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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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
For the fiscal year ended: December 31, 1998
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________to ________________
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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)
Washington 91-1486560
(State of Incorporation) (IRS Employer
Identification No.)
1800 Millrace Drive
Eugene, OR 97403
(Address of principal executive offices)
Registrant's telephone number, including area code (541) 344-1189
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: Common Stock
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in the definitive proxy statement incorporated
by reference in Part III of this Form 10-KSB or any amendment to this Form
10-KSB. [ ]
Issuer's revenues for its most recent fiscal year ended December 31, 1998 were
$31,070,940.
Documents Incorporated by Reference
-----------------------------------
Proxy Statement for 1999 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 25, 1999 was $25,420,076. The number of shares of Common
Stock outstanding on March 25, 1999 was 3,910,781. Transitional Small Business
Disclosure Format (Check One): YES NO X
----- -----
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1
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Company Overview
Percon Incorporated ("Percon" or the "Company") develops, assembles, and markets
a complete line of data collection hardware and data management software
products. These products are primarily sold into the Automatic Data Collection
("ADC") industry. The Company's product offering includes radio frequency ("RF")
and batch portable data collection terminals ("PDCT"), fixed station and
integrated decoders, hand-held laser scanners, data management application
software, and terminal emulation software. The Company also markets bar code
input devices manufactured by others for use with the Company's fixed station
decoders and PDCTs. 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
manufacturing, warehousing and distribution, package delivery, retail,
education, and healthcare.
Percon markets its products through a network of ADC 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 ADC industry
because the use of ADC 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 1998 the Company introduced several products.
Falcon 320 and 325 - The Falcon 320 and Falcon 325 hand-held portable data
terminals are the most recent innovative technology from Percon, offering a
16-line screen, 486-class processor, 33 MHz operating speed, integrated
scanning, real-time RF connectivity, user-accessible PC Card slot, a 57-key
full alphanumeric keypad, and 8 MB RAM. Both products share the same DOS
6.22 operating system, Universal Program Generator ("UPG") visual
development tool, chargers, and other accessories. The Falcon 325 is RF
enabled and operates on 2.4GHz spread spectrum radio frequency. The Falcon
320 is a batch model.
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IntelliTrack RF - IntelliTrack RF is a reliable, affordable, and
easy-to-use real-time inventory control solution. IntelliTrack RF provides
sub-second response times, a complete audit trail, and paperless receiving.
This 32-bit application operates under Microsoft Windows 95, 98, and NT.
Combining IntelliTrack with a Falcon 315 or 325 RF DOS portable data
terminal creates a real-time warehouse management system.
PowerNet TN Terminal Emulation Software- PowerNet TN permits configuration
of the Falcon 315 and Falcon 325 RF PDCTs for wireless data applications.
PowerNet TN supports VT100/220, HP700/92, and IBM 3270/5250 terminal
emulation on the Falcon 315 and 325.
Universal Program Generator (UPG) Version 2.0 - UPG v2.0 is the latest
version of the open-architecture, 32-bit Windows(R)-based portable
application generator that creates 'C'-based programs for DOS-based
portable terminals.
Falcon Four Slot Dock - Provides a convenient docking/storage base for
Percon's Falcon line of portable data terminals, featuring two-way
communications with the host PC, and intelligent power management.
Percon's goal is to be a leading provider of innovative, high quality ADC
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, especially
those in manufacturing, warehousing, distribution, and logistics
markets;
(ii) tightly integrating the Company's hardware and application software
to provide customers a complete solution for their business needs;
(iii) rapidly expand the Company's open-systems and RF product offerings;
(iv) leveraging third party ADC distribution channels;
(v) emphasizing superior price/performance and customer service;
(vi) enhancing and diversifying product lines, particularly in the PDCT
family of products;
(vii) expanding the Company's sales channels to support relationships as an
OEM for companies that sell to large end user customers and expanding
international sales channels; and
(viii) expanding through strategic acquisitions and partnerships.
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Since the Company's initial public offering ("IPO") in July 1995, the Company
has:
o 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.
o Increased its sales outside of the United States and Canada from 9% in
1995 to over 36% in 1998.
o Acquired Percon Europe (formerly known as STI S.A.), a Paris based
decoder manufacturer, in March 1996. This acquisition greatly
increased Percon's international revenue, expanded its fixed station
and integrated decoder product lines, and provided existing European
channels for increased sales of Percon's PDCTs and application
software.
o Introduced SnapShot(R) in October 1996, the first hand-held input
device manufactured by the Company.
o Introduced the Falcon, the Falcon RF, and UPG in 1997, enabling Percon
to enter the wireless portable data terminal market and begin
competing in the growing market for open-systems architecture,
DOS-based PDCTs.
o Significantly expanded the Company's sales and management teams in
1997 and 1998 to support growth in revenues and earnings, both
domestically and internationally.
o Moved the Eugene-based corporate headquarters to a new facility,
providing the Company additional room for growth.
o Introduced the Falcon 320, the Falcon 325, and IntelliTrack RF
inventory control software. These new products broaden the Percon
family of products and round out its wireless data collection
solutions.
The statements concerning the expected expansion of the ADC 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, 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 ADC market and the PDCT 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 PDCTs, include, but
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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 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, underestimating the resources necessary to make any required
modifications, or underestimating the impact of external elements on the
Company. Factors that could hamper the Company's ability to execute its
acquisition strategy with respect to Percon Europe include, but are not limited
to, costs or difficulties related to the integration of the business of Percon
Europe 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 expenses include, but
is 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
The ADC industry encompasses the automatic recognition, decoding, processing,
transmission, and recording of data, most commonly through the printing and
reading of information encoded in bar codes. ADC technologies enable more
efficient supply chain management and inventory control by providing real-time
access to critical data. Bar code applications 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 a variety of objects that include
mailing tubes, envelopes, boxes, cans, bottles, packages, books, files and other
paperwork, furniture, cards, and many other items for identification.
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
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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 ADC market will broaden its base of applications as the
cost of ADC technology continues to decrease and customer acceptance of the
technology increases. In addition, the Company believes improvements in scanning
technology, increased acceptance of wireless ADC systems, and industry-mandated
standardization of bar coding will further expand the ADC market. The Company
believes European countries and, to a lesser degree, Pacific Rim and Latin
American countries are expanding their use of ADC technology and may represent
significant future growth opportunities.
The Company believes PDCTs that support wireless communications are a rapidly
growing segment of the ADC market. Furthermore, the Company believes the
increased availability and use of systems that require real time information,
such as just-in-time inventory and electronic data interchange, will provide the
basis for this growth. These systems are designed to shorten inventory reorder
and sales cycle times, consistent with the increased focus on business
productivity.
Products
Product Lines
The Company offers a range of bar code reading and data management products,
including:
o portable data collection terminals (PDCTs)
o vehicle-mounted data collection terminals
o fixed station and integrated decoders
o hand-held laser scanners
o data management application software
o software development tools and
o terminal emulation software.
These products provide rapid, accurate, and efficient means for gathering and
tracking information in a wide variety of applications.
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Portable Data Collection Terminals. PDCTs are hand-held, battery-powered,
durable computers that typically employ application-specific software. The
Company's PDCTs may be operated for up to 10 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, magnetic
stripe reader, integrated laser scanning module, or hand-held laser scanner.
Products offered in this category include the Falcon 320 and Falcon 325 PDCTs,
which include a 486 processor, 33 MHz operating speed, 16-line graphic backlit
display, and a splash-resistant 57-key full alphanumeric keypad. The Falcon 320
is the batch version and the Falcon 325 is the RF version, incorporating 2.4GHz
spread-spectrum radio technology via a user accessible PC Card slot. The Falcon
320/325's PC Card slot may also be used for memory expansion cards or modems.
Additional products offered in this category include:
o Falcon 310 - An 8-line DOS PDCT batch unit with a 386 processor and a
user accessible PC Card slot for ATA Flash cards or modem.
o Falcon 315 - An 8-line DOS PDCT RF unit with a 386 processor and
2.4GHz spread spectrum radio.
o PT 2000 - A 12 ounce PDCT with 34 splash-resistant alphanumeric keys,
up to one megabyte of data storage, and a separate bank of erasable
flash ROM memory.
o TopGun - A PT 2000 with an integrated laser which allows for
one-handed scanning.
o Falcon Single- and Four-Slot Dock - Provides a docking and storage
base for the Falcon 310, 315, 320, and 325 PDCTs and permits data
transmission to and from the host computer as well as battery
recharging and intelligent power management.
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
Mini PowerWedge(TM), PowerWedge 10, PowerWedge 20, Master B+, and Master BB+.
Integrated decoders are products incorporating the base decoder technology in
other form factors thereby creating integrated decoder products. These products
include the SnapShot, a hand-held laser scanner available with an integrated
decoder, and the Decoder Communications Card, which is an ISA Bus card
incorporating the decoder technology with four high-speed serial ports. Symphony
is a decoder product that incorporates narrow band RF support and includes the
Maestro base station and Player radio unit with belt clip. Percon also licenses
its interface and decoder technologies to other companies.
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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.
Application Software. Application software consists of PC-based computer
programs available in both stand-alone and networked versions that permit the
storage, management, and reporting of data. Data can be uploaded or downloaded
into these programs with the Company's PDCTs. 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
checkout applications, and stock room management. IntelliTrack RF is a real-time
inventory control software application. When combined with the Falcon 315 or
Falcon 325 RF PDCT, it becomes a complete RF-based inventory solution. Other
software can be used with the Company's PDCTs including UPG, Portable
Applications Library ("PAL"), which includes seven standard applications, and
the 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, custom programming of other leading
DOS-based portable data terminals.
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 that meet or exceed customer
expectations by including the most popular feature set 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 improve product development cycles and
reduce manufacturing and support costs.
The Company develops PDCT products 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 to the manufacturing, warehouse, and distribution target
markets and permits users to mix and match equipment from various vendors.
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The Company has also developed IntelliTrack RF software as well as a new
terminal emulation software program to complement its RF PDCTs. The Company
plans to broaden its data collection terminal product offering to include the
DOS-based operating platform in other form factors such as fixed-station,
vehicle-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 $1,688,385 and $1,847,255 in 1998 and 1997 on research and
product development net of capitalized software of $331,920 and $161,000,
respectively. Company engineers are experienced in the specialty disciplines of
mechanical, electronic, and software engineering.
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Sales, Distribution and Marketing
Sales and Distribution
The Company's products are used primarily in applications supporting
warehousing, logistics and distribution, manufacturing, and retail companies
with fewer than 500 employees. The Company markets its products to these end
users primarily through indirect distribution channels, consisting principally
of ADC distributors, VARs, systems integrators, and as an OEM. ADC distributors
serve various vertical markets through sales to VARs and systems integrators.
VARs integrate the Company's hardware products with their 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 ADC system for a particular end user. The
Company sells its products on an OEM basis to larger companies, primarily in the
ADC 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. Table 1 below represents the Company's sales of products
through various channels in 1998 and 1997:
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Channel 1998 1997
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Distributors 29% 27%
VARs 29% 29%
Integrators 23% 22%
OEM 11% 12%
Direct End Users 8% 10%
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Table 1 - % of Net Sales by Channel 1998 & 1997
In 1998, net sales of Company products to distributors increased approximately
17.8%, as the Company continued its focus on promoting channel related sales.
Sales activity to one distributor accounted for approximately 14.1% and 12.0% of
net sales in 1998 and 1997, respectively. No other customer accounted for more
than 10% of net sales in 1998 or 1997.
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 ADC products and additional customer service and support not
provided by distributors, VARs, or systems integrators. In 1998 the proportion
of revenue associated with direct end users decreased 11.8% and represented
approximately 8% of net sales for 1998.
The Company believes foreign countries are expanding their use of ADC 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. Table 2 below summarizes net sales activities outside
of the U.S. and Canada in 1997 and 1998.
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International Sales 1998 % 1997 %
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North America $19,746 64% $18,433 65%
International $11,325 36% $ 9,743 35%
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Total $31,071 100% $28,176 100%
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Table 2 - International Sales - in thousands
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 staff creates and
coordinates advertising in domestic and international trade publications,
develops collateral, manages domestic and international trade show exhibits, and
places articles highlighting applications of the Company's products in trade and
industry publications. The marketing staff also creates and publishes marketing,
corporate, sales, and investor-related information for the Company's web site.
The marketing staff 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, technical support, and customer
service staff. The Company provides each direct customer with toll-free
telephone technical support and a personal account representative for orders,
shipping, and general information.
The Company's fixed station decoders carry five-year limited warranties, its
hand-held input devices and its portable data terminals carry one-year limited
warranties, and input devices manufactured by others carry warranties offered by
their manufacturers. The Company's application software carries a 30-day free
technical support agreement. Customers may also purchase on-site replacement
warranties 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 that add up to three years to the original
warranty on PDCTs and input devices. Software maintenance agreements can be
purchased which provide the user with incremental revision upgrades and free
technical support during the term of the agreement that usually lasts one year.
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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.
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.
Year 2000 Computer System Impact
The Year 2000 issue relates to the inability of some computers and computer
software programs to accurately recognize dates after 1999 expressed as a
two-digit number. The inability to recognize date information accurately could
affect computer operations and calculations or cause computer systems and
computer-dependent mechanical systems not to operate properly.
The Company's assessment of the potential impact of the Year 2000 problem
consists of two phases. The detection phase identifies and catalogs all
mechanical and operational systems owned or operated by the Company that rely on
date related information to function properly. The Company has recently
completed this phase for its domestic operations. A similar assessment of its
European operations is expected to be completed by March 31, 1999. The
remediation phase will repair, replace, or retire any non-compliant systems.
This phase began early in 1999 and is expected to be completed by June 30, 1999.
The detection phase for domestic operations revealed that only minor upgrades
and replacements are required to achieve full Year 2000 compliance.
Specifically, software upgrades are required to bring the Company's general
ledger, payroll, and fixed asset systems into compliance. The Company believes
that the remainder of the domestic non-compliant systems require only
incremental software upgrades or are non-critical in nature.
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Based upon the Company's current estimates, total incremental out-of-pocket
costs of its Year 2000 program are expected to be approximately $25,000. These
costs are primarily related to remediation of computer software. These costs do
not include internal management time and the deferral of other projects, the
effects of which are not expected to be material to the Company's results of
operations or financial condition.
Based on a recent assessment, the Company believes that modification to its
product offering will not be required in order for its products to function
properly with respect to dates in the Year 2000. The Company has undertaken
measures to inform customers of Year 2000 related issues via its Year 2000 web
site. However, it is not possible to anticipate all end user situations and/or
Year 2000 related issues, particularly those involving third party products.
At this stage of the process, the Company believes that it is difficult to
specifically identify the cause of the most reasonable worst case Year 2000
scenario. A reasonable worst case scenario would be the failure of the Company's
products to operate properly through the interaction with third party products
causing customers' systems and/or operations that are dependent upon such
products to fail or be disrupted. In case of such failures, customers may
commence legal action against the Company or otherwise seek compensation for
their losses associated with such failures. An additional worst case Year 2000
scenario would be the failure of key vendors and/or suppliers to have corrected
their own Year 2000 issues which could cause disruption of the Company's
operations and have a material adverse effect on the Company's financial
condition. In a survey of major suppliers, no immediate problems in the delivery
of materials required for the Company to sustain operations were discovered.
Discussions with these key business partners will continue and contingency plans
developed as needed based on assessments of their exposure and remediation
plans. If major suppliers, customers, or economic conditions are negatively
affected by the Year 2000, there may be a negative impact on the Company's
performance and operational results.
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 ADC products is highly competitive, and the Company expects this
competition to increase as open system architecture in ADC products becomes more
common. The strength of certain competitors may increase as a result of
consolidation of manufacturers.
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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.
Employees
As of February 28, 1999, the Company employed 127 people. Of these employees, 32
were engaged in sales and marketing, 20 in customer service support, 20 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.
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ITEM 2. DESCRIPTION OF PROPERTIES
The Company's leases approximately 37,250 square feet for its corporate
headquarters, manufacturing, and research and development facility located in
Eugene, Oregon. The term of the lease is 10 years, before the effect of certain
extension clauses. The lease provides for an option to increase to 47,150 square
feet of space for the last five years of the lease term. Lease payments are
approximately $32,000 per month. The Company intends to sublease a portion of
the building for the first five years of the lease term and secured a tenant in
January 1999.
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.
<TABLE>
<CAPTION>
Year Ended December 31, 1998 High Low
- ------------------------------------- ------------ ------------
<S> <C> <C>
Fourth Quarter $ 7 1/4 $ 5 1/4
Third Quarter 10 1/2 5 1/2
Second Quarter 13 1/2 8
First Quarter 14 1/2 11
Year Ended December 31, 1997 High Low
- ------------------------------------- ------------ ------------
<S> <C> <C>
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
</TABLE>
As of March 31, 1999, 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.
16
<PAGE>
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 collection terminals, fixed station and integrated
decoders, hand-held laser scanners, and data management application software,
for the worldwide ADC market. The Company also markets bar code input devices
manufactured by others for use with the Company's fixed station decoders and
PDCTs. 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 variety of industries including education, retail, warehousing and
distribution, package delivery, manufacturing, and healthcare.
Percon U.S. and Percon Europe market products through a network of ADC
distributors, VARs, and systems integrators in Europe, Latin America and Asia,
which allows the Companies' 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 believes the increases in its net sales in 1998 and 1997 were the
result of growth in sales of PDCTs, software and decoder products, and the
continued expansion of its distributor, VAR and systems integrator customer
bases.
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 (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 1999 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 PDCT product family.
17
<PAGE>
Results of Operations
The following table sets forth for the periods indicated selected statements of
operations data, expressed as a percent of sales, and the percentage change in
dollar amounts of each of the items on the consolidated statements of income
(see page F-4 of this Form 10-KSB).
<TABLE>
<CAPTION>
Percentage
Years Ended December 31, change
1998 1997 in amount
------------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 10.3%
Cost of goods sold 52.5% 49.4% 17.1%
- ------------------------------------------------------------------------------------------
Gross profit 47.5% 50.6% 3.6%
Operating Expenses:
Selling, marketing and customer service 18.9% 16.5% 26.1%
General and administrative 9.6% 8.8% 19.7%
Research and product development 5.4% 6.6% -8.6%
- ------------------------------------------------------------------------------------------
Operating income 13.6% 18.7% -19.6%
Interest Income (Expense), net 0.4% -0.1% -474.6%
- ------------------------------------------------------------------------------------------
Income before taxes 14.0% 18.6% -17.0%
Provision for income taxes 5.3% 6.4% -9.9%
- ------------------------------------------------------------------------------------------
Net income 8.7% 12.2% -20.8%
- ------------------------------------------------------------------------------------------
</TABLE>
Comparison of Years Ended December 31, 1998 and 1997
Net sales. Net sales for 1998 increased $2.9 million (10.3%) to $31.1 million
from $28.2 million for 1997. Net sales attributed to Percon Europe increased
$1.6 million (16.2%) to $11.3 million in 1998, primarily due to increased sales
volume of the Company's PDCTs. Net sales from Percon's U.S. operations increased
$1.3 million (7.1%) to $19.8 million with increases coming from sales of
application software and accessories. The overall sales mix of the Company's
products is shown in the table 3 below.
=======================================
Product 1998 1997
- ---------------------------------------
Decoders 33.2% 36.6%
Portables 35.6% 32.9%
Software/Other 18.5% 17.8%
Input devices 12.7% 12.7%
- ---------------------------------------
Total 100.0% 100.0%
=======================================
Table 3 - Product Sales Mix
1998 and 1997
Gross profit. Gross profit for 1998 increased $0.6 million (3.6%) to $14.8
million from $14.2 million for 1997, representing 47.5% and 50.6% of net sales
in 1998 and 1997, respectively. The dollar increase in gross profit was
primarily due to the increase in net sales of portables. The percentage decrease
was primarily due to the decline in end user sales
18
<PAGE>
that contribute higher margins as more emphasis was placed on developing sales
through the distribution channel. Direct end user sales fell from 10% of net
sales in 1997 to 8% of net sales in 1998 (see table on page 10). The sales mix
of the Company's portables products increased 19.6% over 1997 and increased as a
percentage of net sales to 35.6% in 1998 from 32.9% in 1997.
Selling, marketing, and customer service. Selling, marketing, and customer
service expense for 1998 increased $1.2 million (26.1%) to $5.9 million from
$4.7 million for 1997, representing 18.9% and 16.5% of net sales, respectively.
The increase resulted primarily from the addition of 15 new employees, 8 of
which are involved directly with selling the Company's products and services,
and an increase in activities to support new product introductions and
additional marketing efforts.
General and administrative expense. General and administrative expense for 1998
increased $0.5 million (19.7%) to $3.0 million from $2.5 million for 1997,
representing 9.6% and 8.8% of net sales, respectively. These increases were
primarily due to costs associated with the Company's relocation to new
headquarter offices, increased rent expense, and severance payments related to
reductions in the workforce of the Company's European subsidiary.
Research and product development expense. Research and product development
expense for 1998 decreased $159,000 (8.6%) to $1.7 million from $1.85 million
for 1997, representing 5.4% and 6.6% of net sales, respectively. The decrease
was largely attributable to reorganization within the engineering group and
capitalization of certain expenditures after two new software products reached
technological feasibility. The capitalized amounts represented 16.4% and 8.0% of
total research and product development expense for 1998 and 1997, respectively.
The Company expects these expenditures, as a percentage of net sales, to remain
fairly constant in 1999.
Interest Income (expense), net. Net interest income was $109,216 for 1998
compared to net interest expense of $29,115 for 1997. The increase was a result
of higher average cash holdings during 1998.
Provision for income taxes. The provision for income taxes for 1998 was $1.6
million, which represents an effective tax rate of 37.5%. 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 remain approximately the same for 1999 due to a normalized state income
tax rate in 1998, compared to a temporarily reduced state income tax rate during
1997.
19
<PAGE>
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.
Liquidity and Capital Resources
The Company financed its operations in 1998 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
bank agreement) to a maximum of $1.0 million. Outstanding principal amounts
thereunder bear interest at the bank's prime rate, which was 7.75% at December
31, 1998. The Company also has a line of credit and short-term borrowing
arrangements with two foreign banks that allow it to borrow up to an aggregate
of 2,000,000 French francs (approximately $358,000), collateralized by accounts
receivable. Borrowings under these facilities bear interest at the banks'
current interest rates, which were 8.1% and 10.1%, respectively, at December 31,
1998. No amounts were outstanding under any of these arrangements at December
31,1998.
Net cash provided by operations was $4.0 million 1998, compared to $854,000 for
1997. Significant changes in 1998 included non-cash charges for amortization and
depreciation along with increases in accounts receivable and decreases in
inventories.
For 1998 net cash used in investing activities totaled $1.3 million compared to
$605,000 for 1997. The Company made capital expenditures of $1.3 million for
1998, compared to $558,000 for 1997.
For 1998 net cash used by financing activities totaled $332,000. For 1997 net
cash provided by financing activities totaled $48,000. Cash used for financing
activities in 1998 was primarily for the repurchase of the Company's common
stock. As of December 31, 1998 the Company had repurchased 94,400 shares of its
common stock in open market transactions for $597,000. Additional cash provided
by financing activities was generated by the issuance of common stock for
$317,000.
On October 8, 1998 the Company announced that its Board of Directors has
authorized the repurchase of up to 250,000 shares of its common stock. The
shares may be repurchased from time to time through open market transactions,
and funded from existing cash balances or from borrowings under bank credit
arrangements.
20
<PAGE>
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
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130") which establishes requirements for disclosure of comprehensive income. The
objective of SFAS 130 is to report all changes in equity that result from
transactions and economic events other than transactions with owners.
Comprehensive income is the total of net income and all other non-owner changes
in equity. The Company has adopted SFAS 130 in 1998 and retroactively
reclassified previous financial statements for comparative purposes.
During the year ended December 31, 1998, Percon adopted SFAS 131, "Disclosures
about Segment of an enterprise and Related Information." SFAS 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. SFAS 131 also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The adoption
of SFAS 131 did not affect results of operations or financial position, but did
affect the disclosure of segment information.
In February 1998 FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" which revises employers' disclosures
about pension and other postretirement benefit plans. The Company is complying
with the new standard.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which requires the Company to recognize all derivatives
on the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge, depending
on the nature of the hedge, changes in fair value of the derivative will either
be offset against the change in fair value of the hedged assets, liabilities, or
firm commitments through earnings, or recognized through comprehensive income
until the hedged item is recognized in earnings. The Company believes that SFAS
No. 133 will not affect financial reporting because the Company and its wholly
owned subsidiaries are not currently involved in any hedge positions at this
time, nor are there any plans to adopt such positions in the near future.
21
<PAGE>
Disclosure Regarding Euro Conversion
On January 1, 1999, eleven member countries of the European Community began a
process to convert their existing sovereign currencies to a single common
denomination, the euro. The process of conversion is gradual over the next three
years, culminating in the eventual removal from circulation of all existing
domestic currency for the participating countries.
The Company's French subsidiary, Percon Europe, is located in a member country,
France, and transacts business in all European countries. Prior to the January
1, 1999 conversion, new accounting and sales systems that allow for euro
denominated transactions were successful installed. To date the Company has
experienced no difficulty in adopting the new currency, nor are any future
problems anticipated.
The full impact of this currency transition on Company profitability,
competitive position, and future prospects has not yet been fully evaluated but
is anticipated to be neutral to positive on future Company performance.
ITEM 7. FINANCIAL STATEMENTS
The financial statements and supplementary data required by this item are
included on pages F-1 to F-21 of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On September 10, 1998, the Company dismissed its prior certifying accountants,
PricewaterhouseCoopers LLP ("PwC"). The reports of PwC on the financial
statements of the Company for the past two fiscal years contained no adverse
opinion or disclaimers of opinion and were not qualified or modified as to
uncertainty, audit scope, or accounting principle. The decision to change
accountants was approved by the Company's Audit Committee of the Board of
Directors and ratified by its entire Board of Directors. During the two most
recent fiscal years and through the date hereof, there have been no
disagreements with PwC on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure. The Company has
authorized PwC to respond fully to the inquiries of the Company's successor
certifying accountants concerning the subject matter of each of the
circumstances which PwC believes may give rise to an event reportable pursuant
to item 304(a)(1)(iv)(B) of Regulation S-B. The Company engaged KPMG Peat
Marwick LLP ("KPMG") as its new independent accountants as of September 10,
1998.
22
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors, Executive Officers, and Key Employees. Information with respect to
executive officers and directors of the Company is included under this Item 9 of
Part III of this Report. Information with respect to Section 16(a) of the
Securities Exchange Act is included under "Compliance with Section 16(a) of the
Exchange Act" in the Company's definitive proxy statement for its 1999 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.
Name Age Position
- ---------------------------------------------------------------------------
Michael P. Coughlin 44 President, Chief Executive Officer,
and Director
Andy J. Storment 36 Executive Vice President of Business
Development, Secretary, Treasurer, and
Director
Jason A. Davis 42 Chief Financial Officer
Brad West 41 Vice President, Manufacturing
Dianne M. Bert 50 Vice President, Customer Service and
Professional Services
Ben Irwin 39 Vice President, Engineering and Product
Marketing
Kenneth T. Phillips 45 Vice President, Marketing
Thierry Lefebvre 34 Vice President, European Operations
Arlen I. Prentice (1)(2) 61 Chairman of the Board
Donald K. Skinner (1)(2) 58 Director
Dana E. Siebert (1)(2) 39 Director
- ---------------------------------------------------------------------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
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.
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 1998. In June 1995 Mr. Storment was
promoted to Executive Vice President.
23
<PAGE>
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 Sony Disc
Manufacturing employed Mr. Davis 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.)
Brad West joined the Company in April 1996 as Vice President Operations and
Corporate Quality and was promoted to Vice President, Manufacturing in February
1999. From July 1984 to March 1996 Mr. West was employed by Spectra-Physics
Scanning Systems, Inc. (now PSC 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.
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 Medical Electronics, Inc.
F. Ben Irwin joined the Company in June 1998 as Vice President of Engineering.
In July 1998 Mr. Irwin acquired additional responsibilities for Product
Marketing. From January 1998 to April 1998 Teklogix Inc. employed Mr. Irwin as
Director of Project Management. From May 1994 to January 1998 Mr. Irwin was
Manager of Hardware Engineering for Teklogix. From September 1990 to April 1994
Mr. Irwin was employed as a Product Manager with Teklogix.
Kenneth T. Phillips joined the Company in July 1998 as Director of Marketing. In
March 1999 Mr. Phillips was promoted to Vice President of Marketing. From March
1981 to February 1998, Apple Computer employed Mr. Phillips in a variety of
capacities. From February 1994 to February 1998 Mr. Phillips worked in Apple's
Corporate Marketing Department as a Senior Marketing Manager for North America.
24
<PAGE>
Thierry A. Lefebvre joined the Company in January 1998 as Finance and
Administration Manager, was promoted to Managing Director in March 1998 and to
Vice President of European Operations in February 1999. From March 1996 to
January 1998 General Electric Medical Systems employed Mr. Lefebvre as Finance
Manager for Eastern Europe, Middle East, and Africa. From June 1990 to February
1996 Les Laboratoires Servier employed Mr. Lefebvre successively as
International Finance Controller (June 1990 to February 1993) and Finance and
Administration Manager of German Operations (March 1993 to February 1996).
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
also serves as a director of Starbucks Coffee Corporation, Western Drug
Distributors (d.b.a. 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 Second President of Zebra Technologies' Card Printer Business Unit.
Zebra Technologies designs, manufactures, and markets bar code label printers,
plastic card printers, software, and related products. Mr. Skinner founded
Eltron International, Inc. in January 1991, and served as Chief Executive
Officer and Second Chairman of the Board before it was acquired by Zebra
Technologies in 1998.
Dana E. Siebert joined the Company's Board of Directors in December 1997. Mr.
Siebert is Executive 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. Symantec has
employed Mr. Siebert since 1985 and he 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.
25
<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 1999 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 1999 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 1999 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.
26
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. The Financial Statements are listed in the Index of
Financial Statements on page 31 of this report.
(a)(2) Exhibits:
*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 - Business Loan Agreement with Key Bank of Oregon dated September
1, 1995.
**10.6 - Modification and/or Extension Agreement, dated July 24, 1997,
between the Registrant and KeyBank National Association
***10.7 - Industrial Park Lease-1710 Building, dated October 27, 1997,
between Registrant and WCP, LLC.
***10.8 - Industrial Park Lease-1720 Building, dated October 27, 1997,
between Registrant and WCP, LLC.
****10.9 - Lease Agreement-Riverfront Research Park, dated December 24,
1997, between Registrant and Robert B. Booth LLC.
+****10.10 - Split Dollar Plan and Pledge Agreements between Registrant and
the Coughlin Family Irrevocable Trust.
+****10.11 - Split Dollar Plan and Pledge Agreements between Registrant and
the Storment Family Irrevocable Trust.
21.1 - Subsidiaries of the Registrant.
23.1 - Consent of PricewaterhouseCoopers LLP.
23.2 - Consent of KPMG Peat Marwick LLP.
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 Quarterly Report
on Form 10-QSB for the quarter ended June 30, 1997.
*** Incorporated by reference to Exhibits to Registrant's Quarterly Report
on Form 10-QSB for the quarter ended September 30, 1997.
**** Incorporated by reference to Exhibits to Registrant's Annual Report on
Form 10-KSB for the year ended December 31, 1997.
+ This Exhibit constitutes a management contract or compensatory plan or
arrangement.
(b) Reports on Form 8-K.
None
27
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1934, the
Registrant has duly caused this annual report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PERCON INCORPORATED
By /s/ Michael P. Coughlin
--------------------------------
Michael P. Coughlin
President and
Chief Executive Officer
Dated March 30, 1999
In accordance with the requirements of the Securities Act of 1934, the following
persons on behalf of the Registrant and in the capacities and dates indicated
have signed this report below.
Signature Title Date
- -------------------------------------------------------------------------------
Principal Executive Officer:
/s/ MICHAEL P. COUGHLIN President, Chief Executive March 30, 1999
- ----------------------- Officer and Director
Michael P. Coughlin
Principal Financial and
Accounting Officer:
/s/ JASON A. DAVIS Chief Financial Officer March 30, 1999
- -----------------------
Jason A. Davis
/s/ ANDY J. STORMENT Executive Vice President, March 30, 1999
- ----------------------- Business Development
Andy J. Storment Secretary, Treasurer and
Director
/s/ ARLEN I. PRENTICE Chairman of the Board March 30, 1999
- -----------------------
Arlen I. Prentice
/s/ DONALD K. SKINNER Director March 30, 1999
- -----------------------
Donald K. Skinner
/s/ DANA E. SIEBERT Director March 30, 1999
- -----------------------
Dana E. Siebert
28
<PAGE>
1998 Financial Report
29
<PAGE>
Percon Incorporated
Index to Financial Statements Page
Independent Auditor's Report F-1
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Income for the years ended
December 31, 1998 and 1997 F-4
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997 F-6
Notes to Consolidated Financial Statements as of
December 31, 1998 and 1997 F-7
30
<PAGE>
Independent Auditor's Report
To Board of Directors
Percon Incorporated:
We have audited the accompanying consolidated balance sheet of Percon
Incorporated and subsidiaries as of December 31, 1998, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
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 1998 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Percon
Incorporated as of December 31, 1998, and the results of their operations and
cash flows for the year then ended in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Portland, OR
January 27, 1999
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors
Percon Incorporated and Subsidiary
Eugene, Oregon
We have audited the accompanying consolidated balance sheet of Percon
Incorporated and subsidiary as of December 31, 1997, and the related
consolidated statements of income, changes in shareholder's equity and cash
flows for the year 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 audit.
We conducted our audit 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 audit provides 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 the consolidated results
of their operations and cash flows for the year then ended in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Eugene, Oregon
January 23, 1998
F-2
<PAGE>
<TABLE>
<CAPTION>
Percon Incorporated
Consolidated Balance Sheets
December 31, 1998 and 1997
1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 4,534,485 $ 1,883,756
Accounts receivable, net 6,793,447 6,199,042
Inventories, net 3,742,215 4,496,922
Prepaid expenses and other 859,533 501,408
Deferred income tax asset 276,100 173,718
- ----------------------------------------------------------------------------------------
Total current assets 16,205,780 13,254,846
Property and equipment, net 2,758,083 2,542,282
Goodwill and intangibles, net 1,438,989 1,556,708
- ----------------------------------------------------------------------------------------
Total assets $20,402,852 $17,353,836
========================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 104,557 $ 88,802
Accounts payable 1,644,306 1,604,727
Accrued expenses 1,123,611 864,785
Deferred revenue 115,930 37,911
Income taxes payable 231,912 206,545
- ----------------------------------------------------------------------------------------
Total current liabilities 3,220,316 2,802,770
Deferred income taxes 467,600 448,466
Long-term debt, less current portion 702,852 754,553
Other liabilities 19,614 24,476
- ----------------------------------------------------------------------------------------
Total liabilities 4,410,382 4,030,265
========================================================================================
Shareholders' equity:
Preferred stock, 5,000,000 shares authorized, - -
none issued
Common stock, no par value, 20,000,000 shares
authorized, 3,918,781 and 3,976,061 shares issued
and Outstanding at 1998 and 1997, respectively
9,319,116 9,002,585
Treasury stock, at cost, 94,400 shares at 1998 (596,885) -
Retained earnings 7,471,259 4,756,051
Accumulated other comprehensive income (201,020) (435,065)
- ----------------------------------------------------------------------------------------
Total shareholders' equity 15,992,470 13,323,571
- ----------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $20,402,852 $17,353,836
========================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
Percon Incorporated
Consolidated Statements of Income
For the Years Ended December 31, 1998 and 1997
1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $31,070,940 $28,175,837
Cost of goods sold 16,311,670 13,929,207
- ----------------------------------------------------------------------------------------
Gross profit 14,759,270 14,246,630
Operating expenses:
Selling, marketing and customer service 5,865,714 4,651,033
General and administrative 2,967,679 2,479,036
Research and product development 1,688,385 1,847,255
- ----------------------------------------------------------------------------------------
Operating income 4,237,492 5,269,306
Interest income (expense), net 109,216 (29,155)
- ----------------------------------------------------------------------------------------
Income before taxes 4,346,708
5,240,151
Provision for income taxes 1,631,500 1,810,362
- ----------------------------------------------------------------------------------------
Net income $2,715,208 $ 3,429,789
========================================================================================
Net income per share:
Basic $ 0.68 $ 0.87
================================================== ====================================
Diluted $ 0.67 $ 0.83
================================================== ====================================
Weighted average shares outstanding:
Basic 3,999,975 3,962,333
Effect of dilutive securities:
Warrants 15,215 45,170
Options 25,799 102,792
- -------------------------------------------------- ------------------------------------
Diluted 4,040,989 4,110,295
================================================== ====================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
Percon Incorporated
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended December 31, 1998 and 1997
Accumulated
Other Other
Comprehensive Common Treasury Comprehensive Retained
Income Shares Stock Stock Income Earnings Total
----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 3,958,541 $8,824,775 $0 $(48,870) $1,326,262 $10,102,167
Net Income $3,429,789 3,429,789 3,429,789
Comprehensive Income
Other comprehensive
income, net of tax
Foreign currency
translation adjustment (386,195) (386,195) (386,195)
----------
Other comprehensive income $3,043,594
==========
Proceeds from exercise
of stock options 17,520 138,720 138,720
Income tax benefits from 39,090 39,090
stock options exercised
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 3,976,061 9,002,585 0 (435,065) 4,756,051 13,323,571
Net Income $2,715,208 2,715,208 2,715,208
Comprehensive Income
Other comprehensive
income, net of tax
Foreign currency
translation adjustment 234,045 234,045 234,045
----------
Other comprehensive income $2,949,253
==========
Proceeds from exercise
of stock options 37,120 260,031 260,031
Income tax benefits from
stock options exercised 56,500 56,500
Repurchase of common stock (94,000) (596,885) (596,885)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 3,918,781 $9,319,116 $(596,885) $(201,010) $7,471,259 $15,992,470
===================================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-5
<PAGE>
Percon Incorporated
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Cash flows from operating activities:
Net Income $ 2,715,208 $ 3,429,789
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,189,392 1,077,640
Deferred income taxes (83,248) (154,087)
Change in operating assets and liabilities
Accounts receivable (594,405) (3,068,229)
Inventories 754,707 (1,099,869)
Prepaid expenses and other (358,124) 371,860
Accounts payable and accrued expenses 387,317 275,722
Income taxes payable 25,367 20,803
- ----------------------------------------------------------------------------------------
Net cash provided by operating activities 4,036,214 853,629
- ----------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (1,301,672) (558,469)
Purchase of technology - (46,046)
- ----------------------------------------------------------------------------------------
Net cash used in investing activities (1,301,672) (604,515)
- ----------------------------------------------------------------------------------------
Cash flows from financing activities:
Principal paid on long-term debt (51,701) (91,153)
Proceeds from stock issued 316,531 138,720
Cash used for purchase of treasury stock (596,885) -
- ----------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (332,055) 47,567
- ----------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 248,242 (13,548)
- ----------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,650,729 283,133
Cash and cash equivalents at beginning of period 1,883,756 1,600,623
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 4,534,485 $ 1,883,756
========================================================================================
Supplemental disclosure:
Interest paid $ 82,987 $ 92,353
Taxes paid $ 1,639,216 $ 2,054,147
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-6
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
For the Years Ended December 31, 1998 and 1997
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, its wholly owned subsidiary Percon Europe S.A.,
and its foreign sales corporation. 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 (methods which
approximate the first-in, first-out method) or market. Inventory costs include
materials, labor, and overhead. The Company increased inventory reserves to
account for slow moving and obsolete products by $262,005 and $35,540 in 1998
and 1997, respectively.
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).
Continued,
F-7
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
For the Years Ended December 31, 1998 and 1997
Summary of Significant Accounting Policies, Continued:
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.
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 for
sale 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 technology 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.
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.
Continued,
F-8
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
For the Years Ended December 31, 1998 and 1997
Summary of Significant Accounting Policies, Continued:
Stock Options: Statement of Financial Accounting Standards No. 123 (SFAS No.
123), "Accounting for Stock-Based Compensation", 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.
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. Sales
agreements provide for a basic 30-day right of return. The Company provides for
estimated costs of warranty and returns when products are shipped.
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. The Company also holds in reserve amounts associated with the sale
of demonstration and evaluation equipment, and basic 30-day rights of return.
The total of these reserves was approximately $134,000 and $101,000 as of
December 31, 1998 and 1997, respectively. These reserves increased by
approximately $33,000 in 1998 and decreased by approximately $34,000 in 1997.
Ultimate losses may vary from the current estimates, and any adjustments are
reported in earnings in the periods in which they become known.
Continued,
F-9
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
For the Years Ended December 31, 1998 and 1997
Summary of Significant Accounting Policies, Continued:
Research and Development: Research and development costs are charged to expense
as incurred.
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: Basic earnings per share are computed by dividing net income
by the weighted average number of shares outstanding for the period. Diluted
earnings per share include the assumed dilution, using the treasury stock
method, which would occur if warrants and options to purchase common stock were
exercised.
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 as accumulated other comprehensive income in
the shareholders' equity section of the balance sheet. Operating transactions
are translated at weighted average rates during the period. Transaction gains
and losses are reflected in net income.
Continued,
F-10
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
For the Years Ended December 31, 1998 and 1997
Estimates and Industry Factors:
Estimates - 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.
F-11
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
For the Years Ended December 31, 1998 and 1997
Financial Accounting Standards Board (FASB): The FASB has issued certain
accounting pronouncements that the Company has adopted:
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130") which establishes requirements for disclosure of comprehensive income. The
objective of SFAS 130 is to report all changes in equity that result from
transactions and economic events other than transactions with owners.
Comprehensive income is the total of net income and all other non-owner changes
in equity. The Company has adopted SFAS 130 in 1998 and retroactively
reclassified previous financial statements for comparative purposes.
During the year ended December 31, 1998, Percon adopted SFAS 131, "Disclosures
about Segment of an enterprise and Related Information." SFAS 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. SFAS 131 also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The adoption
of SFAS 131 did not affect results of operations or financial position, but did
affect the disclosure of segment information.
In February 1998 FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" which revises employers' disclosures
about pension and other postretirement benefit plans. Management believes they
comply with the new standard.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which requires the Company to recognize all derivatives
on the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge, depending
on the nature of the hedge, changes in fair value of the derivative will either
be offset against the change in fair value of the hedged assets, liabilities, or
firm commitments through earnings, or recognized through comprehensive income
until the hedged item is recognized in earnings. The Company believes that SFAS
No. 133 will not affect financial reporting because the Company and its wholly
owned subsidiaries are not currently involved in any hedge positions at this
time, nor are there any plans to adopt such positions in the near future.
F-12
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
For the Years Ended December 31, 1998 and 1997
Reclassifications: Certain prior-period amounts have been reclassified to
conform to the December 31, 1998 presentation. Such reclassification did not
affect previously reported net income
2. Inventories, net
Inventory consists of the following:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Finished Goods $2,257,528 $2,121,695
Materials 2,053,245 2,681,780
Reserve (568,558) (306,553)
- ---------------------------------------------------------------------------------------
$3,742,215 $4,496,922
=======================================================================================
</TABLE>
3. Property and Equipment, net:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Building on land leased from others $1,339,942 $1,252,225
Equipment 2,544,704 2,070,545
Tooling 988,674 822,831
Leasehold improvements 193,303 98,984
- ---------------------------------------------------------------------------------------
5,066,623 4,244,585
Less accumulated depreciation and amortization 2,308,540 1,702,303
- ---------------------------------------------------------------------------------------
$2,758,083 $2,542,282
=======================================================================================
</TABLE>
4. Goodwill and Intangibles, net:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Capitalized software and technology $2,423,631 $2,011,868
Noncompete agreements 832,129 832,129
Goodwill and other 641,560 565,355
- ---------------------------------------------------------------------------------------
3,897,320 3,409,352
Less accumulated amortization 2,458,331 1,852,644
- ---------------------------------------------------------------------------------------
$1,438,989 $1,556,708
=======================================================================================
</TABLE>
F-13
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
For the Years Ended December 31, 1998 and 1997
5. Accrued Expenses:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Accrued payroll and payroll liabilities $ 635,148 $ 590,918
Accrued warranty 132,642 81,878
Accrued business and property taxes 127,142 88,456
Other liabilities 228,679 103,533
- -------------------------------------------------------------------------------------
$1,123,611 $ 864,785
=====================================================================================
</TABLE>
6. 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 (7.75% at
December 31, 1998). No amounts were outstanding as of December 31, 1998 or 1997.
The Company also has a credit facility with two foreign banks to borrow up to
2,000,000 French francs (approximately $358,000), collateralized by accounts
receivable. Borrowings under these facilities bear interest at the banks'
current interest rate (8.1% and 10.1% at December 31, 1998). No amounts were
outstanding at December 31,1998 or 1997.
F-14
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
For the Years Ended December 31, 1998 and 1997
7. Long-term Debt:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
Bank loan, monthly payments of approximately
$14,750, including interest at 9.6%,
maturing December 31, 2004 $ 807,409 $ 843,355
Less current portion (104,557) (88,802)
- --------------------------------------------------------------------------------------
$ 702,852 $ 754,553
======================================================================================
</TABLE>
The bank loan is collateralized by a preferential lien on the building owned by
Percon Europe S.A. and matures as follows:
1999 $ 104,557
2000 115,048
2001 126,591
2002 139,294
2003 153,270
Thereafter 168,649
- -------------------------------------------------------------------------------
$ 807,409
===============================================================================
F-15
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
For the Years Ended December 31, 1998 and 1997
8. Income Taxes:
The provision for income taxes consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Current:
Federal $1,151,348 $1,475,275
State 208,700 185,184
Foreign 354,700 303,990
Deferred (83,248) (154,087)
- -------------------------------------------------------------------------------------
$1,631,500 $1,810,362
=====================================================================================
</TABLE>
The difference between the statutory federal income tax rate and the Company's
effective rate is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
Federal 34.0% 34.0%
State, net of Oregon rebate and federal benefit 3.6 2.4
Research and experimentation tax credits (2.0) (2.1)
Foreign sales corporation (0.5) (0.7)
Excess of foreign over U.S. tax rate 1.5 0.9
Goodwill amortization 0.6 0.6
Other 0.3 (0.6)
- --------------------------------------------------------------------------------------
37.5% 34.5%
======================================================================================
</TABLE>
The components of the net deferred tax liability at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Inventory reserve $ 87,100 $ 35,749
Warranty provision 41,400 25,403
Allowance for doubtful accounts 36,400 20,786
Accrued expenses and other 111,200 91,780
- --------------------------------------------------------------------------------------
276,100 173,718
- --------------------------------------------------------------------------------------
Liabilities:
Depreciation 134,700 118,624
Capitalized software and noncompete agreements 332,900 329,842
----------------------------------------------------------------------------------
467,600 448,466
- --------------------------------------------------------------------------------------
Net deferred income tax liability $ (191,500) $ (274,748)
======================================================================================
</TABLE>
F-16
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
For the Years Ended December 31, 1998 and 1997
10. Stock Options and Warrant:
In connection with its initial public offering, ("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, May 24, 1996, and May 22, 1998 (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 under the Stock Incentive Plan may not exceed
600,000.
During the years ended December 31, 1998 and 1997, the Company granted options
to employees and directors to purchase an aggregate of 104,500 shares and
202,600 shares, respectively. The exercise prices of these options are equal to
or at 110% of the market price of the Company's stock on the date of grant.
A summary of option activity is as follows:
<TABLE>
<CAPTION>
Weighted-
Average
Number of Exercise
Shares Price
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, January 1, 1997 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
Options granted 104,500 11.05
Options exercised (37,120) 7.01
Options surrendered (78,165) 11.14
- -----------------------------------------------------------------------------------------------
Balance, December 31, 1998 390,125 $ 10.70
===============================================================================================
</TABLE>
Continued,
F-17
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
For the Years Ended December 31, 1998 and 1997
The table summarizes information about stock options outstanding as of December
31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------- ---------------------------
Weighted- Weighted-
Weighted- Average Average
Range of Number Average Remaining Exercise Number Exercise
Exercise Price Outstanding Contractual Life Price Exercisable Price
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.00 - $7.50 90,300 5.3 years $ 7.06 67,990 $ 6.99
$7.51 - $10.00 56,100 8.4 years $ 9.83 17,540 $ 9.85
$10.01 - $12.50 142,275 8.3 years $11.08 51,887 $ 11.09
$12.51 - $16.75 101,450 8.3 years $13.90 40,180 $ 14.00
- -------------------------------------------------------------------------- ---------------------------
390,125 7.6 years $10.70 177,597 $ 10.05
========================================================================== ===========================
</TABLE>
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.
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Net income - as reported $2,715,208 $3,429,789
Net income-pro forma $1,979,766 $3,097,375
Earnings per share basic - as reported $ 0.68 $ 0.87
Earnings per share basic - pro forma $ 0.49 $ 0.78
Earnings per share diluted - as reported $ 0.67 $ 0.83
Earnings per share diluted - pro forma $ 0.49 $ 0.75
</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>
1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Average risk-free interest rate 5.58% 6.73%
Average expected life 8.1 years 5.8 years
Expected volatility 47.9% 40.0%
Expected dividend yield None None
Weighted average fair value of options granted $ 6.60 $ 6.94
</TABLE>
F-18
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
For the Years Ended December 31, 1998 and 1997
11. Commitments and Contingencies:
On October 8, 1998, the Company announced that its Board of Directors has
authorized the repurchase of up to 250,000 shares of its common stock. The
shares may be repurchased from time to time through open market transactions,
and funded from existing cash balances or from borrowings under bank credit
arrangements. As of December 31, 1998, the Company had repurchased 94,400
shares.
The Company leases certain facilities and land under non-cancelable operating
leases. The lease for the Company's headquarters expired in September 1998. In
December 1997, the Company signed a ten-year non-cancelable lease for a new
headquarters facility, which contains a five-year lease extension option. The
lease contains provisions for the Company to pay certain ongoing costs, such as
property taxes, insurance and support costs, which are not reflected in the
minimum lease payments totaling approximately $5.6 million. The Company expects
to sublease certain portions of the new facility as permitted under the lease
agreement. The Company completed its move to the new facility September 30,
1998.
Rent expense was $398,821 and $244,150 for the years ended December 31, 1998 and
1997, respectively. Future minimum payments required under these operating lease
agreements are summarized below. All existing sublease agreements have
terminated at December 31, 1998.
Year ending December 31:
- -------------------------------------------------------------------------
1999 $ 396,545
2000 395,028
2001 416,781
2002 440,323
2003 454,582
Thereafter 3,446,958
- -------------------------------------------------------------------------
Total $5,550,217
=========================================================================
F-19
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
For the Years Ended December 31, 1998 and 1997
12. Employee Benefit Plans:
The Company sponsors various benefit plans that cover substantially all of the
Company's employees. Total expense related to these plans were $120,167 and
$86,893 for the years ended December 31, 1998 and 1997, respectively.
13. Fair Value of Financial Instruments:
The carrying value of the Company's financial instruments, including cash and
cash equivalents, accounts receivable, long-term debt, accounts payable, and
accrued liabilities approximates fair value due to their short maturities.
14. Business Segment Information:
The Company operates in a single industry with two geographic operating segments
- - North America and Europe. While the Company's chief operating decision maker
monitors the revenue streams of the various products and geographic locations,
operations are managed and financial performance is evaluated based upon the
geographic locations because each operating segment represents a strategic
business unit that serves different markets.
The accounting policies of the operating segments are the same as those
described in the summary of significant policies. The Company evaluates
performance based on stand-alone operating segment net income and generally
accounts for intersegment sales and transfers based upon internal transfer
prices set by the Company. Revenues are attributed to geographic areas based on
the location of the assets producing the revenues.
Continued,
F-20
<PAGE>
Percon Incorporated
Notes to Consolidated Financial Statements, Continued
For the Years Ended December 31, 1998 and 1997
Summarized data of the Company's operations, by geographic area, for the years
ended December 31, 1998 and 1997 are presented below, in thousands.
<TABLE>
<CAPTION>
Year Ended
December 31, Percon
1998 Percon US Europe Elimination Consolidated
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $19,746 $11,325 $ - $ 31,071
Intra-company transfers 1,941 - (1,941) -
Gross Profit 10,185 4,546 28 14,759
Income from operations 3,346 945 (54) 4,237
Interest & Other Income (Expense), net 175 (66) - 109
Pretax income 3,521 879 (54) 4,346
Total assets 18,930 6,695 (5,223) 20,402
</TABLE>
<TABLE>
<CAPTION>
Percon
1997 Percon US Europe Elimination Consolidated
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $18,433 $9,743 $- $ 28,176
Intra-company transfers 1,714 - (1,714) -
Gross Profit 10,072 4,283 (108) 14,247
Income from operations 4,491 967 (189) 5,269
Interest & Other Income (Expense), net 79 (108) - (29)
Pretax income 4,570 859 (189) 5,240
Total assets 16,437 6,527 (5,610) 17,354
</TABLE>
Identifiable assets are those tangible and intangible assets used in operations
in each geographic area. Eliminated assets primarily represent the investment in
the European subsidiary and the net result of operations since that time.
Sales to a single distributor accounted for 14.1% and 12.0% of net sales for the
years 1998 and 1997, respectively. Accounts receivable at December 31, 1998 and
1997 were $1,357,310 and $931,908, respectively, related to this distributor. No
other single account represented more than 10% of the Company's sales for 1998.
F-21
PERCON INCORPORATED
1995 STOCK INCENTIVE PLAN
As amended May 22, 1998
1. Purpose. The purpose of this Stock Incentive Plan (the "Plan") is to
enable Percon Acquisition, Inc. (the "Company") to attract and retain the
services of (1) selected employees, officers and directors of the Company or of
any subsidiary of the Company and (2) selected nonemployee agents, consultants,
advisors, persons involved in the sale or distribution of the Company's products
and independent contractors of the Company or any subsidiary.
2. Shares Subject to the Plan. Subject to adjustment as provided below and
in paragraph 13, the shares to be offered under the Plan shall consist of Common
Stock of the Company, and the total number of shares of Common Stock that may be
issued under the Plan shall not exceed 600,000 shares. The shares issued under
the Plan may be authorized and unissued shares or reacquired shares. If an
option, stock appreciation right or performance unit granted under the Plan
expires, terminates or is cancelled, the unissued shares subject to such option,
stock appreciation right or performance unit shall again be available under the
Plan. If shares sold or awarded as a bonus under the Plan are forfeited to the
Company or repurchased by the Company, the number of shares forfeited or
repurchased shall again be available under the Plan.
3. Effective Date and Duration of Plan.
(a) Effective Date. The Plan shall become effective as of June 2,
1995. No option, stock appreciation right or performance unit granted under the
Plan shall become exercisable, however, until the Plan is approved by the
affirmative vote of the holders of a majority of the shares of Common Stock
represented at a shareholders meeting at which a quorum is present and any such
awards under the Plan prior to such approval shall be conditioned on and subject
to such approval. Subject to this limitation, options, stock appreciation rights
and performance units may be granted and shares may be awarded as bonuses or
sold under the Plan at any time after the effective date and before termination
of the Plan.
(b) Duration. The Plan shall continue in effect until all shares
available for issuance under the Plan have been issued and all restrictions on
such shares have lapsed. The Board of Directors may suspend or terminate the
Plan at any time except with respect to options, performance units and shares
subject to restrictions then outstanding under the Plan. Termination shall not
affect any outstanding options, any right of the Company to repurchase shares or
the forfeitability of shares issued under the Plan.
<PAGE>
4. Administration.
(a) Board of Directors. The Plan shall be administered by the Board of
Directors of the Company, which shall determine and designate from time to time
the individuals to whom awards shall be made, the amount of the awards and the
other terms and conditions of the awards. Subject to the provisions of the Plan,
the Board of Directors may from time to time adopt and amend rules and
regulations relating to administration of the Plan, advance the lapse of any
waiting period, accelerate any exercise date, waive or modify any restriction
applicable to shares (except those restrictions imposed by law) and make all
other determinations in the judgment of the Board of Directors necessary or
desirable for the administration of the Plan. The interpretation and
construction of the provisions of the Plan and related agreements by the Board
of Directors shall be final and conclusive. The Board of Directors may correct
any defect or supply any omission or reconcile any inconsistency in the Plan or
in any related agreement in the manner and to the extent it shall deem expedient
to carry the Plan into effect, and it shall be the sole and final judge of such
expediency.
(b) Committee. The Board of Directors may delegate to a committee of
the Board of Directors or specified officers of the Company, or both (the
"Committee") any or all authority for administration of the Plan. If authority
is delegated to a Committee, all references to the Board of Directors in the
Plan shall mean and relate to the Committee except (i) as otherwise provided by
the Board of Directors, (ii) that only the Board of Directors may amend or
terminate the Plan as provided in paragraphs 3 and 15 and (iii) that a Committee
including officers of the Company shall not be permitted to grant options to
persons who are officers of the Company.
5. Types of Awards; Eligibility. The Board of Directors may, from time to
time, take the following action, separately or in combination, under the Plan:
(i) grant Incentive Stock Options, as defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), as provided in paragraphs 6(a)
and 6(b); (ii) grant options other than Incentive Stock Options ("Non-Statutory
Stock Options") as provided in paragraphs 6(a) and 6(c); (iii) award stock
bonuses as provided in paragraph 7; (iv) sell shares subject to restrictions as
provided in paragraph 8; (v) grant stock appreciation rights as provided in
paragraph 9; (vi) grant cash bonus rights as provided in paragraph 10; (vii)
grant performance units as provided in paragraph 11 and (viii) grant foreign
qualified awards as provided in paragraph 12. Any such awards may be made to
employees, including employees who are officers or directors, and to other
individuals described in paragraph 1 who the Board of Directors believes have
made or will make an important contribution to the Company or any subsidiary of
the Company; provided, however, that only employees of the Company shall be
eligible to receive Incentive Stock Options under the Plan. The Board of
Directors shall select the individuals to whom awards shall be made and shall
specify the action taken with respect to each individual to whom an award is
made. At the discretion of the Board of Directors, an individual may be given an
election to surrender an award in exchange for the grant of a new award. No
employee may be
2
<PAGE>
granted options or stock appreciation rights under the Plan for more than an
aggregate of 200,000 shares of Common Stock in connection with the hiring of the
employee or 50,000 shares of Common Stock in any calendar year otherwise.
6. Option Grants.
(a) General Rules Relating to Options.
(i) Terms of Grant. The Board of Directors may grant options
under the Plan. With respect to each option grant, the Board of Directors
shall determine the number of shares subject to the option, the option
price, the period of the option, the time or times at which the option may
be exercised and whether the option is an Incentive Stock Option or a
Non-Statutory Stock Option. At the time of the grant of an option or at any
time thereafter, the Board of Directors may provide that an optionee who
exercised an option with Common Stock of the Company shall automatically
receive a new option to purchase additional shares equal to the number of
shares surrendered and may specify the terms and conditions of such new
options.
(ii) Exercise of Options. Except as provided in paragraph
6(a)(iv) or as determined by the Board of Directors, no option granted
under the Plan may be exercised unless at the time of such exercise the
optionee is employed by or in the service of the Company or any subsidiary
of the Company and shall have been so employed or provided such service
continuously since the date such option was granted. Absence on leave or on
account of illness or disability under rules established by the Board of
Directors shall not, however, be deemed an interruption of employment or
service for this purpose. Unless otherwise determined by the Board of
Directors, vesting of options shall not continue during an absence on leave
(including an extended illness) or on account of disability. Except as
provided in paragraphs 6(a)(iv) and 13, options granted under the Plan may
be exercised from time to time over the period stated in each option in
such amounts and at such times as shall be prescribed by the Board of
Directors, provided that options shall not be exercised for fractional
shares. Unless otherwise determined by the Board of Directors, if the
optionee does not exercise an option in any one year with respect to the
full number of shares to which the optionee is entitled in that year, the
optionee's rights shall be cumulative and the optionee may purchase those
shares in any subsequent year during the term of the option. Unless
otherwise determined by the Board of Directors, if an Officer exercises an
option within six months of the grant of the option, the shares acquired
upon exercise of the option may not be sold until six months after the date
of grant of the option.
(iii) Nontransferability. Each Incentive Stock Option and, unless
otherwise determined by the Board of Directors each other option granted
under
3
<PAGE>
the Plan by its terms shall be nonassignable and nontransferable by the
optionee, either voluntarily or by operation of law, except by will or by
the laws of descent and distribution of the state or country of the
optionee's domicile at the time of death.
(iv) Termination of Employment or Service.
(A) General Rule. Unless otherwise determined by the Board
of Directors, in the event the employment or service of the optionee
with the Company or a subsidiary terminates for any reason other than
because of physical disability or death as provided in subparagraphs
6(a)(iv)(B) and (C), the option may be exercised at any time prior to
the expiration date of the option or the expiration of 30 days after
the date of such termination, whichever is the shorter period, but
only if and to the extent the optionee was entitled to exercise the
option at the date of such termination.
(B) Termination Because of Total Disability. Unless
otherwise determined by the Board of Directors, in the event of the
termination of employment or service because of total disability, the
option may be exercised at any time prior to the expiration date of
the option or the expiration of 12 months after the date of such
termination, whichever is the shorter period, but only if and to the
extent the optionee was entitled to exercise the option at the date of
such termination. The term "total disability" means a medically
determinable mental or physical impairment which is expected to result
in death or which has lasted or is expected to last for a continuous
period of 12 months or more and which causes the optionee to be
unable, in the opinion of the Company and two independent physicians,
to perform his or her duties as an employee, director, officer or
consultant of the Company and to be engaged in any substantial gainful
activity. Total disability shall be deemed to have occurred on the
first day after the Company and the two independent physicians have
furnished their opinion of total disability to the Company.
(C) Termination Because of Death. Unless otherwise
determined by the Board of Directors, in the event of the death of an
optionee while employed by or providing service to the Company or a
subsidiary, the option may be exercised at any time prior to the
expiration date of the option or the expiration of 12 months after the
date of death, whichever is the shorter period, but only if and to the
extent the optionee was entitled to exercise the option at the date of
death and only by the person or persons to whom such optionee's rights
under the option shall pass by the optionee's will or by the laws of
descent and distribution of the state or country of domicile at the
time of death.
4
<PAGE>
(D) Amendment of Exercise Period Applicable to Termination.
The Board of Directors, at the time of grant or, with respect to an
option that is not an Incentive Stock Option, at any time thereafter,
may extend the 30-day and 12-month exercise periods any length of time
not longer than the original expiration date of the option, and may
increase the portion of an option that is exercisable, subject to such
terms and conditions as the Board of Directors may determine.
(E) Failure to Exercise Option. To the extent that the
option of any deceased optionee or of any optionee whose employment or
service terminates is not exercised within the applicable period, all
further rights to purchase shares pursuant to such option shall cease
and terminate.
(v) Purchase of Shares. Unless the Board of Directors determines
otherwise, shares may be acquired pursuant to an option granted under the
Plan only upon receipt by the Company of notice in writing from the
optionee of the optionee's intention to exercise, specifying the number of
shares as to which the optionee desires to exercise the option and the date
on which the optionee desires to complete the transaction, and if required
in order to comply with the Securities Act of 1933, as amended, containing
a representation that it is the optionee's present intention to acquire the
shares for investment and not with a view to distribution. Unless the Board
of Directors determines otherwise, on or before the date specified for
completion of the purchase of shares pursuant to an option, the optionee
must have paid the Company the full purchase price of such shares in cash
(including, with the consent of the Board of Directors, cash that may be
the proceeds of a loan from the Company (provided that, with respect to an
Incentive Stock Option, such loan is approved at the time of option grant))
or, with the consent of the Board of Directors, in whole or in part, in
Common Stock of the Company valued at fair market value, restricted stock,
performance units or other contingent awards denominated in either stock or
cash, promissory notes and other forms of consideration. The fair market
value of Common Stock provided in payment of the purchase price shall be
determined by the Board of Directors. If the Common Stock of the Company is
not publicly traded on the date the option is exercised, the Board of
Directors may consider any valuation methods it deems appropriate and may,
but is not required to, obtain one or more independent appraisals of the
Company. If the Common Stock of the Company is publicly traded on the date
the option is exercised, the fair market value of Common Stock provided in
payment of the purchase price shall be the closing price of the Common
Stock as reported in The Wall Street Journal on the last trading day
preceding the date the option is exercised, or such other reported value of
the Common Stock as shall be specified by the Board of Directors. No shares
shall be issued until full payment for the shares has been made. With the
consent of the Board of Directors (which, in the case of an Incentive Stock
Option, shall be given only at the time of option grant), an optionee may
request the Company to apply automatically the shares to be received upon
the exercise of a portion of a stock
5
<PAGE>
option (even though stock certificates have not yet been issued) to satisfy
the purchase price for additional portions of the option. Each optionee who
has exercised an option shall immediately upon notification of the amount
due, if any, pay to the Company in cash amounts necessary to satisfy any
applicable federal, state and local tax withholding requirements. If
additional withholding is or becomes required beyond any amount deposited
before delivery of the certificates, the optionee shall pay such amount to
the Company on demand. If the optionee fails to pay the amount demanded,
the Company may withhold that amount from other amounts payable by the
Company to the optionee, including salary, subject to applicable law. With
the consent of the Board of Directors an optionee may satisfy this
obligation, in whole or in part, by having the Company withhold from the
shares to be issued upon the exercise that number of shares that would
satisfy the withholding amount due or by delivering to the Company Common
Stock to satisfy the withholding amount. Upon the exercise of an option,
the number of shares reserved for issuance under the Plan shall be reduced
by the number of shares issued upon exercise of the option.
(b) Incentive Stock Options. Incentive Stock Options shall be subject
to the following additional terms and conditions:
(i) Limitation on Amount of Grants. No employee may be granted
Incentive Stock Options under the Plan if the aggregate fair market value,
on the date of grant, of the Common Stock with respect to which Incentive
Stock Options are exercisable for the first time by that employee during
any calendar year under the Plan and under all incentive stock option plans
(within the meaning of Section 422 of the Code) of the Company or any
parent or subsidiary of the Company exceeds $100,000.
(ii) Limitations on Grants to 10 Percent Shareholders. An
Incentive Stock Option may be granted under the Plan to an employee
possessing more than 10 percent of the total combined voting power of all
classes of stock of the Company or of any parent or subsidiary of the
Company only if the option price is at least 110 percent of the fair market
value, as described in paragraph 6(b)(iv), of the Common Stock subject to
the option on the date it is granted and the option by its terms is not
exercisable after the expiration of five years from the date it is granted.
(iii) Duration of Options. Subject to paragraphs 6(a)(ii) and
6(b)(ii), Incentive Stock Options granted under the Plan shall continue in
effect for the period fixed by the Board of Directors, except that no
Incentive Stock Option shall be exercisable after the expiration of 10
years from the date it is granted.
(iv) Option Price. The option price per share shall be determined
by the Board of Directors at the time of grant. Except as provided in
paragraph 6(b)(ii), the option price shall not be less than 100 percent of
the fair
6
<PAGE>
market value of the Common Stock covered by the Incentive Stock Option at
the date the option is granted. The fair market value shall be determined
by the Board of Directors. If the Common Stock of the Company is not
publicly traded on the date the option is granted, the Board of Directors
may consider any valuation methods it deems appropriate and may, but is not
required to, obtain one or more independent appraisals of the Company. If
the Common Stock of the Company is publicly traded on the date the option
is exercised, the fair market value shall be deemed to be the closing price
of the Common Stock as reported in The Wall Street Journal on the day
preceding the date the option is granted, or, if there has been no sale on
that date, on the last preceding date on which a sale occurred or such
other value of the Common Stock as shall be specified by the Board of
Directors.
(v) Limitation on Time of Grant. No Incentive Stock Option shall
be granted on or after the tenth anniversary of the effective date of the
Plan.
(vi) Conversion of Incentive Stock Options. The Board of
Directors may at any time without the consent of the optionee convert an
Incentive Stock Option to a Non-Statutory Stock Option.
(c) Non-Statutory Stock Options. Non-Statutory Stock Options shall be
subject to the following terms and conditions in addition to those set forth in
Section 6(a) above:
(i) Option Price. The option price for Non-Statutory Stock
Options shall be determined by the Board of Directors at the time of grant
and may be any amount determined by the Board of Directors.
(ii) Duration of Options. Non-Statutory Stock Options granted
under the Plan shall continue in effect for the period fixed by the Board
of Directors.
7. Stock Bonuses. The Board of Directors may award shares under the Plan as
stock bonuses. Shares awarded as a bonus shall be subject to the terms,
conditions, and restrictions determined by the Board of Directors. The
restrictions may include restrictions concerning transferability and forfeiture
of the shares awarded, together with such other restrictions as may be
determined by the Board of Directors. If shares are subject to forfeiture, all
dividends or other distributions paid by the Company with respect to the shares
shall be retained by the Company until the shares are no longer subject to
forfeiture, at which time all accumulated amounts shall be paid to the
recipient. The Board of Directors may require the recipient to sign an agreement
as a condition of the award, but may not require the recipient to pay any
monetary consideration other than amounts necessary to satisfy tax withholding
requirements. The agreement may contain any terms, conditions, restrictions,
representations and warranties required by the Board of Directors. The
certificates representing the shares awarded shall bear any legends
7
<PAGE>
required by the Board of Directors. The Company may require any recipient of a
stock bonus to pay to the Company in cash upon demand amounts necessary to
satisfy any applicable federal, state or local tax withholding requirements. If
the recipient fails to pay the amount demanded, the Company may withhold that
amount from other amounts payable by the Company to the recipient, including
salary or fees for services, subject to applicable law. With the consent of the
Board of Directors, a recipient may deliver Common Stock to the Company to
satisfy this withholding obligation. Upon the issuance of a stock bonus, the
number of shares reserved for issuance under the Plan shall be reduced by the
number of shares issued.
8. Restricted Stock. The Board of Directors may issue shares under the Plan
for such consideration (including promissory notes and services) as determined
by the Board of Directors. Shares issued under the Plan shall be subject to the
terms, conditions and restrictions determined by the Board of Directors. The
restrictions may include restrictions concerning transferability, repurchase by
the Company and forfeiture of the shares issued, together with such other
restrictions as may be determined by the Board of Directors. If shares are
subject to forfeiture or repurchase by the Company, all dividends or other
distributions paid by the Company with respect to the shares shall be retained
by the Company until the shares are no longer subject to forfeiture or
repurchase, at which time all accumulated amounts shall be paid to the
recipient. All Common Stock issued pursuant to this paragraph 8 shall be subject
to a purchase agreement, which shall be executed by the Company and the
prospective recipient of the shares prior to the delivery of certificates
representing such shares to the recipient. The purchase agreement may contain
any terms, conditions, restrictions, representations and warranties required by
the Board of Directors. The certificates representing the shares shall bear any
legends required by the Board of Directors. The Company may require any
purchaser of restricted stock to pay to the Company in cash upon demand amounts
necessary to satisfy any applicable federal, state or local tax withholding
requirements. If the purchaser fails to pay the amount demanded, the Company may
withhold that amount from other amounts payable by the Company to the purchaser,
including salary, subject to applicable law. With the consent of the Board of
Directors, a purchaser may deliver Common Stock to the Company to satisfy this
withholding obligation. Upon the issuance of restricted stock, the number of
shares reserved for issuance under the Plan shall be reduced by the number of
shares issued.
9. Stock Appreciation Rights.
(a) Grant. Stock appreciation rights may be granted under the Plan by
the Board of Directors, subject to such rules, terms, and conditions as the
Board of Directors prescribes.
(b) Exercise.
(i) Each stock appreciation right shall entitle the holder, upon
exercise, to receive from the Company in exchange therefor an amount equal
in
8
<PAGE>
value to the excess of the fair market value on the date of exercise of one
share of Common Stock of the Company over its fair market value on the date
of grant (or, in the case of a stock appreciation right granted in
connection with an option, the excess of the fair market value of one share
of Common Stock of the Company over the option price per share under the
option to which the stock appreciation right relates), multiplied by the
number of shares covered by the stock appreciation right or the option, or
portion thereof, that is surrendered. No stock appreciation right shall be
exercisable at a time that the amount determined under this subparagraph is
negative. Payment by the Company upon exercise of a stock appreciation
right may be made in Common Stock valued at fair market value, in cash, or
partly in Common Stock and partly in cash, all as determined by the Board
of Directors.
(ii) A stock appreciation right shall be exercisable only at the
time or times established by the Board of Directors. If a stock
appreciation right is granted in connection with an option, the following
rules shall apply: (1) the stock appreciation right shall be exercisable
only to the extent and on the same conditions that the related option could
be exercised; (2) the stock appreciation rights shall be exercisable only
when the fair market value of the stock exceeds the option price of the
related option; (3) the stock appreciation right shall be for no more than
100 percent of the excess of the fair market value of the stock at the time
of exercise over the option price; (4) upon exercise of the stock
appreciation right, the option or portion thereof to which the stock
appreciation right relates terminates; and (5) upon exercise of the option,
the related stock appreciation right or portion thereof terminates.
(iii) The Board of Directors may withdraw any stock appreciation
right granted under the Plan at any time and may impose any conditions upon
the exercise of a stock appreciation right or adopt rules and regulations
from time to time affecting the rights of holders of stock appreciation
rights. Such rules and regulations may govern the right to exercise stock
appreciation rights granted prior to adoption or amendment of such rules
and regulations as well as stock appreciation rights granted thereafter.
(iv) For purposes of this paragraph 9, the fair market value of
the Common Stock shall be determined as of the date the stock appreciation
right is exercised, under the methods set forth in paragraph 6(b)(iv).
(v) No fractional shares shall be issued upon exercise of a stock
appreciation right. In lieu thereof, cash may be paid in an amount equal to
the value of the fraction or, if the Board of Directors shall determine,
the number of shares may be rounded downward to the next whole share.
(vi) Each stock appreciation right granted in connection with an
Incentive Stock Option, and unless otherwise determined by the Board of
9
<PAGE>
Directors, each other stock appreciation right granted under the Plan by
its terms shall be nonassignable and nontransferable by the holder, either
voluntarily or by operation of law, except by will or by the laws of
descent and distribution of the state or country of the holder's domicile
at the time of death, and each stock appreciation right by its terms shall
be exercisable during the holder's lifetime only by the holder.
(vii) Each participant who has exercised a stock appreciation
right shall, upon notification of the amount due, pay to the Company in
cash amounts necessary to satisfy any applicable federal, state and local
tax withholding requirements. If the participant fails to pay the amount
demanded, the Company may withhold that amount from other amounts payable
by the Company to the participant including salary, subject to applicable
law. With the consent of the Board of Directors a participant may satisfy
this obligation, in whole or in part, by having the Company withhold from
any shares to be issued upon the exercise that number of shares that would
satisfy the withholding amount due or by delivering Common Stock to the
Company to satisfy the withholding amount.
(viii) Upon the exercise of a stock appreciation right for
shares, the number of shares reserved for issuance under the Plan shall be
reduced by the number of shares issued. Cash payments of stock appreciation
rights shall not reduce the number of shares of Common Stock reserved for
issuance under the Plan.
10. Cash Bonus Rights.
(a) Grant. The Board of Directors may grant cash bonus rights under
the Plan in connection with (i) options granted or previously granted, (ii)
stock appreciation rights granted or previously granted, (iii) stock bonuses
awarded or previously awarded and (iv) shares sold or previously sold under the
Plan. Cash bonus rights will be subject to rules, terms and conditions as the
Board of Directors may prescribe. Unless otherwise determined by the Board of
Directors each cash bonus right granted under the Plan by its terms shall be
nonassignable and nontransferable by the holder, either voluntarily or by
operation of law, except by will or by the laws of descent and distribution of
the state or country of the holder's domicile at the time of death. The payment
of a cash bonus shall not reduce the number of shares of Common Stock reserved
for issuance under the Plan.
(b) Cash Bonus Rights in Connection With Options. A cash bonus right
granted in connection with an option will entitle an optionee to a cash bonus
when the related option is exercised (or terminates in connection with the
exercise of a stock appreciation right related to the option) in whole or in
part if, in the sole discretion of the Board of Directors, the bonus right will
result in a tax deduction that the Company has sufficient taxable income to use.
If an optionee purchases shares upon exercise of an option and does not exercise
a related stock appreciation right, the amount of the bonus, if any, shall be
determined by multiplying the excess of the total fair market value of the
10
<PAGE>
shares to be acquired upon the exercise over the total option price for the
shares by the applicable bonus percentage. If the optionee exercises a related
stock appreciation right in connection with the termination of an option, the
amount of the bonus, if any, shall be determined by multiplying the total fair
market value of the shares and cash received pursuant to the exercise of the
stock appreciation right by the applicable bonus percentage. The bonus
percentage applicable to a bonus right, including a previously granted bonus
right, may be changed from time to time at the sole discretion of the Board of
Directors but shall in no event exceed 75 percent.
(c) Cash Bonus Rights in Connection With Stock Bonus. A cash bonus
right granted in connection with a stock bonus will entitle the recipient to a
cash bonus payable when the stock bonus is awarded or restrictions, if any, to
which the stock is subject lapse. If bonus stock awarded is subject to
restrictions and is repurchased by the Company or forfeited by the holder, the
cash bonus right granted in connection with the stock bonus shall terminate and
may not be exercised. The amount and timing of payment of a cash bonus shall be
determined by the Board of Directors.
(d) Cash Bonus Rights in Connection With Stock Purchases. A cash bonus
right granted in connection with the purchase of stock pursuant to paragraph 8
will entitle the recipient to a cash bonus when the shares are purchased or
restrictions, if any, to which the stock is subject lapse. Any cash bonus right
granted in connection with shares purchased pursuant to paragraph 8 shall
terminate and may not be exercised in the event the shares are repurchased by
the Company or forfeited by the holder pursuant to applicable restrictions. The
amount of any cash bonus to be awarded and timing of payment of a cash bonus
shall be determined by the Board of Directors.
(e) Taxes. The Company shall withhold from any cash bonus paid
pursuant to paragraph 10 the amount necessary to satisfy any applicable federal,
state and local withholding requirements.
11. Performance Units. The Board of Directors may grant performance units
consisting of monetary units which may be earned in whole or in part if the
Company achieves certain goals established by the Board of Directors over a
designated period of time, but not in any event more than 10 years. The goals
established by the Board of Directors may include earnings per share, return on
shareholders' equity, return on invested capital, and such other goals as may be
established by the Board of Directors. In the event that the minimum performance
goal established by the Board of Directors is not achieved at the conclusion of
a period, no payment shall be made to the participants. In the event the maximum
corporate goal is achieved, 100 percent of the monetary value of the performance
units shall be paid to or vested in the participants. Partial achievement of the
maximum goal may result in a payment or vesting corresponding to the degree of
achievement as determined by the Board of Directors. Payment of an award earned
may be in cash or in Common Stock or in a combination of both, and may be made
when earned, or vested and deferred, as the Board of Directors determines.
Deferred awards shall earn interest on the terms and at a rate determined by the
Board of Directors.
11
<PAGE>
Unless otherwise determined by the Board of Directors, each performance unit
granted under the Plan by its terms shall be nonassignable and nontransferable
by the holder, either voluntarily or by operation of law, except by will or by
the laws of descent and distribution of the state or country of the holder's
domicile at the time of death. Each participant who has been awarded a
performance unit shall, upon notification of the amount due, pay to the Company
in cash amounts necessary to satisfy any applicable federal, state and local tax
withholding requirements. If the participant fails to pay the amount demanded,
the Company may withhold that amount from other amounts payable by the Company
to the participant, including salary or fees for services, subject to applicable
law. With the consent of the Board of Directors a participant may satisfy this
obligation, in whole or in part, by having the Company withhold from any shares
to be issued that number of shares that would satisfy the withholding amount due
or by delivering Common Stock to the Company to satisfy the withholding amount.
The payment of a performance unit in cash shall not reduce the number of shares
of Common Stock reserved for issuance under the Plan. The number of shares
reserved for issuance under the Plan shall be reduced by the number of shares
issued upon payment of an award.
12. Foreign Qualified Grants. Awards under the Plan may be granted to such
officers and employees of the Company and its subsidiaries and such other
persons described in paragraph 1 residing in foreign jurisdictions as the Board
of Directors may determine from time to time. The Board of Directors may adopt
such supplements to the Plan as may be necessary to comply with the applicable
laws of such foreign jurisdictions and to afford participants favorable
treatment under such laws; provided, however, that no award shall be granted
under any such supplement with terms which are more beneficial to the
participants than the terms permitted by the Plan.
13. Changes in Capital Structure.
(a) Stock Splits; Stock Dividends. If the outstanding Common Stock of
the Company is hereafter increased or decreased or changed into or exchanged for
a different number or kind of shares or other securities of the Company by
reason of any stock split, combination of shares or dividend payable in shares,
recapitalization or reclassification appropriate adjustment shall be made by the
Board of Directors in the number and kind of shares available for grants under
the Plan. In addition, the Board of Directors shall make appropriate adjustment
in the number and kind of shares as to which outstanding options, or portions
thereof then unexercised, shall be exercisable, so that the optionee's
proportionate interest before and after the occurrence of the event is
maintained. Notwithstanding the foregoing, the Board of Directors shall have no
obligation to effect any adjustment that would or might result in the issuance
of fractional shares, and any fractional shares resulting from any adjustment
may be disregarded or provided for in any manner determined by the Board of
Directors. Any such adjustments made by the Board of Directors shall be
conclusive.
12
<PAGE>
(b) Mergers, Reorganizations, Etc. In the event of a merger,
consolidation, plan of exchange, acquisition of property or stock, separation,
reorganization or liquidation to which the Company or a subsidiary is a party or
a sale of all or substantially all of the Company's assets (each, a
"Transaction"), the Board of Directors shall, in its sole discretion and to the
extent possible under the structure of the Transaction, select one of the
following alternatives for treating outstanding options under the Plan:
(i) Outstanding options shall remain in effect in accordance with
their terms.
(ii) Outstanding options shall be converted into options to
purchase stock in the corporation that is the surviving or acquiring
corporation in the Transaction. The amount, type of securities subject
thereto and exercise price of the converted options shall be determined by
the Board of Directors of the Company, taking into account the relative
values of the companies involved in the Transaction and the exchange rate,
if any, used in determining shares of the surviving corporation to be
issued to holders of shares of the Company. Unless otherwise determined by
the Board of Directors, the converted options shall be vested only to the
extent that the vesting requirements relating to options granted hereunder
have been satisfied.
(iii) The Board of Directors shall provide a 30-day period prior
to the consummation of the Transaction during which outstanding options may
be exercised to the extent then exercisable, and upon the expiration of
such 30-day period, all unexercised options shall immediately terminate.
The Board of Directors may, in its sole discretion, accelerate the
exercisability of options so that they are exercisable in full during such
30-day period.
(c) Dissolution of the Company. In the event of the dissolution of the
Company, options shall be treated in accordance with paragraph 13(b)(iii).
(d) Rights Issued by Another Corporation. The Board of Directors may
also grant options, stock appreciation rights, performance units, stock bonuses
and cash bonuses and issue restricted stock under the Plan having terms,
conditions and provisions that vary from those specified in this Plan provided
that any such awards are granted in substitution for, or in connection with the
assumption of, existing options, stock appreciation rights, stock bonuses, cash
bonuses, restricted stock and performance units granted, awarded or issued by
another corporation and assumed or otherwise agreed to be provided for by the
Company pursuant to or by reason of a Transaction.
14. Amendment of Plan. The Board of Directors may at any time, and from
time to time, modify or amend the Plan in such respects as it shall deem
advisable because of changes in the law while the Plan is in effect or for any
other reason. Except as
13
<PAGE>
provided in paragraphs 6(a)(iv), 9, 10 and 13, however, no change in an award
already granted shall be made without the written consent of the holder of such
award.
15. Approvals. The obligations of the Company under the Plan are subject to
the approval of state and federal authorities or agencies with jurisdiction in
the matter. The Company will use its best efforts to take steps required by
state or federal law or applicable regulations, including rules and regulations
of the Securities and Exchange Commission and any stock exchange on which the
Company's shares may then be listed, in connection with the grants under the
Plan. The foregoing notwithstanding, the Company shall not be obligated to issue
or deliver Common Stock under the Plan if such issuance or delivery would
violate applicable state or federal securities laws.
16. Employment and Service Rights. Nothing in the Plan or any award
pursuant to the Plan shall (i) confer upon any employee any right to be
continued in the employment of the Company or any subsidiary or interfere in any
way with the right of the Company or any subsidiary by whom such employee is
employed to terminate such employee's employment at any time, for any reason,
with or without cause, or to decrease such employee's compensation or benefits,
or (ii) confer upon any person engaged by the Company any right to be retained
or employed by the Company or to the continuation, extension, renewal, or
modification of any compensation, contract, or arrangement with or by the
Company.
17. Rights as a Shareholder. The recipient of any award under the Plan
shall have no rights as a shareholder with respect to any Common Stock until the
date of issue to the recipient of a stock certificate for such shares. Except as
otherwise expressly provided in the Plan, no adjustment shall be made for
dividends or other rights for which the record date occurs prior to the date
such stock certificate is issued.
18. Option Grants to Non-Employee Directors.
(a) Initial Board Grants. Each person who is a Non-Employee Director
when the Plan is adopted or who becomes a Non-Employee Director thereafter shall
be automatically granted an option to purchase 15,000 shares of Common Stock on
the date the Plan is approved by the shareholders of the Company or when he or
she becomes a Non-Employee Director. A "Non-Employee Director" is a director who
is not an employee of the Company or any of its subsidiaries.
(b) Additional Grants. Each Non-Employee Director shall be
automatically granted an option to purchase additional shares of Common Stock in
each calendar year subsequent to the year in which such Non-Employee Director
was granted an option pursuant to paragraph 18(a), such option to be granted as
of the date of the Company's annual meeting of shareholders held in such
calendar year, provided that the Non-Employee Director continues to serve in
such capacity as of such date. The number of shares subject to each additional
grant shall be 5,000 shares for each Non-Employee Director.
14
<PAGE>
(c) Exercise Price. The exercise price of options for 15,000 shares
granted pursuant to paragraph 18(a) as of the date the Plan is approved by the
Shareholders of the Company shall be equal to the price per share to the public
in the Company's initial public offering, unless otherwise determined by the
Board. The exercise price of all other options granted pursuant to this
paragraph 18 shall be equal to 100 percent of the fair market value of the
Common Stock determined pursuant to paragraph 6(b)(iv).
(d) Term of Option. The term of each option granted pursuant to this
paragraph 18 shall be 10 years from the date of grant.
(e) Exercisability. Until an option expires or is terminated and
except as provided in paragraphs 18(g) and 13, an option granted under this
paragraph 18 shall be immediately exercisable in full.
(f) Termination As a Director. If an optionee ceases to be a director
of the Company for any reason, including death, the option may be exercised at
any time prior to the expiration date of the option or the expiration of 30 days
(or 12 months in the event of death) after the last day the optionee served as a
director, whichever is the shorter period, but only if and to the extent the
optionee was entitled to exercise the option as of the last day the optionee
served as a director.
(g) Nontransferability. Each option by its terms shall be
nonassignable and nontransferable by the optionee, either voluntarily or by
operation of law, except by will or by the laws of descent and distribution of
the state or country of the optionee's domicile at the time of death, and each
option by its terms shall be exercisable during the optionee's lifetime only by
the optionee.
(h) Exercise of Options. Options may be exercised upon payment of cash
or shares of Common Stock of the Company in accordance with paragraph 6(a)(v).
Adopted: December 9, 1994
Amended: June 2, 1995
May 22, 1998
15
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 (File No. 333-9391) of our report, dated January
23, 1998, on our audit of the consolidated financial statements of Percon
Incorporated and Subsidiary as of December 31, 1997 and for the year then ended,
which report is included in this Annual Report on Form 10-KSB.
PRICEWATERHOUSECOOPERS LLP
Eugene, Oregon
March 29, 1999
Independent Auditors' Consent
The Board of Directors
Percon Incorporated:
We consent to the incorporation by reference on Form S-8 (No. 333-09391) of
Percon Incorporated of our report dated January 27, 1999, relating to the
consolidated balance sheet of Percon Incorporated and subsidiaries as of
December 31, 1998, and the related consolidated statements of income,
shareholders' equity, and cash flows, for the year ended December 31, 1998,
which report appears in this annual report on Form 10-KSB.
KPMG PEAT MARWICK LLP
Portland, Oregon
March 29, 1999
<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
September 30 1998 and the related consolidated statements of income and cash
flows for the nine months in the period ended September 30 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,534
<SECURITIES> 0
<RECEIVABLES> 6,927
<ALLOWANCES> 134
<INVENTORY> 3,742
<CURRENT-ASSETS> 16,206
<PP&E> 5,067
<DEPRECIATION> (2,309)
<TOTAL-ASSETS> 20,403
<CURRENT-LIABILITIES> 3,220
<BONDS> 703
0
0
<COMMON> 8,722
<OTHER-SE> 7,270
<TOTAL-LIABILITY-AND-EQUITY> 20,403
<SALES> 31,071
<TOTAL-REVENUES> 31,071
<CGS> 16,312
<TOTAL-COSTS> 16,312
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 109
<INCOME-PRETAX> 4,347
<INCOME-TAX> 1,632
<INCOME-CONTINUING> 2,715
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,715
<EPS-PRIMARY> 0.68
<EPS-DILUTED> 0.67
</TABLE>
