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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
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(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, 1997
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 [ ]
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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. [ ]
Issuer's revenues for its most recent fiscal year ended December 31, 1997
were $28,175,837.
Documents Incorporated by Reference
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Proxy Statement for 1998 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 24, 1998 was $24,921,902. The number of shares of
Common Stock outstanding on March 24, 1998 was 4,007,971.
Transitional Small Business Disclosure Format (Check One): YES [ ] NO [X]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Company Overview
Percon Incorporated ("Percon" or the "Company") develops, manufactures and
markets a complete line of data collection hardware and data management software
products including radio frequency ("RF") and batch portable data terminals,
fixed station and integrated decoders, hand-held laser scanners, 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, 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, healthcare, manufacturing, package delivery, and warehousing
and distribution.
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 small and mid-size end users cost effectively. 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
smaller end users find the ease of use, durability and price/performance
characteristics of the Company's products, together with the Company's 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. The
Company also distributes its products internationally primarily through VARs in
Europe, Latin America and Asia.
In 1997 the Company introduced several new products including Falcon(TM),
Falcon RF(TM), Universal Program Generator ("UPG"), Symphony and international
versions of IntelliTrack(TM). Falcon is Percon's new 32-bit, 386 DOS-based
hand-held portable which features PC-card capabilities for RF communications,
memory cards and modems. Falcon RF includes support for multiple vendors' 2.4Ghz
spread spectrum radio solutions and allows real time data collection and data
management. UPG is a Windows(TM)-based program generator which allows greater
ease of programming and customizing of Percon's DOS-based portable and other
leading DOS-based portables. Symphony is a narrow band radio product sold
exclusively in Europe that supports wireless scanning applications. The
Company's international versions of IntelliTrack include all existing seven
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, particularly in the portable data terminal family of products;
(v) expanding the Company's sales channels to support relationships as an
original equipment manufacturer for companies who sell to large end user
customers and expanding international sales channels; (vi) expanding the
Company's sales force, both domestically and internationally; and (vii)
expanding through strategic acquisitions.
Since the Company'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 Access based software
-- increased its sales outside of the United States and Canada from 9% in
1995 to over 37% in 1997
-- acquired Percon Europe S.A. (formerly known as STI S.A.), a Paris
based decoder manufacturer, in March 1996 which greatly increased
Percon's international revenue and expanded its fixed station and
integrated decoder product lines and provides existing European
channels to increase sales of Percon's portable data terminals and
application software
-- introduced SnapShot(TM) in October 1996, one of the Company's most
rapid development projects which is also the first hand-held input
device manufactured by the Company
-- introduced Falcon, Falcon RF and UPG in 1997 enabling Percon to enter
the wireless portable data terminal market and begin competing for the
rapidly growing demand for open systems architecture, DOS-based
portable data terminals
-- expanded the Company's management team to support its rapid growth in
revenues and earnings, both domestically and internationally
-- been named one of the 200 Best Small Companies in America by Forbes
Magazine (1997) in recognition for Percon's strong five year return on
equity
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, anticipated sales of the Company's products, year 2000
system issues, expansion of the Company's sales force, expected execution of the
acquisition strategy, product cost reductions, research and development and
rental expense, expected tax rates 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 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, including the expected mix shift toward portable data
terminals, include, but are not limited to, lower than expected customer orders,
competitive 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
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shipment interruptions due to manufacturing difficulties. Factors that could
adversely affect the Company's year 2000 system impact analysis include, but are
not limited to, unidentified issues in existing programs or underestimating the
resources necessary to make any required modifications. Factors that could
affect the Company's ability to increase its sales force, include, but are not
limited to, the availability of qualified candidates and the Company's ability
to attract and retain such personnel. Factors that could hamper the Company's
ability to execute its acquisition strategy with respect to Percon Europe S.A.
include, but are not limited to, costs or difficulties related to the
integration of the business of Percon Europe S.A. that may be greater than
expected and the anticipated integration process may not be fully realized or
realized within the expected time frame. Factors that could affect the Company's
ability to gain further product cost reductions, include, but are not limited
to, its ability to negotiate more favorable terms with its vendors, the ability
of its engineers to develop more cost-effective designs, and general economic
conditions. 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 technological difficulties and resource constraints
encountered in developing new products. Factors that could adversely affect the
Company's tax rates include, but are not limited to, the volume of foreign sales
which qualify for FSC treatment, the volume of research projects which qualify
for related tax credits, and the ability of taxing jurisdictions in which the
Company operates to modify existing tax rates. 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
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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 are 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, provides 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.
Products
Product Lines
The Company offers a range of bar code reading and data management
products, including portable data terminals, fixed station and integrated
decoders, hand-held laser scanners and data management application software,
that provide rapid, accurate and efficient means for gathering and tracking
information in a wide variety of applications.
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 Falcon, introduced in 1997, which is a 32-bit, 386
microprocessor DOS-based unit. The terminal supports 8 lines of 21 characters on
a backlit graphics LCD. The terminal weighs 14 ounces and has 41
splash-resistance alphanumeric keys. The Falcon comes in both batch and RF
models, which support wireless LAN technologies through a user accessible
PC-card slot. Through this PC-card slot the unit supports RF
communications--principally 2.4Ghz radio solutions offered by multiple vendors,
memory cards and modems. Additional products offered in this category include
the PT 2000, which is a 12 ounce terminal with 34 splash-resistant alphanumeric
keys, up to one megabyte of data storage and a separate bank erasable flash ROM
memory, the TopGun, which is a PT 2000 with an integrated laser which allows for
one-handed scanning, the Pocket Reader, 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.
Suggested list prices in this product family range from $795 to $3,295.
Fixed Station and Integrated 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 offered in this category include fixed station decoders such as the
PowerWedge(TM) 10, PowerWedge 20, Mini PowerWedge, Master BB+ and Master B+.
Integrated decoders are products incorporating the base decoder technology in
other form factors, thereby creating integrated decoder products, and include
the EasyKey Plus, which is a 101 keyboard with an integrated decoder and
magnetic stripe reader, the SnapShot(TM), which is a hand held scanner with an
integrated decoder and the Decoder
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Communications Card, which is an ISA Bus card incorporating the decoder
technology with four high-speed serial ports. Symphony is a decoder product that
incorporates narrow band RF support and includes the Maestro base station and
Player radio unit with belt clip. Suggested list prices in this product family
range from $225 to $1,280.
Hand-held Input Devices. SnapShot, the Company's family of hand-held laser
scanners, are input devices that use scanning technology for data collection.
The Company's input devices permit 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. The Company's 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.
Application Software. Application software consists of PC-based computer
programs that are run-time versions of Microsoft Access. These programs, which
are available in both stand alone and networked versions, permit the storing,
management and reporting of data. Data can be uploaded or downloaded into these
programs with the Company's PDTs. 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 that can be used
with the Company's PDT application software include the Universal Program
Generator ("UPG"), Portable Application Library, which includes seven standard
applications, and Percon Program Generator ("PPG"). UPG and PPG are
Windows-based program generators that allow greater ease of programming and
customizing of Percon's portable terminals and, with respect to UPG, of custom
programming of other leading DOS-based portable data terminals. Suggested list
prices in this product family range from $995 to $4,995.
The Company 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 has developed portable data terminals based on open systems
architecture that 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 PDTs, as well as applications for
other leading DOS-based PDTs. The Company plans to broaden its portable product
offering to include the basic DOS-based operating
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platform in other form factors such as fixed-station, portable-mount and
industrial terminals. 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 expensed approximately $1,764,000 and $1,755,000 in 1997 and
1996, respectively, on research and product development. Company engineers are
experienced in the specialty disciplines of mechanical, electronic and software
engineering.
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, which consist
principally of Auto ID distributors, VARs and systems integrators, and as an
OEM. 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 1997 sales of Company
products to Auto ID distributors, VARs, systems integrators and OEMs accounted
for approximately 30%, 30%, 23% and 12% of the Company's net sales,
respectively, and in 1996, 28%, 28%, 20% and 10% of the Company's net sales,
respectively. Sales to one distributor accounted for approximately 12% and 11%
of net sales in 1997 and 1996, respectively. No other customer accounted for
more than 10% of net sales in 1997 or 1996.
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 1997 and
1996 sales of Company products directly to end users accounted for approximately
5% and 14% 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 both
its domestic and international operations. Sales outside of the U.S. and Canada
accounted for approximately $10,488,000, or 37% of net sales, and $7,803,000, or
35% of net sales, in 1997 and 1996, respectively.
Marketing
The Company'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 by regularly consulting with distributors, VARs, systems
integrators, OEMs and end users. Additionally, the marketing
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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.
Customer Service
The Company maintains a highly responsive sales and technical support and
service 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 carries warranties
offered by their manufacturers. The Company's application software carry a
90-day free technical support agreement. On-site replacement warranties may be
purchased by a customer when the product is purchased. Under an on-site
replacement warranty, a customer receives a replacement unit before the
defective equipment is actually returned to Percon for repair. Extended
warranties and extended on-site replacement warranties are available to add up
to three 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.
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 its 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 no material
long-term contracts with component suppliers or subassembly contractors.
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.
Year 2000 Computer System Impact
The Company has analyzed the impact of the Year 2000 issue on its information
systems and believes its enterprise management information system addresses the
Year 2000 issues on all core Company business systems. Accordingly, the Company
expects the Year 2000 issue will not have a material financial impact on the
Company. The Company has other ancillary systems, however, that may require
modification to address the Year 2000 issue, and the Company
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continues to evaluate its information systems in connection with the Year 2000
issue. The Company has not thoroughly analyzed the impact of other parties'
computer system failures, but the Company believes costs incurred in responding
to other parties' Year 2000 computer system failures, together with the cost of
any required modifications to the Company's ancillary systems, will not have a
material impact on the Company's results of operations or financial condition.
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.
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, trade secret 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 material compliance with applicable
government, environmental, waste management, health and safety regulations.
There is 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.
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Employees
As of March 31, 1998, the Company employed 111 people, all of which were
full-time. Of these employees, 24 were engaged in sales and marketing, 13 in
customer service support, 19 in engineering, 37 in manufacturing and 18 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.
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 September 30, 1998. Lease
payments, which exclude the Company's proportionate share of property taxes on
the facility and improvement costs, are approximately $20,000 per month. The
Company has entered into a lease agreement for a new facility in Eugene, Oregon
that commences approximately at the time the existing lease terminates, The term
of the new lease is 10 years, before the effect of certain extension clauses.
The new agreement provides for the lease of approximately 37,250 square feet of
space during the first five years of the lease term and increase to 47,150
square feet of space for the last five years of the lease term. The Company
intends to sublease a portion of the building (for the first five years of the
lease term). Lease payments, excluding the Company's proportionate share of
property taxes and maintenance costs and any anticipated sublease rental income,
will be approximately $32,000 per month for the first five years of the lease
and approximately $53,000 per month for the last five years of the lease.
The Company's Menlo Park office was closed in September 1997. The
activities conducted from that office are now conducted from the Company's
Eugene, Oregon facility.
The Company's facility located near Paris, France is used for sales,
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 $16,000 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 trades on the Nasdaq National Market under the symbol
"PRCN." The following table sets forth for the periods indicated the high and
low sale prices of the Common Stock as reported on the Nasdaq National Market.
Year Ended December 31, 1997
High Low
---- ---
Fourth Quarter....................... $ 16 3/4 $ 11 3/4
Third Quarter........................ 16 3/4 13
Second Quarter....................... 14 3/4 9 7/8
First Quarter........................ 14 9 1/4
Year Ended December 31, 1996
High Low
---- ---
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
As of March 31, 1998, there were approximately 60 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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
Percon develops, manufactures and markets bar code reading products, including
RF and batch portable data terminals, fixed station and integrated decoders,
hand-held laser scanners, and data management application software, for the
worldwide 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 in a
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variety of industries including education, retail, warehousing and distribution,
package delivery, manufacturing, healthcare and other point-of-service
applications.
The Company markets its products through a network of Auto ID distributors,
VARs and systems integrators, which allows the Company's products to reach small
and mid-size end users cost effectively. In addition, Percon markets its
products to mid-size and large end users through its strategic relationships as
an OEM with other sales organizations. The Company also distributes its products
internationally primarily through VARs in Europe, Latin America and Asia.
The Company believes the increases in its net sales in 1997 and 1996 were
due in part to the rapid growth of portable data terminals, software and decoder
products, the continued expansion of its distributor, VAR and systems integrator
customer base and, to a limited extent, its activities as an OEM.
In November 1995, the Company broadened its product offering through the
acquisition of the IntelliTrack application software line. In March 1996, the
Company further broadened its product offering and international markets through
the acquisition of Percon Europe S.A. (formerly known as STI S.A.), a French
company which develops, manufactures and markets a full line of fixed station
and integrated decoder products. The acquisition continues to allow the Company
to expand its sales of portable data terminals and application software into
Percon Europe's existing European customer base. During 1998 management intends
to continue efforts to broaden the Company's market opportunities through its
existing acquisition strategy and through continued expansion of the Company's
product offering, primarily through expanding the portable data terminal product
family, based upon the open system and DOS based architectures similar to those
of the existing Falcon product offering. The Company also expects to increase
its sales force significantly in 1998 primarily to expand its portable data
terminal product offering to a broader range of customers in selected countries
in Europe as well as to certain vertical market customers domestically including
warehousing, distribution and enterprise wide information system software
authors.
Results of Operations
Comparison of Years Ended December 31, 1997 and 1996
Net sales. Net sales for 1997 increased $6.0 million (27.3%) to $28.2
million from $22.1 million for 1996. The increase was primarily due to increased
unit sales volume of the Company's PDTs and application software and
accessories, as well as the inclusion of the operations of Percon Europe S.A.
(acquired on March 7, 1996) for the full year of 1997, which increased sales of
the Company's decoder products. The sales mix of the Company's products was
relatively comparable in 1997 and 1996. The Company expects sales of PDTs to
become a more significant part of the overall product sales mix in 1998.
International sales represented approximately 37% of net sales in 1997 compared
to 35% of net sales in 1996. The strengthening of the United States dollar
against the functional currency of the Company's European subsidiary, however,
negatively impacted international revenues by $1.4 million, or 6.3%, compared to
exchange rates in effect in 1996.
Gross profit. Gross profit for 1997 increased $3.3 million (29.7%) to $14.4
million from $11.1 million for 1996, representing 51.1% and 50.2% of net sales,
respectively. The dollar increase in gross profit was primarily due to the
increase in net sales. The percentage increase was primarily due to product cost
reductions and an increase in the percentage of products manufactured by the
12
<PAGE>
Company compared to sales of products manufactured by others. The Company
expects any reductions in gross profit in 1998 resulting from product mix
changes to be offset by further product cost reductions.
Selling, marketing and customer service. Selling, marketing and customer
service expense for 1997 increased $934,000 (26.3%) to $4.5 million from $3.5
million for 1996, representing 15.9% and 16.0% of net sales, respectively. The
dollar increase primarily resulted from activities to support new product
introductions and the growth in net sales. These additional costs include
increases in sales and marketing personnel and related costs, such as travel, to
support these personnel. The Company expects to increase its number of sales
personnel significantly in 1998, and as such, expects the percentage of selling,
marketing and customer service expenses to increase as a percentage of sales
from the current level.
General and administrative expense. General and administrative expense for
1997 increased $644,000 (29.1%) to $2.9 million from $2.2 million for 1996,
representing 10.1% and 10.0% of net sales, respectively. The increase was
primarily a result of expenditures on business resources and amortization of
costs associated with new management information systems to support the increase
in revenue growth. The Company recently renewed the lease for its Eugene, Oregon
facility, and entered into a new lease to commence when the existing lease
expires, which will result in higher rent expense during 1998.
Research and product development expense. Research and product development
expense for 1997 increased $10,000 (.6%) from 1996, to $1.8 million,
representing 6.3% and 7.9% of net sales, respectively. The percentage decrease
is a result of i) second half of 1997 reorganizations whereby the Company
reduced its engineering expenses for application software in connection with
planned increases in expenses for additional development in the PDT group, ii)
significant development costs in 1996 ahead of net sales resulting from those
efforts, and iii) a planned consistent level of spending between 1997 and 1996
to support a commensurate level of research and product development. The Company
expects these expenditures, as a percentage of net sales, to remain fairly
constant in 1998.
Acquired in-process research and product development. There was no acquired
research and product development expense in 1997. In 1996, a portion ($2.1
million) of the purchase price for the acquisition of Percon Europe S.A. 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 represented 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 bring these projects to fruition, high risk developmental issues
needed to be resolved which required substantial additional effort and testing.
Therefore, technological feasibility of these new products had not yet been
achieved. As these projects had not reached technological feasibility and
alternative future use of these developmental technologies, apart from the
objectives of the individual projects, did not exist, these costs were expensed
as of the acquisition date. The costs reduced net income and diluted net income
per share for 1996 by $2.1 million and $0.51, respectively.
13
<PAGE>
Interest and Other. Net interest expense of $29,000 for 1997 compared to
net interest expense of $1,900 for 1996. Other expense of $17,000 in 1997
compared to $1,800 in 1996 was the result of foreign currency transaction losses
incurred by Percon Europe S.A., which regularly sells product in multiple
currencies that can give rise to such losses, or gains, based upon volatility in
currency exchange rates.
Provision for income taxes. The provision for income taxes for 1997 was
$1.8 million, which represents an effective tax rate of 34.5%. Items that cause
this rate to differ from the U.S. federal statutory rate of 34% include state
and international taxes and benefits from domestic and foreign research credits
and the Company's foreign sales corporation. The Company expects the effective
tax rate to increase in 1998 due to a normalized state income tax rate in 1998,
compared to a temporarily reduced state income tax rate during 1997.
The provision for income taxes for 1996 was $1.3 million, which represents
an effective tax rate of 84.3%. The most significant item that caused this rate
to differ from the U.S. federal statutory rate of 34% was from the acquired
in-process research and product development expense for which no federal or
state tax benefit was realized. Other items that caused the rate to differ
included benefits from research and development tax credits, both domestic and
international, benefits from the Company's foreign sales corporation, and state
and international taxes.
Liquidity and Capital Resources
The Company financed its operations in 1997 primarily through net cash
provided by operations.
The Company's line of credit with a domestic bank permits it to borrow up
to 80% of eligible accounts receivable and 25% of eligible inventory (as defined
by the banking agreement) to a maximum of $1.0 million. Outstanding principal
amounts thereunder bear interest at the bank's prime rate, which was 8.5% at
December 31, 1997. No amounts were outstanding under the line of credit at
December 31, 1997. The Company also has line of credit and short-term borrowing
arrangements with two foreign banks that allow for additional borrowing up to an
aggregate of 1,300,000 French Francs (approximately $220,000 at December 31,
1997). These facilities bear interest at the bank's current rates, which were
8.1% and 10.1%, respectively, at December 31, 1997. No amounts were outstanding
under either of these facilities at December 31, 1997.
Net cash provided by operations was $854,000 for 1997, compared to $2.3
million for 1996. Significant accounts receivable and inventories contributed to
lower operating cash flows compared to 1996, offset primarily by a significant
increase in net income.
For 1997 net cash used in investing activities totaled $605,000, compared to
$4.8 million for 1996. The Company made capital expenditures of $598,000 for
1997, compared to $1.0 million for 1996. In addition, 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
capital stock of STI S.A. (renamed Percon Europe S.A.) in a transaction
accounted for as a purchase for financial reporting purposes. The Company paid
approximately $4.6 million in cash for STI S.A. Cash provided by investing
activities of $998,000 for 1996 was the result of the maturity of short-term
commercial paper.
14
<PAGE>
For 1997 net cash provided by financing activities totaled $48,000. For
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.
The Company's current cash balances, together with the borrowings available
under its line of credit agreements and cash generated from operations, are
expected to be sufficient to meet the Company's liquidity requirements for at
least the next 12 months.
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.
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 1998
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 43 President, Chief Executive Officer
and Director
Andy J. Storment 35 Executive Vice President, Secretary,
Treasurer and Director
Brad West 40 Chief Operating Officer, Vice President,
Operations and Corporate Quality
Jason A. Davis 41 Chief Financial Officer
Dianne M. Bert 49 Vice President, Marketing and
Customer Service
David L. Latimer 47 Vice President, Product Marketing
Thomas W. Burke 39 Vice President, OEM Sales
Jean-Francois Codron 39 Vice President, European Operations
15
<PAGE>
Arlen I. Prentice (1)(2) 60 Chairman of the Board
Donald K. Skinner (1)(2) 57 Director
Dana E. Siebert (1)(2) 38 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.
Brad West joined the Company in April 1996 as Vice President, Operations
and Corporate Quality and was promoted to 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.
Jason A. Davis joined the Company in November 1996 as Director of Financial
Reporting and Corporate Controller. In March 1998 Mr. Davis was promoted to
Chief Financial Officer. From November 1994 to November 1996 Mr. Davis was
employed by Sony Disc Manufacturing as Financial Manager. From April 1988 to
November 1994 Mr. Davis was employed as a Senior Financial Analyst for PSC Inc.
(Formerly Spectra Physics Scanning Systems, Inc.). From June 1983 to April 1988
Mr. Davis was employed as a Senior Financial Analyst with Ford Aerospace
corporation.
Dianne M. Bert joined the Company in January 1997 as Director of Marketing and
Customer Service. In May 1997 Ms. Bert was promoted to Vice President, Marketing
and Customer Service. From June 1994 to December 1996 Ms. Bert was employed as
Manager of Customer Service for PSC Inc. (formerly Spectra Physics Scanning
Systems, Inc.). From March 1991 to May 1994 Ms. Bert was Co-Owner and Vice
President, Business Operations of San Diego
16
<PAGE>
Medical Electronics, Inc. From January 1981 to February 1991 Ms. Bert served in
various Sales and Marketing management positions with IBM Corporation.
David L. Latimer joined the Company in March 1997 as Director of Product
Marketing. In May 1997 Mr. Latimer was promoted to Vice President, Product
Marketing. From December 1987 to February 1997 Mr. Latimer was employed as
Director of Product Marketing for PSC Inc. (formerly Spectra Physics Scanning
Systems, Inc.). From June 1982 to November 1987 Mr. Latimer served with
Hewlett-Packard Co. as a Program Manager.
Thomas W. Burke joined the Company in October 1995 as Vice President,
Application Software. In September 1997 Mr. Burke became Vice President, OEM
Sales for Percon. 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 Percon
Europe S.A. (formerly known as 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.
Dana E. Siebert joined the Company's Board of Directors in December 1997. Mr.
Siebert is Vice President, Americas for Symantec Corporation, a company that
designs and markets application and system software for remote productivity
solutions and security and assistance applications. Mr. Siebert has been
employed by Symantec since 1985 and previously served as its Vice President,
Sales and Vice President, Worldwide Services. Mr. Siebert also serves as a
director for TimeLine Solutions Corporation and the Software Publishers
Association.
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
1998 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 1998
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 1998 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 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 21 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 _ Form of Representative's Warrants.
****10.5 _ Modification and/or Extension Agreement, dated July 24, 1997,
between the Registrant and KeyBank National Association.
*****10.6 _ Industrial Park Lease-1710 Building, dated October 27, 1997,
between the Registrant and WCP, LLC.
*****10.7 _ Industrial Park Lease-1720 Building, dated October 27, 1997,
between the Registrant and WCP, LLC.
18
<PAGE>
10.8 _ Lease Agreement-Riverfront Research Park, dated December 24, 1997,
between the Registrant and Robert B. Booth LLC.
+10.9 _ Split Dollar Plan and Pledge Agreements between the Registrant and
the Coughlin Family Irrevocable Trust.
+10.10 _ Split Dollar Plan and Pledge Agreements between the Registrant and
the Storment Family Irrevocable Trust.
+10.11 _ Employment Agreement, dated April 1, 1996, between the Registrant
and Brad West.
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.
**** Incorporated by reference to the Registrant's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1997.
***** Incorporated by reference to Exhibits to Registrant's Quarterly Report
Form 10-QSB for the quarter ended Stpebmer 30, 1997.
+ 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 MICHAEL P. COUGHLIN
--------------------------------------
Michael P. Coughlin
President and
Chief Executive Officer
Dated March 31, 1998
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 March 31, 1998
- ----------------------------- Officer and Director
Michael P. Coughlin
Principal Financial and Accounting Officer:
/s/ MICHAEL P. COUGHLIN President, Chief Executive March 31, 1998
- ----------------------------- Officer and Director
Michael P. Coughlin
/s/ ANDY J. STORMENT Executive Vice President, March 31, 1998
- ----------------------------- Secretary, Treasurer and
Andy J. Storment Director
/s/ ARLEN I. PRENTICE Chairman of the Board March 31, 1998
- -----------------------------
Arlen I. Prentice
/s/ DONALD K. SKINNER Director March 31, 1998
- -----------------------------
Donald K. Skinner
/s/ DANA E. SIEBERT Director March 31, 1998
- -----------------------------
Dana E. Siebert
20
<PAGE>
PERCON INCORPORATED
INDEX TO FINANCIAL STATEMENTS
-------
Page
Report of Independent Accountants F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-2
Consolidated Statements of Income for the years ended December 31,
1997 and 1996 F-3
Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 1997 and 1996 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996 F-5
Notes to Consolidated Financial Statements as of December 31,
1997 and 1996 F-6
21
<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, 1997 and 1996, 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, 1997 and 1996, 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.
Eugene, Oregon
January 23, 1998
F-1
<PAGE>
<TABLE>
<CAPTION>
Percon Incorporated
Consolidated Balance Sheets
December 31
---------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,883,756 $ 1,600,623
Accounts receivable, net 6,199,042 3,908,412
Inventories 4,496,922 3,618,120
Prepaid expenses and other 501,408 470,594
Deferred income taxes 173,718 167,325
--------------- ---------------
Total current assets 13,254,846 9,765,074
Property and equipment, net 2,542,282 2,850,029
Goodwill and intangibles, net 1,556,708 1,898,213
--------------- ---------------
Total assets $ 17,353,836 $ 14,513,316
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 88,802 $ 93,163
Accounts payable 1,604,727 1,809,735
Accrued expenses 864,785 687,410
Deferred revenue 37,911
Income taxes payable 206,545 230,051
--------------- ---------------
Total current liabilities 2,802,770 2,820,359
Long-term debt, less current portion 754,553 973,547
Deferred income taxes 448,466 596,160
Other 24,476 21,083
--------------- ---------------
Total liabilities 4,030,265 4,411,149
--------------- ---------------
Commitments and contingencies (Note 11)
Shareholders' equity:
Preferred stock, 5,000,000 shares authorized,
none issued
Common stock, no par value; 20,000,000 shares
authorized, 3,976,061 and 3,958,541 shares issued
and outstanding at 1997 and 1996, respectively 9,002,585 8,824,775
Cumulative foreign currency translation adjustment (435,065) (48,870)
Retained earnings 4,756,051 1,326,262
--------------- ---------------
Total shareholders' equity 13,323,571 10,102,167
--------------- ---------------
Total liabilities and shareholders' equity $ 17,353,836 $ 14,513,316
=============== ===============
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
---------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Net sales $ 28,175,837 $ 22,128,172
Cost of goods sold 13,782,167 11,029,933
--------------- ---------------
Gross profit 14,393,670 11,098,239
Operating expenses:
Selling, marketing and customer service 4,483,412 3,549,779
General and administrative 2,859,237 2,215,048
Research and product development 1,764,358 1,754,598
Acquired in-process research and product development 0 2,090,696
--------------- ---------------
Operating income 5,286,663 1,488,118
Interest expense, net (29,155) (1,867)
Other expense, net (17,357) (1,808)
--------------- ---------------
Income before taxes 5,240,151 1,484,443
Provision for income taxes 1,810,362 1,250,847
--------------- ---------------
Net income $ 3,429,789 $ 233,596
=============== ===============
Net income per share:
Basic $0.87 $0.06
=============== ===============
Diluted $0.83 $0.06
=============== ===============
Weighted average shares outstanding:
Basic 3,962,333 3,947,901
Effect of dilutive securities:*
Warrants 45,170 45,116
Options 102,792 92,825
--------------- ---------------
Diluted 4,110,295 4,085,842
=============== ===============
* Options to purchase 95,175 shares of common stock at $11.50 to $16.75 per
share were outstanding during 1996, but were not included in the computation
of diluted earnings per share because exercise price was greater than the
average market price of the common shares throughout the year ended December
31, 1996.
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, 1997 and 1996
Cumulative
Foreign
Common Stock Currency
----------------------------- Translation Retained
Shares Amount Adjustment Earnings Total
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 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 0 0 0 233,596 233,596
------------- ------------- ------------- ------------- -------------
Balance, December 31, 1996 3,958,541 8,824,775 (48,870) 1,326,262 10,102,167
Proceeds from exercise of
stock options 17,520 138,720 138,720
Income tax benefits from
stock options exercised 39,090 39,090
Foreign currency translation
adjustment (386,195) (386,195)
Net income 0 0 0 3,429,789 3,429,789
------------- ------------- ------------- ------------- -------------
Balance, December 31, 1997 3,976,061 $ 9,002,585 $ (435,065) $ 4,756,051 $ 13,323,571
============= ============= ============= ============= =============
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
---------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Cash flows from operating activities:
Net income $ 3,429,789 $ 233,596
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,077,640 986,241
Deferred Income taxes (154,087) (206,522)
Acquired in-process research and product development 2,090,696
Other (24,145)
Changes in operating assets and liabilities, net of
effects of acquisition of business:
Receivables (3,068,229) (408,038)
Inventories (1,099,869) (456,564)
Prepaid expenses and other 371,860 (137,899)
Accounts payable and accrued expenses 275,722 119,625
Income taxes payable 20,803 121,544
Net cash provided by operating activities 853,629 2,318,534
Cash flows from investing activities:
Purchases of businesses, net of cash acquired (Note 13) (4,650,463)
Equipment purchases (558,469) (1,018,637)
Purchases of technology (46,046) (87,928)
Proceeds on maturity of short-term investments 0 998,125
Net cash used in investing activities (604,515) (4,758,903)
Cash flows from financing activities:
Principal paid on long-term debt (91,153) (70,879)
Proceeds from exercise of stock options 138,720 106,512
Net cash provided by financing activities 47,567 35,633
Effect of exchange rates on cash and cash equivalents (13,548) (1,238)
Net increase (decrease) in cash and cash equivalents 283,133 (2,405,974)
Cash and cash equivalents at beginning of year 1,600,623 4,006,597
Cash and cash equivalents at end of year $ 1,883,756 $ 1,600,623
Supplemental Disclosures:
Interest paid $ 92,353 $ 89,302
Taxes paid 2,054,147 1,302,034
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
F-5
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
1. Summary of Significant Accounting Policies:
Organization: Percon Incorporated (the "Company") develops, manufactures
and markets data collection hardware and data management software products,
including batch and radio frequency ("RF") portable data terminals, fixed
station and integrated decoders, hand-held laser scanners, and 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, Percon
Europe S.A. (formerly known as STI S.A.), 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.
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 Percon Europe S.A.
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, Continued
December 31, 1997 and 1996
1. Summary of Significant Accounting Policies, Continued:
Intangibles include the cost of internally developed software, purchased
product software, technologies acquired in connection with business
combinations, and certain noncompete agreements. Software costs related to
software developed to be sold are capitalized where economic and
technological feasibility has been established and for qualifying purchased
products software. Amortization of capitalized software cost, which is
included in cost of goods sold, is provided on a product-by-product basis
on 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. The
amortization period for these products match the products estimated useful
life, generally from two to five years. 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 (two to 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.
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).
When factors indicate intangibles should be evaluated for possible
impairment, management uses an estimate of the related asset's undiscounted
cash flow over its remaining life in measuring whether the carrying amount
of goodwill is impaired.
Stock Options: Statement of Financial Accounting Standards No. 123 (SFAS
No. 123), "Accounting for Stock-Based Compensation", 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 generally
recognized upon shipment. In conjunction with these sales, service
maintenance or extended warranty agreements are sold for certain products.
When such revenue is recorded prior to providing these services, it is
deferred and recognized over the term of the related agreement. 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
December 31, 1997 and 1996
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, value-added resellers and
system integrators, principally in the United States and Europe. The
Company believes any risk of loss is significantly reduced by its ongoing
credit evaluations of its customers, diversity of its end users and
geographical sales area.
The Company considers current and historical loss experience and general
economic conditions in determining the allowance for uncollectible accounts
receivable of approximately $101,000 and $135,000 as of December 31, 1997
and 1996, 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 economic and technological feasibility have not been achieved are
expensed at the date of purchase.
Income taxes: 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: In 1997, Statement of Financial Accounting Standards
No. 128 (SFAS No. 128), "Earnings Per Share", established a new standard
for computing and presenting earnings per share.
SFAS No. 128 requires presentation of basic and diluted earnings per share.
Basic earnings per share is computed by dividing net income by the weighted
average number of shares outstanding for the period. It also requires a
reconciliation of the numerator and denominator of the basic earnings per
share computation to the numerator and denominator of the diluted earnings
per share computation. Diluted earnings per share include the assumed
dilution, using the treasury stock method, that would occur if warrants and
options to purchase common stock were exercised. Prior-period earnings per
share have been restated in accordance with SFAS No. 128.
Continued
F-8
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
December 31, 1997 and 1996
1. Summary of Significant Accounting Policies, Continued:
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.
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 future 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 portable data
terminals, fixed-station and integrated decoders, hand-held laser scanners,
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. Although the Company is not involved in any such litigation, there
is 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 no material long-term contracts with suppliers of components or
subassemblies. 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 the Company
could have a material adverse effect on the Company's financial condition
and results of operations. Although 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.
Continued
F-9
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
December 31, 1997 and 1996
1. Summary of Significant Accounting Policies, Continued:
Financial Accounting Standards Board (FASB): The FASB has issued certain
accounting pronouncements which the Company will be required to adopt in
future fiscal reporting periods:
SFAS No. 130 - In June 1997, FASB issued SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes requirements for disclosure
of comprehensive income and becomes effective for the Company for the year
ending December 31, 1998. Comprehensive income includes such items as
foreign currency translation adjustments and unrealized gains and losses on
securities available-for-sale that are currently being included as a
component of stockholders' equity. The Company does not expect this
pronouncement to materially impact its financial statements.
SFAS No. 131 - In June 1997, FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information", which requires
disclosure of information about key revenue-producing segments of an
entity. A reconciliation of segment financial information to amounts
reported in the financial statements will be required. SFAS No. 131 is
effective for the Company in 1998 and it has not been determined if
additional disclosure is required.
Reclassifications: Certain prior-period amounts have been reclassified to
conform with the December 31, 1997 presentation. Such reclassification did
not affect previously reported net income or cash flows.
F-10
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
December 31, 1997 and 1996
2. Acquisition:
On March 7, 1996, the Company purchased all of the outstanding stock of
Percon Europe S.A. for approximately $4.7 million in cash. Percon Europe
S.A., located near Paris, France, is a leading manufacturer of
fixed-station and integrated decoders. The results of Percon Europe S.A.'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.
Unaudited pro forma consolidated sales, net income and net income per share
would have been $23,280,000, $245,000 and $.06, respectively, had the
consolidated results of operations been reported as if the acquisition had
occurred as of January 1, 1996. 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 diluted 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 diluted share by $0.51.
3. Inventories:
December 31
-----------------------------
1997 1996
------------- -------------
Finished goods $ 1,949,285 $ 1,586,657
Materials 2,547,637 2,031,463
$ 4,496,922 $ 3,618,120
F-11
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
December 31, 1997 and 1996
4. Property and Equipment, Net:
<TABLE>
<CAPTION>
December 31
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Building on land leased from others $ 1,252,225 $ 1,333,292
Equipment 2,070,545 1,452,909
Tooling 822,831 729,755
Leasehold improvements 98,984 100,691
------------- -------------
4,244,585 3,616,647
Less accumulated depreciation and amortization 1,702,303 766,618
------------- -------------
$ 2,542,282 $ 2,850,029
============= =============
</TABLE>
5. Goodwill and Intangibles, Net:
<TABLE>
<CAPTION>
December 31
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Capitalized software and technology $ 2,011,868 $ 1,796,829
Noncompete agreements 832,129 832,129
Goodwill and other 565,355 564,642
------------- -------------
3,409,352 3,193,600
Less accumulated amortization 1,852,644 1,295,387
------------- -------------
$ 1,556,708 $ 1,898,213
============= =============
</TABLE>
6. Accrued Expenses:
<TABLE>
<CAPTION>
December 31
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Accrued employee bonuses $ 30,701 $ 45,500
Accrued payroll and payroll liabilities 560,217 517,067
Accrued warranty 81,878 59,559
Accrued business and property taxes 88,456 35,496
Other liabilities 103,533 29,788
------------- -------------
$ 864,785 $ 687,410
============= =============
</TABLE>
F-12
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
December 31, 1997 and 1996
7. Bank Line of Credit:
The Company has a revolving line of credit with one domestic bank of up to
$1,000,000, subject to certain limitations, collateralized by accounts
receivable and inventories. The interest rate is the bank's prime rate
(8.5% at December 31, 1997). No amounts were outstanding as of December 31,
1997.
The Company also has a credit facility with a foreign bank to borrow up to
1,000,000 French francs (approximately $170,000), collateralized by
accounts receivable. Borrowings under the facility bear interest at the
bank's current interest rate (8.10% at December 31, 1997). No amounts were
outstanding at December 31, 1997.
The Company has overdraft and line of credit facilities with a foreign bank
for up to 300,000 French francs (approximately $50,000) at the bank's
current overdraft interest rate (10.10% at December 31, 1997). No amounts
were outstanding at December 31, 1997.
8. Long-term Debt:
<TABLE>
<CAPTION>
December 31
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Bank loan, monthly payments of 82,840 French
francs (approximately $14,000), including interest
at 9.6%, maturing December 31, 2004 $ 843,355 $ 1,066,710
Less current portion (88,802) (93,163)
------------- -------------
$ 754,553 $ 973,547
============= =============
The bank loan is collateralized by a preferential lien on the building
owned by Percon Europe S.A. and matures as follows:
1999 $ 97,712
2000 107,516
2001 118,305
2002 130,175
2003-2004 300,845
-------------
$ 754,553
=============
</TABLE>
F-13
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
December 31, 1997 and 1996
9. Income Taxes:
The provision for income taxes consists of the following at December 31:
<TABLE>
<CAPTION>
Actual
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Current:
Federal $ 1,475,275 $ 876,536
State 185,184 215,787
Foreign 303,990 365,046
Deferred (154,087) (206,522)
------------- -------------
$ 1,810,362 $ 1,250,847
============= =============
</TABLE>
The difference between the statutory federal income tax rate and the
Company's effective rate is summarized as follows:
<TABLE>
<CAPTION>
Actual
------------------------
1997 1996
-------- --------
<S> <C> <C>
Federal 34.0% 34.0%
State, net of Oregon rebate and federal benefit 2.4 4.7
Research and experimentation tax credits (2.1) (8.7)
Acquired in-process research and development 54.5
Foreign sales corporation (.7) (2.0)
Excess of foreign over U.S. tax rate .9 2.0
Goodwill amortization .6 1.8
Other (.6) (2.0)
-------- --------
34.5% 84.3%
======== ========
</TABLE>
The components of the net deferred tax asset/liability at December 31 are
as follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Assets:
Inventory reserve $ 35,749 $ 69,660
Warranty provision 25,403 23,049
Allowance for doubtful accounts 20,786 34,922
Accrued expenses and other 91,780 39,694
------------- -------------
173,718 167,325
------------- -------------
Liabilities:
Depreciation 118,624 132,414
Capitalized software and noncompete
agreements 329,842 463,746
------------- -------------
448,466 596,160
------------- -------------
Net deferred income tax liability $ (274,748) $ (428,835)
============= =============
</TABLE>
F-14
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
December 31, 1997 and 1996
10. 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 2000.
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, 1997 and 1996, the Company granted
options to employees and directors to purchase an aggregate of 202,600
shares and 176,515 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-
Number Average
of Exercise
Shares Price
--------- ---------
<S> <C> <C>
Balance, January 1, 1996 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
Options granted 202,600 11.33
Options exercised (17,520) 6.78
Options surrendered (70,515) 11.04
---------
Balance, December 31, 1997 400,910 $ 10.40
=========
</TABLE>
Continued
F-15
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
December 31, 1997 and 1996
10. Stock Options and Warrant, Continued:
The table summarizes information about stock options outstanding as of
December 31, 1997:
<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 2,000 2 years $ 3.84 0 $ 3.84
$ 6.75 - $ 7.425 118,470 6 years $ 6.92 87,870 $ 6.89
$ 9.25 - $ 11.875 178,930 9 years $10.80 25,867 $ 10.60
$ 12.25 - $ 14.75 101,510 9 years $13.89 37,730 $ 13.79
----------- -------------
400,910 8 years $10.40 151,467 $ 9.24
=========== =============
</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.
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Net income - as reported $ 3,429,789 $ 233,596
Net income (loss) - pro forma 3,097,375 (606)
Earnings per share diluted - as reported $ 0.83 $ 0.06
Earnings per share diluted - pro forma $ 0.75 $ 0.00
</TABLE>
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 assumptions.
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Average risk-free interest rate 6.73% 6.70%
Average expected life 5.8 years 6.0 years
Expected volatility 40.0% 46.6%
Expected dividend yield None None
</TABLE>
F-16
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
December 31, 1997 and 1996
11. Commitments and Contingencies:
The Company leases certain facilities and land under noncancelable
operating leases. The lease for the Company's headquarters expires in
September 1998. In December 1997, the Company signed a ten-year
noncancelable lease for a new headquarters facility, which contains a
five-year lease extension option. The beginning of this new lease coincides
with the termination of the existing lease. The leases contain provisions
for the Company to pay for certain ongoing costs, such as property taxes,
insurance and support costs, which are not reflected in the minimum lease
payment. The Company expects to sublease certain portions of the new
facility. Rent expense was $244,150 and $310,386 for the years ended
December 31, 1997 and 1996, respectively. Rent expense in 1997 and 1996 is
before sublease income of $3,761 and $78,066, respectively. Future minimum
payments required under these operating lease agreements are summarized
below. All existing sublease agreements have terminated at December 31,
1997.
Year ending December 31:
1998 $ 289,988
1999 372,214
2000 379,664
2001 402,014
2002 421,384
Thereafter 3,566,748
-------------
$ 5,432,012
=============
12. 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 $86,893
and $116,982 for the years ended December 31, 1997 and 1996, respectively.
13. Supplemental Disclosure of Investing and Financing Activities:
<TABLE>
<CAPTION>
Acquisition of business, net of cash acquired, in 1996:
<S> <C>
Current assets, net of cash acquired $ 3,088,445
Property and equipment 1,637,903
Intangibles, noncompetes and goodwill 654,468
In-process research and product development 2,090,696
Deferred tax liability resulting from acquisition (27,676)
Current liabilities assumed (1,594,332)
Noncurrent liabilities assumed (1,199,041)
--------------
Cash used in purchase of business,
net of cash acquired $ 4,650,463
==============
</TABLE>
F-17
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
December 31, 1997 and 1996
14. Fair Value of Financial Instruments:
The carrying value of the Company's financial instruments, including cash
and cash equivalents, investments, accounts receivable, long-term debt,
accounts payable and accrued liabilities approximates fair value due to
their short maturities.
15. Business Segment Information:
The Company operates in one business segment: the development, manufacture
and marketing of bar code reading products, including portable data
terminals, fixed-station and integrated decoders, hand-held laser scanners
and data management application software. Summarized data of the Company's
operations, by geographic area, for the years ended December 31, 1997 and
1996 are presented below.
<TABLE>
<CAPTION>
Consolidation
United States Europe Adjustments Consolidated
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
1997
Sales to unaffiliated customers $ 20,147,294 $ 9,742,566 $ (1,714,023) $ 28,175,837
Income from operations 4,514,210 961,724 (189,271) 5,286,663
Identifiable assets at year end 16,436,221 6,527,082 (5,609,467) 17,353,836
1996
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 for 1996 reflects
$2.1 million of acquired in-process research and development recorded in
connection with the purchase of Percon Europe S.A.
Sales to a single distributor accounted for 12% and 11% of net sales for
the years 1997 and 1996, respectively. Accounts receivable at December 31,
1997 were $931,908 related to this distributor.
F-18
SPLIT DOLLAR PLAN AGREEMENT
THIS PLAN is adopted by agreement between PERCON INCORPORATED, a Washington
corporation (the "Company"), and the Trustee of the Coughlin Family Irrevocable
Trust, under trust agreement dated September 27, 1997 (the "wner").
Definitions
A. Company. PERCON INCORPORATED, a Washington corporation
B. Insureds. Michael and Katherine Coughlin
C. Insurer. Pacific Life Insurance Company, Newport Beach, California
D. Owner. The Trustee of the Coughlin Family Irrevocable Trust under trust
agreement dated ___________________, 1997
E. Policy. The policy of insurance on the joint lives of the Insureds issued
by the Insurer and listed on Exhibit A.
F. Premium Advance. An amount, due to the Company, equal to the cumulative
total premiums paid by the Company on the Policy.
Recitals
A. The Insureds own a significant amount of Company' stock and that stock
comprises a large portion of Insureds assets. Insureds desire that there
be cash assets available to pay the estate taxes of the estate of the last
of the Insureds, thereby reducing the probability that a large block of
stock will have to liquidated to pay estate taxes. Insureds and the Company
are concerned that such a liquidation may have an adverse effect on the
market for the stock.
B. The Owner wishes to obtain life insurance on the joint lives of the
Insureds to ensure that there will be cash assets available to pay estate
taxes on the death of the survivor of the Insureds.
THEREFORE, the parties agree as follows:
1. Premium Payments
1.1 Each annual premium on the policy shall be paid as follows:
Split Dollar Plan Agreement
Page 1 of 7
<PAGE>
(A) The Owner
(1) while both insureds are living, the Owner shall pay annually
an amount equal to the lower of (1) the Insurer's lowest
published survivor term insurance rate available to all
standard risks, or (2) the imputed economic benefit for
federal income tax purposes for split dollar survivor life
insurance policies, commonly referred to as the "U.S. 38" or
P.S. 38" rate.
(2) Following the death of first Insured to die, the Owner shall
pay annually an amount equal to the lower of (1) the
Insurer's lowest published term insurance rate available to
all standard risks, or (2) the imputed economic benefit for
federal income tax purposes for split dollar insurance,
commonly referred to as the "P.S. 58" rate and more
particularly described in Revenue Rulings 64-328 and 66-110.
(3) The Owner may elect to pay part or all of any additional
premium by policy loan or other borrowing, and shall deliver
notice of such election to the Company on or before the
premium due date.
(b) The Company shall pay all premium amounts not paid by the Owner.
1.2. The Owner's premium share (other than that paid with policy loans) and
the Company's premium share shall be remitted to the Insurer before
expiration of the grace period.
1.3. Dividends on the policy shall be applied as elected by the Owner.
2. Rights of Parties
2.1. The Owner shall be the sole and exclusive owner of the Policy. This
includes all rights of "owner" under the terms of the Policy
including, but not limited to, the right to designate beneficiaries,
select settlement and dividend options, borrow on the security of the
Policy, and to surrender the Policy. All such rights may be exercised
by the Owner without the Company' consent.
2.2. In exchange for the Company' payment of its premium contribution
under Section 1, the Owner agrees to return to the Company the amount
of its Premium Advance on the earlier of:
Split Dollar Plan Agreement
Page 2 of 7
<PAGE>
(a) Termination of this plan as provided in Section 4; or
(b) The surviving Insured' death.
Provided, that nothing herein shall give the Company any interest in
any of the assets of the Owner, including but not limited to, the
Policy.
3. Assignment. The Owner shall have the right to assign any part or all of
the Owner's retained interest in the Policy to any person, entity, or trust
by execution of a written assignment delivered to Insurer.
4. Termination
4.1. This Plan shall terminate on the first to occur of the following:
(a) Without notice, upon the termination of the employment of the
Insured with the Company, whether voluntary or involuntary,
including termination as a result of disability but not as a
result of death.
(b) Surrender of the Policy by the Owner, who has the sole and
exclusive right of surrender.
(c) Delivery by the Owner of a written notice of termination to the
Company.
(d) Failure of the Owner to make a premium contribution as required
by Section 1.
5. Security for Reimbursement of Premium Advance to Company. In the event of
a termination of the Plan under Section 4, the Owner agrees, under Section
2.2, to reimburse to the Company the amount of its Premium Advance. As
security for the Owner's promise to reimburse the Company for its Premium
Advance, the Owner agrees to provide collateral to the Company in the form
of common stock of the Company. The Owner further agrees to sign a Pledge
Agreement in the form attached to this Agreement, and deliver to the
Company stock certificates having a value equal to the greatest amount by
which the Premium Advance due to the Company is projected to exceed the
cash surrender value during the lives of the Insureds, or the policy
proceeds upon the death of the surviving Insured, as illustrated in the "s
sold"Policy illustration, a copy of which is attached to this Agreement as
Exhibit B.
Split Dollar Plan Agreement
Page 3 of 7
<PAGE>
6. ERISA Provisions: The following provisions are intended to comply with the
requirements of the Employee Retirement Income Security Act of 1974
("ERISA"):
6.1. Named Fiduciary and Plan Administrator: The secretary of the Company.
6.2. Funding Policy: The funding policy under this Plan is that all
premiums on the Policy be remitted to the Insurer when due.
6.3. Basis of Payment of Benefits. Direct payment by the Insurer is the
basis for payment of benefits under this Plan, with those benefits in
turn being based on the payment of premiums as provided for in this
Plan.
6.4. Claims Procedure. Claims shall be made as follows:
(a) Filing a Claim for Benefits
(1) Company. If the claim is against the Company, the claimant
shall deliver a written request to the Chief Financial
Officer of the Company.
(2) Insurer. If the claim is for a benefit provided by the
Insurer, a claim for such benefit shall be filed with the
Insurer in accordance with its procedures.
(b) Notification to Claimant of Decision. If for any reason, a claim
for benefits under this Plan is denied by the Company, the Claims
Manager shall deliver to the claimant a notice of the decision,
in accordance with the requirements of Section 6.4(c) within 90
days after receipt of the claim by the Claims Manager. If special
circumstances require more than 90 days to process the claim,
this period may be extended for up to an additional 90 days by
giving written notice to the claimant before the end of the 90
day period stating the special circumstances that necessitate an
extension and the date by which it is anticipated that a final
decision will be issued. Failure to provide a notice of decision
in the time specified shall constitute a denial of the claim and
the claimant shall be entitled to require a review of the denial
in accordance with the "Claims Review Procedure" in section
6.4(d).
(c) Content of Notice. The notice to be provided to every claimant
who is denied a claim for benefits shall be in writing and shall
set forth, in a manner calculated to be understood by the
claimant, the following:
Split Dollar Plan Agreement
page 4 of 7
<PAGE>
(1) The specific reason or reasons for the denial;
(2) Specific reference to pertinent provisions of this Plan on
which the denial is based;
(3) A description of any additional material or information
necessary for the claimant to perfect the claim and an
explanation of why such material or information is
necessary; and
(4) An explanation of the Claims Review Procedure describing the
steps to be taken by a claimant who wishes to submit his or
her claim for review.
(d) Claims Review Procedure. The purpose of this Claims Review
Procedure is to provide a procedure by which a claimant may have
a reasonable opportunity to appeal a denial of a claim to one or
more persons selected by the Named Fiduciary.
(1) Consistent with the purpose of the Claims Review Procedure,
the claimant or his duly authorized representative:
(A) May request a review upon written application to the
appropriate Named Fiduciary;
(B) May review pertinent plan documents; and
(C) May submit issues and comments in writing.
(2) A claimant (or his duly authorized representative) shall
request a review by filing a written application for review
at any time within 60 days after receipt by the claimant of
written notice of the denial of his claim.
(e) Decision on Review. The decision on review of a denied claim
shall be made in the following manner:
(1) The decision on review shall be made promptly, which shall
ordinarily not be later than 60 days after receipt of a
request for review, unless special circumstances (such as
the need to hold a hearing) require an extension of time for
processing. In that case, a decision shall be rendered as
soon as possible, but not
Split Dollar Plan Agreement
Page 5 of 7
<PAGE>
later than 120 days after receipt of the request for review.
If an extension of time is required due to special
circumstances, written notice of the extension shall be
furnished to the claimant prior to the time the extension
commences.
(2) The decision on review shall be in writing and shall include
specific reasons for the decision, written in a manner
calculated to be understood by the claimant, as well as
specific references to the pertinent provisions of this Plan
on which the decision is based.
(3) In the event the decision on review is not furnished to the
claimant within the time required, the claim shall be deemed
denied on review.
(f) Claims Review Procedure for Insurance Benefits. Any claim arising
out of or in any way pertaining to rights or obligations under
the Policy shall be made to the Insurer, which shall have sole
responsibility for the determination of any such claim and its
review. The Owner agrees to hold the Company harmless from and
against any such claim.
7. Miscellaneous
7.1 Binding Agreement. This Agreement is binding on and enforceable by and
against the parties, their heirs, successors, legal representatives,
and assigns.
7.2 Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
7.3 Governing Law. This Agreement will be governed by and construed
according to the laws of the state of Oregon.
7.4 Severability. No part of this Agreement will be affected if any other
part of it is held invalid or unenforceable.
7.5 Notices. All notices required or permitted to be given under this
Agreement must be given in writing, and will be deemed given when
delivered by hand or by messenger or, if earlier, when received after
mailing by registered or certified mail, postage prepaid, with return
receipt requested. Notice to the Owner is valid if sent to it at its
address as it appears below:
Split Dollar Plan Agreement
Page 6 of 7
<PAGE>
Warren Barnes, Trustee, Coughlin Family Irrevocable Trust
Mailing Address: _
7.6 "Days" Defined. Any reference in this Agreement to "days" means all
calendar days, whether or not such days are legal holidays under the
law of the United States or of any state.
7.7 Waiver. Any party's failure to insist on compliance or enforcement of
any provision in this Agreement shall neither affect is validity nor
its enforceability, or constitute a waiver of future enforcement of
that provision or of any other provision of this Agreement.
7.8 Gender and Number. Whenever the context of this Agreement requires,
the masculine gender includes the feminine and neuter, and the
singular number includes the plus, and vice versa.
7.9 Amendment of Agreement. This Agreement is the entire agreement between
the parties, and shall not be modified or amended except in writing,
signed by the Company and the Owner.
7.10 Attorney Fees. In the event of a default under this Agreement, the
defaulting party shall reimburse the nondefaulting party for all costs
and expenses reasonably incurred by the nondefaulting party in
connection with the default, including, without limitation, attorney
fees. In addition, in the event a suit or action is filed to enforce
this Agreement, or is filed with respect to this Agreement, the
prevailing party shall be reimbursed by the other party for all costs
and expenses incurred in connection with the suit or action,
including, without limitation, reasonable attorney fees at the trial
level and on appeal.
Agreed to by each of the undersigned this 20 day of September, 1997.
Company: PERCON INCORPORATED,
By: Andy J. Storment
---------------------------------------------
Title: Executive Vice President
Owner: Trustee of the Coughlin Family
Irrevocable Trust, dated September 27,
1997
Warren Barnes
--------------------------------------------------
Split Dollar Plan Agreement
Page 7 of 7
<PAGE>
PLEDGE AGREEMENT
This Pledge Agreement is made as of September 22, 1997 by and between
PERCON INCORPORATED, a Washington corporation (the "Company"), and the Trustee
of the Coughlin Family Irrevocable Trust (the "Trust").
Recitals
A. The Company and the Trust have executed a Split Dollar Plan Agreement (the
"Split Dollar Plan") dated as of September 20, 1997, a copy of which is
attached as Exhibit A.
B. The Split Dollar Plan provides that upon a termination of the Split Dollar
Plan, the Trust will pay to the Company the amount of its Premium Advance.
The Trust promises to pledge to the Company collateral, in the form of
Company stock, to secure the Company's right to reimbursement of its
Premium Advance.
THEREFORE, the parties agree as follows:
1. Pledge. The Trust pledges and grants to the Company a security interest in
a sufficient number of shares of Company stock to fully secure the greatest
amount by which it is projected, in accordance with the "as sold" Policy
illustration attached to the Split Dollar Plan as Exhibit C, that the
Company's accumulated premium contributions will exceed the amount of the
net proceeds payable to the Company under the Split Dollar Plan. The
Company stock pledged by the Trust as collateral to secure the Company's
Premium Reimbursement shall be delivered to the Company with this Pledge
Agreement, together with a duly executed assignment or stock power. The
Trust further pledges to the Company all dividends, stock splits,
distributions, cash instruments, and other property and proceeds from time
to time received, receivable, or otherwise made upon, or distributed in
respect of, or in exchange for, any or all of the Shares. The Company shall
retain custody of all pledged Shares prior to their release from pledge and
shall have full power to assign its rights or prospective rights as
pledgee. While the Shares are pledged, the Company shall be entitled to
collect and receive all dividends, income, installment, sale proceeds,
revenue and profits accruing with respect to the Shares, and shall have
full power with respect to voting the Shares.
2. Event of Default. In the event the Trust defaults on its promise to pay the
Company its Premium Reimbursement, the Company shall have the rights and
remedies provided in the Uniform Commercial Code in force in the State of
Oregon on the date of this Pledge Agreement and in connection with its
rights and remedies, may, upon five days' notice to the Trust, sent by
registered mail and without liability for any diminution in price which may
have occurred, sell all the pledged shares in such manner and for such
price as the Company may determine. From the proceeds of the
Pledge Agreement
Page 1 of 3
<PAGE>
sale, the Company may retain all amounts owed it under this Pledge
Agreement, plus the expenses of sale. In the event that the proceeds of any
sale are insufficient to cover the amount owed to the Company plus the
expenses of sale, the Trust shall remain liable to the Company for any
deficiency.
3. Release of Stock. The Shares shall be released upon the earliest to occur
of (a) a termination of the Split Dollar Plan in accordance with its terms,
(b) payment by the Trust to the Company of all amounts owed to the Company
under the Split Dollar Plan, or (c) the first anniversary date of the
Policy on which it is projected that the cash surrender value of the Policy
will exceed the total amount of premiums contributed by the Corporation in
accordance with the "as sold" illustration attached to the Split Dollar
Plan as Exhibit C and incorporated by reference herein. If at any time
after the Shares are released, the amount the Company would receive if the
Policies were then surrendered would be less than the total premiums paid
by the Corporation to that date, the Company may request that the Trust
again pledge to the Company sufficient shares of Company stock to cover the
difference between the cash surrender value of the Policy and the total
premiums contributed by the Corporation to that date.
4. Successor and Assigns. This Agreement shall inure to the benefit of, and be
binding on, the successors, assigns, and heirs, of the parties to this
Agreement.
5. Counterparts. This Agreement may be executed in counterparts, each of which
shall be deemed an original, but all of which together shall constitute one
and the same instrument.
6. Governing Law. This Agreement will be governed by, and construed according
to, the laws of the State of Oregon.
7. Severability. No part of this Agreement will be affected if any other part
of it is held invalid or unenforceable.
8. Amendment of Agreement. This Agreement is the entire agreement between the
parties, and shall not be modified or amended except in writing, signed by
the Company and the Trust.
9. Attorney Fees. In the event of a default under this Agreement, the
defaulting party shall reimburse the nondefaulting party for all costs and
expenses reasonably incurred by the nondefaulting party for all costs and
expenses reasonably incurred by the nondefaulting party in connection with
the default, including, without limitation, attorney fees. In addition, in
the event a suit or action filed to enforce this Agreement, or with respect
to this Agreement, the prevailing party shall be reimbursed by the other
party for all costs and expenses incurred in connection with the suit or
action, including, without limitation, reasonable attorney fees at the
trial level and on appeal.
Pledge Agreement
Page 2 of 3
<PAGE>
Agreed to by the undersigned on the date first noted above.
Company: PERCON INCORPORATED
By: Andy J. Storment
--------------------------------------
Title: Exxecutive Vice President
Trustee of the Coughlin Family
Irrevocable Trust, dated September 27, 1997
Warren Barnes
-------------------------------------------
Pledge Agreement
Page 3 of 3
SPLIT DOLLAR PLAN AGREEMENT
THIS PLAN is adopted by agreement between PERCON INCORPORATED, a Washington
corporation (the "Company"), and the Trustee of the Storment Family Irrevocable
Trust, under trust agreement dated September 1, 1997 (the "Owner").
Definitions
A. Company. PERCON INCORPORATED, a Washington corporation
B. Insureds. Andreas J. And Christine Louise Storment
C. Insurer. John Hancock Mutual Life Insurance Company, Boston, Massachusetts
D. Owner. The Trustee of the Storment Family Irrevocable Trust under trust
agreement ated September 1, 1997
E. Policy. The policy of insurance on the joint lives of the Insureds
issued by the Insurer and listed on Exhibit A.
F. Prremium Advance. An amount, due to the Company, equal to the cumulative
total premiums paid by the Company on the Policy.
Recitals
A. The Insureds own a significant amount of Company's stock and that stock
comprises a large portion of Insureds' assets. Insureds desire that there be
cash assets available to pay the estate taxes of the estate of the last of the
Insureds, thereby reducing the probability that a large block of stock will have
to liquidated to pay estate taxes. Insureds and the Company are concerned that
such a liquidation may have an adverse effect on the market for the stock.
B. The Owner wishes to obtain life insurance on the joint lives of the
Insureds to ensure that there will be cash assets available to pay estate taxes
on the death of the survivor of the Insureds.
THEREFORE, the parties agree as follows:
1. Premium Payments
1.1 Each annual premium on the policy shall be paid as follows:
Split Dollar Plan Agreement
Page 1 of 7
<PAGE>
(a) The Owner
(1) While both Insureds are living, the Owner shall pay annually
an amount equal to the lower of (1)"the Insurer" lowest
published survivor term insurance rate available to all
standard risks, or (2)"the imputed economic benefit for
federal income tax purposes for split dollar survivor life
insurance policies, commonly referred to as the "U.S. 38" or
"P.S. 38" rate.
(2) Following the death of the first Insured to die, the
Owner shall pay annually an amount equal to the lower of
(1) the Insurer's lowest published term insurance rate
available to all standard risks, or (2)"the imputed economic
benefit for federal income tax purposes for split dollar
insurance, commonly referred to as the "P.S. 58" rate and
more particularly described in Revenue Rulings 64-328 and
66-110.
(3) The Owner may elect to pay part or all of any additional
premium by policy loan or other borrowing, and shall deliver
notice of such election to the Company on or before the
premium due date.
(b) The Company shall pay all premium amounts not paid by the Owner.
1.2. The Owner's premium share (other than that paid with policy loans)
and the Company's premium share shall be remitted to the Insurer
before expiration of the grace period.
1.3. Dividends on the policy shall be applied as elected by the Owner.
2. Rights of Parties
2.1. The Owner shall be the sole and exclusive owner of the Policy. This
includes all rights of "owner" under the terms of the Policy
including, but not limited to, the right to designate beneficiaries,
select settlement and dividend options, borrow on the security of the
Policy, and to surrender the Policy. All such rights may be exercised
by the Owner without the Company's consent.
2.2. In exchange for the Company's payment of its premium contribution
under Section 1, the Owner agrees to return to the Company the amount
of its Premium Advance on the earlier of:
(a) Termination of this plan as provided in Section 4; or
(b) The surviving Insured's death.
Split Dollar Plan Agreement
Page 2 of 7
<PAGE>
Provided, that nothing herein shall give the Company any interest in
any of the assets of the Owner, including but not limited to, the
Policy.
3. Assignment. The Owner shall have the right to assign any part or
all of the Owner's retained interest in the Policy to any person, entity,
or trust by execution of a written assignment delivered to Insurer.
4. Termination
4.1. This Plan shall terminate on the first to occur of the following:
(a) Without notice, upon the termination of the employment of the
Insured with the Company, whether voluntary or involuntary,
including termination as a result of disability but not as a
result of death.
(b) Surrender of the Policy by the Owner, who has the sole and
exclusive right of surrender.
(c) Delivery by the Owner of a written notice of termination to the
Company.
(d) Failure of the Owner to make a premium contribution as required
by Section 1.
5. Security for Reimbursement of Premium Advance to Company. In the event
of a terminating of the Plan under Section 4, the Owner agrees, under
Section 2.2, to reimburse to the Company the amount of its Premium Advance.
As security for the Owner's promise to reimburse the Company for its
Premium Advance, the Owner agrees to provide collateral to the Company in
the form of common stock of the Company. The Owner further agrees to sign a
Pledge Agreement in the form attached to this Agreement, and deliver to the
Company stock certificates having a value equal to the greatest amount by
which the Premium Advance due to the Company is projected to exceed the
cash surrender value during the lives of the Insureds, or the policy
proceeds upon the death of the surviving Insured, as illustrated in the "as
sold: Policy illustration, a copy of which is attached to this Agreement as
Exhibit B.
6. ERISA Provisions: The following provisions are intended to comply with the
requirements of the Employee Retirement Income Security Act of 1974
("ERISA"):
6.1. Named Fiduciary and Plan Administrator: The secretary of the Company.
6.2. Funding Policy: The funding policy under this Plan is that all
premiums on the Policy be remitted to the Insurer when due.
Split Dollar Plan Agreement
Page 3 of 7
<PAGE>
6.3. Basis of Payment of Benefits. Direct payment by the Insurer is the
basis for payment of benefits under this Plan, with those benefits in
turn being based on the payment of premiums as provided for in this
Plan.
6.4. Claims Procedure. Claims shall be made as follows:
(a) Filing a Claim for Benefits
(1) Company. If the claim is against the Company, the claimant
shall deliver a written request to the Chief Financial
Officer of the Company.
(2) Insurer. If the claim is for a benefit provided by the
Insurer, a claim for such benefit shall be filed with the
Insurer in accordance with its procedures.
(b) Notification to Claimant of Decision. If for any reason, a claim
for benefits under this Plan is denied by the Company, the Claims
Manager shall deliver to the claimant a notice of the decision,
in accordance with the requirements of Section 6.4(c) within 90
days after receipt of the claim by the Claims Manager. If special
circumstances require more than 90 days to process the claim,
this period may be extended for up to an additional 90 days by
giving written notice to the claimant before the end of the 90
day period stating the special circumstances that necessitate an
extension and the date by which it is anticipated that a final
decision will be issued. Failure to provide a notice of decision
in the time specified shall constitute a denial of the claim and
the claimant shall be entitled to require a review of the denial
in accordance with the "Claims Review Procedure" in section
6.4(d).
(c) Content of Notice. The notice to be provided to every claimant
who is denied a claim for benefits shall be in writing and shall
set forth, in a manner calculated to be understood by the
claimant, the following:
(1) The specific reason or reasons for the denial;
(2) Specific reference to pertinent provisions of this Plan on
which the denial is based;
(3) A description of any additional material or information
necessary for the claimant to perfect the claim and an
explanation of why such material or information is
necessary; and
Split Dollar Plan Agreement
Page 4 of 7
<PAGE>
(4) An explanation of the Claims Review Procedure describing the
steps to be taken by a claimant who wishes to submit his or
her claim for review.
(d) Claims Review Procedure. The purpose of this Claims Review
Procedure is to provide a procedure by which a claimant may have
a reasonable opportunity to appeal a denial of a claim to one or
more persons selected by the Named Fiduciary.
(1) Consistent with the purpose of the Claims Review Procedure,
the claimant or his duly authorized representative:
(A) May request a review upon written application to
the appropriate Named Fiduciary;
(B) May review pertinent plan documents; and
(C) May submit issues and comments in writing.
(2) A claimant (or his duly authorized representative) shall
request a review by filing a written application for review
at any time within 60 days after receipt by the claimant of
written notice of the denial of his claim.
(e) Decision on Review. The decision on review of a denied claim
shall be made in the following manner:
(1) The decision on review shall be made promptly, which shall
ordinarily not be later than 60 days after receipt of a
request for review, unless special circumstances (such as
the need to hold a hearing) require an extension of time for
processing. In that case, a decision shall be rendered as
soon as possible, but not later than 120 days after receipt
of the request for review. If an extension of time is
required due to special circumstances, written notice of the
extension shall be furnished to the claimant prior to the
time the extension commences.
(2) The decision on review shall be in writing and shall include
specific reasons for the decision, written in a manner
calculated to be understood by the claimant, as well as
specific references to the pertinent provisions of this Plan
on which the decision is based.
Split Dollar Plan Agreement
Page 5 of 7
<PAGE>
(3) In the event the decision on review is not furnished to the
claimant within the time required, the claim shall be deemed
denied on review.
(f) Claims Review Procedure for Insurance Benefits. Any claim
arising out of or in any way pertaining to rights or obligations
under the Policy shall be made to the Insurer, which shall have
sole responsibility for the determination of any such claim and
its review. The Owner agrees to hold the Company harmless from
and against any such claim.
7. Miscellaneous
7.1 Binding Agreement. This Agreement is binding on and enforceable by
and against the parties, their heirs, successors, legal
representatives, and assigns.
7.2 Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
7.3 Governing Law. This Agreement will be governed by and construed
according to the laws of the state of Oregon.
7.4 Severability. No part of this Agreement will be affected if any other
part of it is held invalid or unenforceable.
7.5 Notices. All notices required or permitted to be given under this
Agreement must be given in writing, and will be deemed given when
delivered by hand or by messenger or, if earlier, when received after
mailing by registered or certified mail, postage prepaid, with return
receipt requested. Notice to the Owner is valid if sent to it at its
address as it appears below:
Split Dollar Plan Agreement
Page 6 of 7
<PAGE>
Michael Coughlin, Trustee, Storment Family Irrevocable Trust
Percon INCORPORATED
1720 Willow Creek Circle, Suite 530
Eugene, Oregon 97402-9171
7.6 "Days" Defined. Any reference in this Agreement to "days" means all
calendar days, whether or not such days are legal holidays under the
law of the United States or of any state.
7.7 Waiver. Any party's failure to insist on compliance or enforcement of
any provision in this Agreement shall neither affect is validity nor
its enforceability, or constitute a waiver of future enforcement of
that provision or of any other provision of this Agreement.
7.8 Gender and Number. Whenever the context of this Agreement requires,
the masculine gender includes the feminine and neuter, and the
singular number includes the plus, and vice versa.
7.9 Amendment of Agreement. This Agreement is the entire agreement
between the parties, and shall not be modified or amended except in
writing, signed by the Company and the Owner.
7.10 Attorney Fees. In the event of a default under this Agreement, the
defaulting party shall reimburse the nondefaulting party for all costs
and expenses reasonably incurred by the nondefaulting party in
connection with the default, including, without limitation, attorney
fees. In addition, in the event a suit or action is filed to enforce
this Agreement, or is filed with respect to this Agreement, the
prevailing party shall be reimbursed by the other party for all costs
and expenses incurred in connection with the suit or action,
including, without limitation, reasonable attorney fees at the trial
level and on appeal.
Agreed to by each of the undersigned this 10th day of September, 1997.
Company: PERCON INCORPORATED,
By: Michael Coughlin
-------------------------------------
Title: President
Owner: Trustee of the Storment Family
Irrevocable Trust, dated September 1,
1997
Michael Coughlin
------------------------------------------
Split Dollar Plan Agreement
Page 7 of 7
<PAGE>
PLEDGE AGREEMENT
This Pledge Agreement is made as of September 22, 1997 by and between
PERCON INCORPORATED, a Washington corporation (the "Company"), and the Trustee
of the Storment Family Irrevocable Trust (the "Trust").
Recitals
A. The Company and the Trust have executed a Split Dollar Plan Agreement
(the "Split Dollar Plan) dated as of September 20, 1997, a copy of which
is attached as Exhibit A.
B. The Split Dollar Plan provides that upon a termination of the Split Dollar
Plan, the Trust will pay to the Company the amount of its Premium Advance.
The Trust promises to pledge to the Company collateral, in the form of
Company stock, to secure the Company's right to reimbursement of its
Premium Advance.
THEREFORE, the parties agree as follows:
1. Pledge. The Trust pledges and grants to the Company a security interest
in a sufficient number of shares of Company stock to fully secure the
greatest amount by which it is projected, in accordance with the "as sold"
Policy illustration attached to the Split Dollar Plan as Exhibit C, that
the Company's accumulated premium contributions will exceed the amount of
the net proceeds payable to the Company under the Split Dollar Plan. The
Company stock pledged by the Trust as collateral to secure the Company's
Premium Reimbursement shall be delivered to the Company with this Pledge
Agreement, together with a duly executed assignment or stock power. The
Trust further pledges to the Company all dividends, stock splits,
distributions, cash instruments, and other property and proceeds from time
to time received, receivable, or otherwise made upon, or distributed in
respect of, or in exchange for, any or all of the Shares. The Company shall
retain custody of all pledged Shares prior to their release from pledge and
shall have full power to assign its rights or prospective rights as
pledgee. While the Shares are pledged, the Company shall be entitled to
collect and receive all dividends, income, installment, sale proceeds,
revenue and profits accruing with respect to the Shares, and shall have
full power with respect to voting the Shares.
2. Event of Default. In the event the Trust defaults on its promise to pay
the Company its Premium Reimbursement, the Company shall have the rights
and remedies provided in the Uniform Commercial Code in force in the State
of Oregon on the date of this Pledge Agreement and in connection with its
rights and remedies, may, upon five days' notice to the Trust, sent by
registered mail and without liability for any diminution in price which may
have occurred, sell all the pledged shares in such manner and for such
price as the Company may determine. From the proceeds of the
Pledge Agreement
Page 1 of 3
<PAGE>
sale, the Company may retain all amounts owed it under this Pledge
Agreement, plus the expenses of sale. In the event that the proceeds of any
sale are insufficient to cover the amount owed to the Company plus the
expenses of sale, the Trust shall remain liable to the Company for any
deficiency.
3. Release of Stock. The Shares shall be released upon the earliest to occur
of (a) a termination of the Split Dollar Plan in accordance with its terms,
(b) payment by the Trust to the Company of all amounts owed to the Company
under the Split Dollar Plan, or (c) the first anniversary date of the
Policy on which it is projected that the cash surrender value of the Policy
will exceed the total amount of premiums contributed by the Corporation in
accordance with the "as sold" illustration attached to the Split Dollar
Plan as Exhibit C and incorporated by reference herein. If at any time
after the Shares are released, the amount the Company would receive if the
Policies were then surrendered would be less than the total premiums paid
by the Corporation to that date, the Company may request that the Trust
again pledge to the Company sufficient shares of Company stock to cover the
difference between the cash surrender value of the Policy and the total
premiums contributed by the Corporation to that date.
4. Successor and Assigns. This Agreement shall inure to the benefit of, and
be binding on, the successors, assigns, and heirs, of the parties to this
Agreement.
5. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
6. Governing Law. This Agreement will be governed by, and construed according
to, the laws of the State of Oregon.
7. Severability. No part of this Agreement will be affected if any other part
of it is held invalid or unenforceable.
8. Amendment of Agreement. This Agreement is the entire agreement between the
parties, and shall not be modified or amended except in writing, signed by
the Company and the Trust.
9. Attorney Fees. In the event of a default under this Agreement, the
defaulting party shall reimburse the nondefaulting party for all costs and
expenses reasonably incurred by the nondefaulting party for all costs and
expenses reasonably incurred by the nondefaulting party in connection with
the default, including, without limitation, attorney fees. In addition, in
the event a suit or action filed to enforce this Agreement, or with respect
to this Agreement, the prevailing party shall be reimbursed by the other
party for all costs and expenses incurred in connection with the suit or
action, including, without limitation, reasonable attorney fees at the
trial level and on appeal.
Pledge Agreement
Page 2 of 3
<PAGE>
Agreed to by the undersigned on the date first noted above.
Company: PERCON INCORPORATED
By: Michael Coughlin
-----------------------------------
Title: President
Trustee of the Storment Family
Irrevocable Trust, dated September,
1997
Michael Coughlin
----------------------------------------
PERCON
INCORPORATED
EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement") is made this 1st day of April, 1996 by and
between PERCON INCORPORATED, a Washington corporation ("Employer") and Brad West
("Employee").
1. Employment
Employer hereby agrees to employ Employee, and Employee hereby accepts
employment, subject to the terms and conditions set forth herein, in the
capacity of Vice President of Operations and Quality Programs. Employee shall
perform such duties in such capacity as are assigned to him or her by the
President of Employer. Employee agrees that any and all creative or intellectual
work, inventions, know how, etc., including, without limitation, computer
programs or models, prepared or originated by Employee during or within the
scope of his or her employment by Employer, whether or not such work, etc. is
subject to protection under federal or state copyright, patent or similar laws,
shall constitute work for hire, all rights to which shall be owned exclusively
by Employer; and, in any event, Employee hereby assigns, or agrees to assign, to
Employer all rights, title and interest in all such work, etc., except to the
extent Employer, by written consent, permits Employee to retain such work, etc.
2. Compensation
2.1 As compensation for all services rendered by Employee to Employer,
Employer shall pay Employee $90,000 per Year. In addition, Employee shall be
entitled to participate in any health, welfare or other benefit plans adopted by
Employer for the benefit of its employees generally. All other benefits and
terms of employment, except as herein provided, shall be governed by and subject
to the policies and procedures set forth in Employer's Personnel Manual.
Employee acknowledges that Employer may change such policies and procedures from
time to time as and when Employer determines such changes are necessary or
appropriate.
2.2 Employee shall be entitled to receive, in addition to the annual
salary, an annual bonus calculated in accordance with the Executive Bonus Plan.
The Executive Bonus Plan is determined by Employer's Compensation Committee of
the Board of Directors and is updated annually. The Executive Bonus Plan is at
the sole discretion of Employer's Compensation Committee of the Board of
Directors and future awards under the plan are not guaranteed. Employee will not
participate in Employer's regular Employee Profit Sharing Plan.
<PAGE>
3. Term and Termination
Employee's duties and obligations hereunder shall commence as of the date
hereof, and shall continue until terminated as provided herein. Employee's
employment hereunder (but not his or her other obligations hereunder) may be
terminated as follows:
(a) By Employee or Employer at any time and for any reason upon six (6)
months written notice, provided, however, that upon such notice, whether given
by Employer or Employee, Employer may, at its sole option, pay Employee all
amounts owing through the end of such notice period, and Employee shall not
return to work thereafter. If Employee provides notice to Employee, Employer
shall provide Employee outplacement services reasonable for the Employee to
retain a comparable position with another company. Fees for outplacement
services for Employee shall not exceed $10,000.
(b) By Employer immediately if Employee shall commit a criminal act or
otherwise engage in conduct which a reasonable person would consider materially
damaging to the reputation or business of Employer or to the trust necessary in
an employment relationship.
(c) By Employer immediately upon a material breach of this Agreement.
(d) Immediately by Employee upon the dissolution or liquidation of
Employer, whether voluntarily, through a bankruptcy proceeding or otherwise,
provided, however, that if there is a successor-in-interest of Employer to whom
this Agreement has been assigned, the dissolution or liquidation of Employer
shall not terminate any of Employee's obligations hereunder. Any termination by
Employee pursuant to this Section 3(d) shall extinguish all of Employee's
obligations hereunder, including the obligations set forth in Section 4 and 5.
(e) In the event of a merger, consolidation, plan of exchange, acquisition
of property or stock or other "change in control" of Employer, Employee shall be
entitled to a minimum of six (6) months salary as severance payment and shall be
entitled to 100% vesting in all stock options granted to Employee by Employer if
the Employee is terminated or there is a material change in the Employee's pay,
benefits, duties, responsibilities or Employee is required to relocate within
two (2) years of the change in control. Employee shall not be entitled to
severance payments or 100% vesting in stock options granted for termination as
noted in sections 3.(b) and 3.(c).
4. Non Competition
In consideration of the execution of this Agreement and Employee's
employment hereunder, Employee agrees that during the course of Employee's
employment with Employer, and for a period of two (2) years following the
termination of such employment for any reason whatsoever (except as set forth in
section 3(d) above), Employee shall not,
<PAGE>
directly or indirectly (whether as a partner, shareholder, sole proprietor,
employee, independent contractor, consultant, agent, officer, director, creditor
(other than as a supplier of permitted goods or series to such businesses
generally), investor, or in any other capacity, engage in any business activity
or operations in competition with or which would otherwise detract from the then
current or planed business activities and operations of Employer, any place in
the United States. Notwithstanding the foregoing nothing herein shall prohibit
Employee from investing in any publicly traded securities. Employee acknowledges
that the foregoing covenant is reasonable and that Employee is capable of
gainful employment without breaching the provisions thereof.
5. Confidentiality
5.1 As used in this Agreement, "Confidential Information" includes (a)
proprietary and/or confidential information of Employer; (b) any information or
material marked, designated or treated by Employer as confidential or propriety;
(c) information, whether or not in tangible form and whether or not designated
as confidential or proprietary, which is known to Employee as being treated by
Employer as confidential or proprietary or which might reasonably be treated as
confidential or proprietary; and (d) information provided to Employer by third
parties which Employer is obligated to keep confidential. Confidential
Information includes, but is not limited to, discoveries, ideas, concepts,
product source codes, designs, drawings, trade secrets, know how,
specifications, techniques, models, data, programs, documentation, processes,
customer information, marketing information, financial information, technical
information and business plans and planning.
5.2 Employee acknowledges and agrees that the Confidential Information is a
valuable asset of Employer, and its protection as confidential is vital to the
success of Employer's business. Employee acknowledges and agrees that all
Confidential Information is and shall at all times remain the sole and exclusive
property of Employer, even if prepared or created, in whole or in part, by
Employee, and whether or not directly disclosed or entrusted to Employee by
Employer or any other person. In addition, Employee agrees to comply with all
policies and procedures as Employer may from time to time establish to protect
and preserve the Confidential Information. Employee agrees to exercise the
highest degree of care in safeguarding the Confidential Information against
disclosure of any kind or nature, whether intentional or unintentional, and
agrees generally to take all steps necessary to ensure the maintenance of its
confidentiality.
5.3 Employee shall not disclose the Confidential Information, directly or
indirectly, under any circumstance or by any means, to any third person without
the express prior written consent of Employer.
5.4 Employee shall not copy, transmit, reproduce, summarize, in whole or in
part, or otherwise made any use of Confidential Information, except as may be
necessary to perform Employee's duties to Employer and for Employer's benefit.
Employee agrees that all records, notes, computer programs, disks and other
materials (and all copies thereof)
<PAGE>
relating to Employer's operations or business, including those which may be
prepared by Employee, and all objects associated therewith, whether or not such
materials include or contain Confidential Information, are and shall remain the
property of Employer, and Employee shall not remove such material from
Employer's business premises except with Employer's prior written consent. Upon
termination of Employee's employment for any reason whatsoever, or at any time
on Employer's request, Employee shall promptly deliver to Employer all
Confidential Information, in whatever form, and such other materials of
Employer, as may be in Employee's possession or within Employee's control.
5.5 Confidential Information shall not include information voluntarily
disclosed to the general public by Employer or otherwise clearly in the public
domain through no act in violation of any covenant of confidentiality.
5.6 The obligations of Employee under this Section 5 shall survive
termination of Employee's employment and shall terminate only pursuant to
Section 3(d) above.
6. Remedies
Employee agrees that a breach of his or her covenants under sections 4 or 5
hereunder would result in substantial damages to Employer which would be
difficult, if not impossible, to ascertain, and by reason of that fact Employee
agrees that upon any such breach, Employer shall have the right to enforce the
provisions of sections 4 and 5 hereof by injunction specific performance, or
other proceeding in equity, without the necessity of bond. The parties hereby
agree that venue for such proceeding may be laid in Lane County, Oregon or the
federal district court for the State of Oregon.
7. Modification
No waiver or modification of any term or provision of this Agreement shall
be valid unless in writing and duly executed by the parties hereto.
8. Notice
Any notice to be given hereunder shall be in writing and delivered
personally or sent by certified or registered mail, return receipt requested,
addressed as follows:
If to Employer: President
Percon Incorporated
1720 Willow Creek Circle #530
Eugene, Oregon 97402
If to Employee: Brad West
3056 Wolf Meadows Lane
Eugene, OR 97408
<PAGE>
or to such other address as either party may notify the other in accordance with
this section.
9. Binding Effect
The provisions of this Agreement shall inure to the benefit of and be
binding upon Employer or any assignee of Employer in connection with the sale of
substantially all of the business and operations of Employer. The obligations of
Employee hereunder are personal in nature and may not be assigned.
IN WITNESS WHEREOF the parties hereto have executed this Agreement as of
the date first written above.
Employee: /S/ BRAD WEST
---------------------------------
Employer:
Percon Incorporated
By: /S/ MICHAEL COUGHLIN
---------------------------------
Title: President
Exhibit 21.1
LIST OF SUBSIDIARIES
Jurisdiction of
Name Incorporation
- ---- ---------------
Percon Europe S.A. France
Percon Incorporated Foreign
Sales Corporation Barbados
Consent of Independent Accountants
We consent to the incorporation by reference in the Registration Statement of
Percon Incorporated on form S-8 of our report, dated January 23, 1998, on our
audits of the consolidated financial statements of Percon Incorporated and
subsidiary as of December 31, 1997 and 1996, 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 30, 1998
<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, 1997 and the related consolidated statements of income and cash
flows for the twelve months in the period ended December 31, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,883
<SECURITIES> 0
<RECEIVABLES> 6,300
<ALLOWANCES> 101
<INVENTORY> 4,497
<CURRENT-ASSETS> 13,254
<PP&E> 4,244
<DEPRECIATION> 1,702
<TOTAL-ASSETS> 17,353
<CURRENT-LIABILITIES> 2,802
<BONDS> 754
0
0
<COMMON> 9,002
<OTHER-SE> 4,321
<TOTAL-LIABILITY-AND-EQUITY> 17,353
<SALES> 28,175
<TOTAL-REVENUES> 28,175
<CGS> 13,782
<TOTAL-COSTS> 13,782
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (30)
<INCOME-PRETAX> 5,240
<INCOME-TAX> 1,810
<INCOME-CONTINUING> 3,430
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,430
<EPS-PRIMARY> 0.87
<EPS-DILUTED> 0.83
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996
<CASH> 1,324 1,015 482 1,601
<SECURITIES> 0 0 0 0
<RECEIVABLES> 3,506 4,157 4,162 4,043
<ALLOWANCES> 146 114 125 135
<INVENTORY> 3,023 3,116 3,831 3,618
<CURRENT-ASSETS> 8,218 8,685 8,916 9,765
<PP&E> 3,301 3,522 3,966 3,617
<DEPRECIATION> 952 1,053 1,179 767
<TOTAL-ASSETS> 12,782 13,234 13,706 14,513
<CURRENT-LIABILITIES> 2,740 2,707 2,716 2,820
<BONDS> 1,077 1,031 1,010 974
0 0 0 0
0 0 0 0
<COMMON> 8,760 8,766 8,813 8,825
<OTHER-SE> (502) 63 540 1,277
<TOTAL-LIABILITY-AND-EQUITY> 12,782 13,234 13,706 14,513
<SALES> 4,326 10,158 15,683 22,128
<TOTAL-REVENUES> 4,326 10,158 15,683 22,128
<CGS> 2,164 5,039 7,824 11,030
<TOTAL-COSTS> 2,164 5,039 7,824 11,030
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 12 (20) (31) (41)
<INTEREST-EXPENSE> (37) (23) 9 (2)
<INCOME-PRETAX> (1,322) (328) 444 1,484
<INCOME-TAX> 282 671 963 1,251
<INCOME-CONTINUING> (1,604) (999) (519) 234
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (1,604) (999) (519) 234
<EPS-PRIMARY> (0.41)<F1> (0.25)<F1> (0.13)<F1> 0.06<F1>
<EPS-DILUTED> (0.41)<F1> (0.25)<F1> (0.13)<F1> 0.06<F1>
<FN>
<F1> Restated to conform with FASB 128.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> MAR-30-1997 JUN-30-1997 SEP-30-1997
<CASH> 1,287 536 1,471
<SECURITIES> 0 0 0
<RECEIVABLES> 4,635 5,202 5,573
<ALLOWANCES> 135 82 96
<INVENTORY> 4,011 4,157 4,205
<CURRENT-ASSETS> 10,395 10,357 11,713
<PP&E> 4,169 4,209 4,278
<DEPRECIATION> 1,340 1,469 1,633
<TOTAL-ASSETS> 15,034 14,777 15,908
<CURRENT-LIABILITIES> 3,020 2,171 2,431
<BONDS> 873 815 788
0 0 0
0 0 0
<COMMON> 8,844 8,850 8,867
<OTHER-SE> 1,734 2,421 3,345
<TOTAL-LIABILITY-AND-EQUITY> 15,034 14,777 15,908
<SALES> 6,033 12,784 19,900
<TOTAL-REVENUES> 6,033 12,784 19,900
<CGS> 2,800 6,025 9,548
<TOTAL-COSTS> 2,800 6,025 9,548
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 9 21 32
<INCOME-PRETAX> 1,040 2,275 3,609
<INCOME-TAX> 676 798 1,197
<INCOME-CONTINUING> 676 1,477 2,412
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 676 1,477 2,412
<EPS-PRIMARY> 0.17<F1> 0.37<F1> 0.61<F1>
<EPS-DILUTED> 0.16<F1> 0.36<F1> 0.58<F1>
<FN>
<F1> Restated to conform with FASB 128.
</FN>
</TABLE>
