treated as an S corporation and,
accordingly, is subject to federal and state income taxes on its earnings.
Under the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes", (Statement No. 109) issued by the Financial
Accounting Standards Board, the Company was required to provide for deferred
taxes, arising from the cumulative temporary differences between financial
reporting and tax reporting, by recognizing a provision for income taxes for
such deferred taxes in its income statement in the period in which the
termination of the Company's S corporation status occurred. Such recognition is
reflected in earnings for the year ended December 31, 1995 as a tax benefit of
approximately $45,000.
The provision for income taxes consists of the following at December 31:
<TABLE>
<CAPTION>
Unaudited
Actual Pro Forma
1996 1995 1995
-------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 876,536 $ 594,983 $ 852,385
State 215,787 59,672 83,925
Foreign 365,046
Deferred (206,522) (100,923) (77,648)
-------------------------------------------------------------------
$ 1,250,847 $ 553,732 $ 858,662
-------------------------------------------------------------------
</TABLE>
Continued
F-14
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
For the Years Ended December 31, 1996 and 1995
10. Income Taxes, Continued:
The difference between the statutory federal income tax rate and the Company's
effective rate is summarized as follows:
<TABLE>
<CAPTION>
Unaudited
Actual Pro Forma
1996 1995 1995
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal 34.0% 34.0% 34.0%
State, net of federal benefit 4.7 4.4 4.4
S corporation earnings not subject to tax (12.9)
Research and experimentation tax credits (8.7) (.1)
Acquired in process research and development 54.5
Goodwill amortization 1.8
Foreign sales corporation (2.0)
Excess of foreign over U.S. tax rate 2.0
State tax rebate (2.2) (2.2)
Other (2.0) .2 .4
---------------------------------------------------------------------------------------
84.3% 23.5% 36.5%
---------------------------------------------------------------------------------------
</TABLE>
The components of the net deferred tax asset/liability at December 31 are as
follows:
<TABLE>
<CAPTION>
1996 1995
--------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Inventory reserve $ 69,660 $ 37,589
Warranty provision 23,049 25,145
Allowance for doubtful accounts 34,922 39,860
Accrued payroll and benefit 24,367
Other 38,329 7,136
--------------------------------------------------------------------------------------
190,327 109,730
--------------------------------------------------------------------------------------
Liabilities:
Depreciation 132,414 19,263
Capitalized software and noncompete agreements 486,748 575,913
--------------------------------------------------------------------------------------
619,162 595,176
--------------------------------------------------------------------------------------
Net deferred income tax liability $ (428,835) $ (485,446)
--------------------------------------------------------------------------------------
Reflected in the accompanying consolidated
balance sheet as follows:
Current deferred income tax asset $ 167,325 $ 109,730
Noncurrent deferred income tax liability 596,160 595,176
--------------------------------------------------------------------------------------
$ (428,835) $ (485,446)
--------------------------------------------------------------------------------------
</TABLE>
Continued
F-15
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
For the Years Ended December 31, 1996 and 1995
11. Stock Options and Warrant:
In connection with its IPO, the Company granted its underwriters a warrant to
purchase 120,000 shares of common stock at an exercise price of $8.10 per share.
The warrants are nontransferable for a period of one year following the date of
issuance and expire in August 1999.
On July 10, 1995, the shareholders of the Company approved a stock option plan,
as amended and restated on June 2, 1995 and May 24, 1996 (the "Stock Incentive
Plan"). The Stock Incentive Plan provides for the award of incentive stock
options to key employees and the award of nonqualified stock options, stock
appreciation rights, bonus rights and other incentive options to employees,
independent contractors and consultants. The total number of shares of common
stock authorized to be issued under the Stock Incentive Plan may not exceed
500,000.
During the years ended December 31, 1996 and 1995, the Company granted options
to purchase an aggregate of 176,515 shares and 214,550 shares, respectively, of
common stock with exercise prices equal to or at 110% of the market price of the
Company's stock on the date of grant.
A summary of option activity is as follows:
<TABLE>
<CAPTION>
Weighted-Average
Number of Exercise
Shares Price
------------------------------------------------------------------
<S> <C> <C>
Balance, January 1, 1995 86,264 $ 1.38
Options granted 214,550 7.27
Options exercised (47,796) 1.14
Options surrendered (13,544) 5.01
------------------------------------------------------------------
Balance, December 31, 1995 239,474 6.51
Options granted 176,515 13.43
Options exercised (37,374) 2.82
Options surrendered (92,270) 11.31
------------------------------------------------------------------
Balance, December 31, 1996 286,345 $ 9.69
------------------------------------------------------------------
</TABLE>
Continued
F-16
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
For the Years Ended December 31, 1996 and 1995
11. Stock Options and Warrant, Continued:
The table summarizes information about stock options outstanding as of December
31, 1996:
<TABLE>
<CAPTION>
Options Outstanding
------------------------------------------------------- Options Exercisable
Weighted- ------------------------
Average Weighted- Weighed-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3.84 3,000 4 years $ 3.84 3,000 $ 3.84
$ 6.75 - $ 7.425 146,470 8 years $ 6.89 78,870 $ 6.85
$ 9.25 - $11.88 48,225 10 years $ 10.34 7,123 $ 10.05
$ 13.00 - $16.75 88,650 10 years $ 14.16 10,500 $ 13.00
-------------------------------------------------------------------------------------
286,345 99,493
-------------------------------------------------------------------------------------
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS No. 123. The
following table presents the Company's net income and earnings per share,
assuming compensation cost had been determined based on the fair value at the
date of grant, and recognized as expense on a straight-line basis over the
vesting period of the options, consistent with the provisions of SFAS No. 123.
The pro forma effect is not representative of future periods because it does not
take into consideration compensation expense related to options granted prior to
1995.
1996 1995
---------------------------------------------------------------------
Net income - as reported $ 233,596 $ 1,800,202
Net income (loss) - pro forma (606) 1,539,181
Earnings per share - as reported $0.06 $0.56
Earnings per share - pro forma $0.00 $0.48
For purposes of the above pro forma information, the fair value of each option
grant was estimated as the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions.
1996 1995
---------------------------------------------------------------------
Average risk-free interest rate 6.70% 6.97%
Average expected life 6.0 years 4.3 years
Expected volatility 46.6% 46.6%
Expected dividend yield None None
Continued
F-17
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
For the Years Ended December 31, 1996 and 1995
12. Commitments and Contingencies:
The Company leases certain facilities and land under noncancelable operating
leases. Rent expense was $310,386 and $154,765 for the years ended December 31,
1996 and 1995, respectively. Rent expense in 1996 is before sublease income of
$78,066. Future minimum payments required under these operating lease agreements
are summarized below. Future sublease payments are not significant.
Year ending December 31:
------------------------------------------------------------
1997 $61,016
1998 18,497
1999 18,497
2000 18,497
2001 18,497
Thereafter 166,473
------------------------------------------------------------
$ 301,477
------------------------------------------------------------
The Company has entered into a five-year purchase agreement expiring December
31, 1997 with the supplier of a principal component of its products. At December
31, 1996, the Company has committed to make approximately $155,000 of purchases
before the expiration of the agreement. The Company expects this purchase
commitment to be fulfilled in the normal course of operations.
13. Employee Benefit Plans:
The Company sponsors various benefit plans which cover substantially all of the
Company's employees. Total expense related to these plans were $116,982 and
$65,674 for the years ended December 31, 1996 and 1995, respectively.
F-18
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
For the Years Ended December 31, 1996 and 1995
14. Supplemental Disclosure of Investing and Financing Activities:
Acquisition of businesses, net of cash acquired:
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------------------------------------------
<S> <C> <C>
Current assets, net of cash acquired $ 3,088,445 $ 8,975
Property and equipment 1,637,903 41,935
Intangibles, noncompetes and goodwill 654,468 1,709,715
In-process research and product development 2,090,696
Deferred tax liability resulting from acquisition (27,676) (586,369)
Current liabilities assumed (1,594,332) (447,510)
Noncurrent liabilities assumed (1,199,041)
Stock issued to seller (552,441)
---------------------------------------------------------------------------------
Cash used in purchases of businesses,
net of cash acquired $ 4,650,463 $ 174,305
---------------------------------------------------------------------------------
</TABLE>
15. Fair Value of Financial Instruments:
The carrying value of the Company's financial instruments, including cash and
cash equivalents, investments, accounts receivable, accounts payable and accrued
liabilities approximates fair value due to their short maturities.
16. Business Segment Information:
The Company operates in one business segment: the development, manufacture and
marketing of bar code reading products, including fixed-station and integrated
decoders, hand-held laser scanners, portable data terminals and data management
application software. Summarized data of the Company's operations, by geographic
area, for the year ended December 31, 1996 are presented below. During 1995, all
of the Company's operations were based in the United States.
<TABLE>
<CAPTION>
Consolidation
United States Europe Adjustments Consolidated
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $ 15,412,479 $ 7,213,420 $ (497,727) $ 22,128,172
Income from operations 2,470,464 1,244,278 (2,226,624) 1,488,118
Identifiable assets at year end 13,103,553 5,837,151 (4,427,388) 14,513,316
</TABLE>
The consolidation adjustments for income from operations include $2.1 million of
acquired in-process research and development recorded in connection with the
purchase of STI.
Sales to a single distributor accounted for 11% and 10% of net sales for the
years 1996 and 1995, respectively.
F-19
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
-------- -----------
**2.1 Agreement and Plan of Reorganization dated November 1, 1995, by and
among the Registrant, IntelliScan, Inc., Mark Hayes and Thomas Burke.
***2.2 Share Purchase Agreement, dated February 13, 1996, between the
Registrant and Mr. Gerard Le Corre.
*3.1 Amended and Restated Articles of Incorporation.
*3.2 Amended and Restated Bylaws.
**4.1 See Articles II, III, IV and V of Exhibit 3.1 and Sections 1 and 4 of
Exhibit 3.2.
+*10.1 1995 Stock Incentive Plan, as amended.
+*10.2 Form of Nonqualified Stock Option Agreement.
+*10.3 Form of Incentive Stock Option Agreement.
*10.4 Business Loan Agreement with Key Bank of Oregon dated September 1,
1995.
*10.5 Form of Representative's Warrants.
21.1 Subsidiaries of the Registrant
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule
- --------------
* Incorporated by reference to Exhibits to Registrant's Registration
Statement on Form SB-2, as amended, effective July 27, 1995 (Commission
Registration Nos. 33-93598-LA and 33-95076).
** Incorporated by reference to Exhibits to Registrant's Current Report on
Form 8-K, as amended, dated November 2, 1995.
*** Incorporated by reference to Exhibits to Registrant's Current Report on
Form 8-K, as amended, dated March 7, 1996.
+ This Exhibit constitutes a management contract or compensatory plan or
arrangement.
Exhibit 21.1
LIST OF SUBSIDIARIES
Jurisdiction of
Name Incorporation
- ---- -------------
Percon Europe S.A. France
Percon Incorporated Foreign Sales Corporation Barbados
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Percon Incorporated on Form S-8 (File No. 333-9391) of our report, dated
January 24, 1997, on our audits of the consolidated financial statements of
Percon Incorporated and subsidiary as of December 31, 1996 and 1995, and for
the years then ended, which report is included in this Annual Report on Form
10-KSB.
COOPERS & LYBRAND L.L.P.
Eugene, Oregon
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of Percon Incorporated and Subsidiaries as of
December 31, 1996 and the related consolidated statements of income and cash
flows for the twelve months in the period ended December 31, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,601
<SECURITIES> 0
<RECEIVABLES> 4,043
<ALLOWANCES> 135
<INVENTORY> 3,618
<CURRENT-ASSETS> 9,765
<PP&E> 3,617
<DEPRECIATION> 767
<TOTAL-ASSETS> 14,513
<CURRENT-LIABILITIES> 2,820
<BONDS> 974
0
0
<COMMON> 8,825
<OTHER-SE> 1,277<F1>
<TOTAL-LIABILITY-AND-EQUITY> 14,513
<SALES> 22,128
<TOTAL-REVENUES> 22,128
<CGS> 11,030
<TOTAL-COSTS> 11,030
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (41)
<INTEREST-EXPENSE> (2)
<INCOME-PRETAX> 1,484
<INCOME-TAX> 1,251
<INCOME-CONTINUING> 234
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 234<F2>
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
<FN>
<F1> Represents retained earnings of $1,326 and cumulative translation
adjustment of ($49).
<F2> Reflects a one time charge to earnings of $2,091 ($.51 per share)
for the portion of the purchase price of STI allocated to in-process research
and product development expense. Excluding this charge, net income for the
twelve months ended December 31, 1996 would have been $2,324 ($.57 per share).
</FN>
</TABLE>
