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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended September 30, 1998.
Commission file number: 0-20206
PERCEPTRON, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-2381442
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
47827 Halyard Drive, Plymouth, Michigan 48170-2461
(Address of principal executive offices)
(734) 414-6100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the proceeding 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
------------- --------------
The number of shares outstanding of each of the issuer's classes of common stock
as of November 9, 1998 was:
Common Stock, $0.01 par value 8,219,152
- ----------------------------- --------------------------
Class Number of shares
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PERCEPTRON, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ITEM 1 Financial Statements
Condensed Consolidated Balance Sheets - September 30, 3
1998 and December 31, 1997
Condensed Consolidated Statements of Income - Three and
Nine Months Ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6-8
ITEM 2 Management's Discussion and Analysis of Financial Condition 9-17
and Results of Operations
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
ITEM 1 Legal Proceedings 18
ITEM 5 Other Information 18
ITEM 6 Exhibits and Reports on Form 8-K 19
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PERCEPTRON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,978,000 $ 14,448,000
Marketable securities --- 2,000,000
Accounts receivable, net of reserves of $140,000 and $175,000 25,821,000 30,692,000
Inventories, net of reserves of $716,000 and $860,000 12,693,000 8,019,000
Income tax receivable 2,169,000 ---
Prepaid expenses and deferred tax asset 1,156,000 708,000
------------ ------------
Total current assets 51,817,000 55,867,000
------------ ------------
Property and equipment:
Building and land 5,982,000 5,982,000
Machinery and equipment 8,065,000 6,638,000
Furniture and fixtures 1,327,000 1,312,000
------------ ------------
15,374,000 13,932,000
Less: Accumulated depreciation and amortization (4,335,000) (3,308,000)
------------ ------------
Net property and equipment 11,039,000 10,624,000
------------ ------------
Intangible assets, net of accumulated amortization of $742,000 and $394,000 1,451,000 1,651,000
------------ ------------
Total assets $ 64,307,000 $ 68,142,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,869,000 $ 2,979,000
Accrued payables and expenses 4,737,000 5,929,000
Accrued compensation and stock option expense 346,000 1,355,000
------------ ------------
Total current liabilities 8,952,000 10,263,000
------------ ------------
Shareholders' equity:
Preferred Stock, no par value, 1,000,000 shares authorized,
none issued --- ---
Common Stock, $0.01 par value; 19,000,000 shares authorized,
8,219,152 and 8,207,000 issued and outstanding at
September 30, 1998 and December 31, 1997, respectively 82,000 82,000
Cumulative translation adjustments (1,500,000) (2,411,000)
Additional paid-in capital 41,013,000 41,666,000
Retained earnings 15,760,000 18,542,000
------------ ------------
55,355,000 57,879,000
------------ ------------
Total liabilities and shareholders' equity $ 64,307,000 $ 68,142,000
============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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PERCEPTRON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 14,482,000 $ 16,255,000 $ 32,792,000 $ 47,445,000
Cost of sales 6,439,000 6,250,000 15,291,000 18,351,000
------------ ------------ ------------ ------------
Gross profit 8,043,000 10,005,000 17,501,000 29,094,000
Selling, general and administrative expense 5,008,000 3,890,000 14,319,000 11,959,000
Engineering, research and development expense 2,542,000 2,229,000 7,875,000 6,744,000
------------ ------------ ------------ ------------
Income (loss) from operations 493,000 3,886,000 (4,693,000) 10,391,000
Interest income, net 91,000 231,000 509,000 661,000
------------ ------------ ------------ ------------
Net income / (loss) before provision for income taxes 584,000 4,117,000 (4,184,000)
11,052,000
Provision (credit) for income taxes 195,000 1,338,000 (1,402,000) 3,592,000
------------ ------------ ------------ ------------
Net income / (loss) $ 389,000 $ 2,779,000 $ (2,782,000) $ 7,460,000
============ ============ ============ ============
Earnings (loss) per share:
Basic $ .05 $ .34 $ (.34) $ .93
============ ============ ============ ============
Diluted $ .05 $ .33 $ (.34) $ .88
============ ============ ============ ============
Weighted average common shares outstanding:
Basic 8,235,630 8,070,944 8,245,197 8,021,356
============ ============ ============ ============
Diluted 8,240,127 8,407,009 8,245,197 8,442,899
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the condensed Consolidated
financial statements.
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PERCEPTRON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,782,000) $ 7,460,000
------------ ------------
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization 1,723,000 1,626,000
Changes in operating assets and liabilities:
Accounts receivable and income
tax receivable 3,345,000 (1,302,000)
Inventories (4,674,000) (217,000)
Prepaid expenses and other current assets (448,000) 1,398,000
Accounts payable 890,000 (2,032,000)
Accrued payables and expenses (2,201,000) (1,171,000)
------------ ------------
Total adjustments (1,365,000) (1,698,000)
------------ ------------
Net cash provided by (used in) operating activities (4,147,000) 5,762,000
------------ ------------
Cash flows from investing activities:
Capital expenditures (1,938,000) (1,650,000)
Sales and maturities of marketable securities 2,000,000 0
------------ ------------
Net cash provided by (used in) investing activities 62,000 (1,650,000)
------------ ------------
Cash flows from financing activities:
Repayment of short-term debt 0 (980,000)
Proceeds from the exercise of options 988,000 1,492,000
Repurchase of company stock (1,641,000) 0
------------ ------------
Net cash provided by (used in) financing activities (653,000) 512,000
------------ ------------
Effect of exchange rates on cash and cash equivalents 268,000 (402,000)
------------ ------------
Net increase (decrease) in cash and cash equivalents (4,470,000) 4,222,000
Cash and cash equivalents, beginning of year 14,448,000 14,924,000
------------ ------------
Cash and cash equivalents, end of period $ 9,978,000 $ 19,146,000
============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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PERCEPTRON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. FINANCIAL STATEMENT PRESENTATION
Information for the three and nine months ended September 30, 1998 and
1997 is unaudited, but includes all adjustments, consisting of normal recurring
adjustments, which the management of Perceptron, Inc. and subsidiaries
("Perceptron" or the "Company") considers necessary for fair presentation of
financial position, results of operations and cash flows. In accordance with the
instructions for the completion of the Quarterly Report on Form 10Q, certain
information and footnote disclosures necessary to comply with generally accepted
accounting principles have been condensed or omitted.
These consolidated financial statements should be read in conjunction
with the Company's Annual Report on Form 10-K for the year ended December 31,
1997, which contains Perceptron's accounting principles and other footnote
information. The results of operations for any interim period are not
necessarily indicative of the results of operations for a full year.
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation. Certain amounts for
prior periods have been reclassified to conform with current period
presentations.
NOTE 2. INVENTORIES
Inventory is stated at the lower of cost or market. The cost of
inventory is determined by the first in, first out (FIFO) method. Inventory, net
of reserves, is comprised of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- --------------
<S> <C> <C>
Component parts ........................ $ 8,925,000 $ 5,507,000
Work in process ........................ 1,393,000 902,000
Finished goods ........................ 2,375,000 1,610,000
-------------- --------------
Total ........................ $ 12,693,000 $ 8,019,000
============== ==============
</TABLE>
NOTE 3. EARNINGS (LOSS) PER SHARE
The Company adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share", for financial statements for the year ended December
31, 1997. Adoption of this standard did not have a material effect on reported
earnings per share.
Basic earnings (loss) per share is calculated by dividing net income by
the average number of shares outstanding during the applicable period. Other
obligations, such as stock options and warrants, are considered to be
potentially dilutive common shares. The calculation of diluted earnings per
share takes into account the effect of these potentially dilutive common shares.
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Earnings (loss) per share were as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30,
1998 1997
----------------------------- ----------------------------
Income Shares Income Shares
<S> <C> <C> <C> <C>
Net income and shares $ 389,000 8,235,630 $ 2,779,000 8,070,944
Basic earnings per share $ .05 $ .34
Net income and shares 389,000 8,235,630 2,779,000 8,070,944
Net dilutive effect of stock
options and warrants -- 4,497 -- 336,065
----------- ----------- ----------- -----------
Diluted income and shares $ 389,000 8,240,127 $ 2,779,000 8,407,009
Diluted earnings per share $ .05 $ .33
<CAPTION>
Nine Months Ended September 30,
1998 1997
----------------------------- ----------------------------
Income (loss) Shares Income Shares
<S> <C> <C> <C> <C>
Net income (loss) and shares $(2,782,000) 8,245,197 $ 7,460,000 8,021,356
Basic earnings (loss) per share $ (.34) $ .93
Net income (loss) and shares (2,782,000) 8,245,197 7,460,000 8,021,356
Net dilutive effect of stock
options and warrants -- 0 -- 421,543
----------- ----------- ----------- -----------
Diluted income (loss) and shares $(2,782,000) 8,245,197 $ 7,460,000 8,442,899
Diluted earnings (loss) per share $ (.34) $ .88
</TABLE>
Potentially dilutive securities of 78,622 shares were excluded from
the calculation for the nine months ended September 30, 1998, because the effect
would have been anti-dilutive.
NOTE 4. COMMITMENTS AND CONTINGENCIES
The Company may, from time to time, be subject to legal proceedings and
claims. Litigation involves many uncertainties. Management is currently unaware
of any significant pending litigation affecting the Company, other than the
matters discussed below and in Part II Item 1 "Legal Proceedings".
The Company has been informed that certain of its customers have
received allegations of possible patent infringement involving processes and
methods used in the Company's products. Certain of those customers, including
one customer who was a party to a patent infringement suit relating to this
matter, have settled such claims. Prior to this settlement, the customer
involved in the patent infringement suit had notified various companies from
which it had purchased equipment, including the Company, that it expected the
suppliers of such equipment to indemnify such customer, on a pro-rata basis, for
expenses and damages, if any, incurred in this matter. Management believes,
however, that the processes used in the Company's products were independently
developed without utilizing any previously patented process or technology.
Because of the uncertainty surrounding the nature of any possible infringement
and the validity of
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any such claim or any possible customer claim for indemnity, it is not possible
to estimate the ultimate effect, if any, of this matter on the Company's
financial position.
NOTE 5. CREDIT FACILITIES
The Company has unsecured bank credit facilities of $5.0 million US and
1.0 million DM, which may be used to finance working capital needs and equipment
purchases or capital leases. Any borrowings for working capital needs or
equipment purchases will bear interest at the bank's prime rate (8% at November
10, 1998) or Euro dollar rate. These credit facilities expire on May 31, 1999
unless canceled earlier by the Company or the bank.
NOTE 6. FOREIGN EXCHANGE CONTRACTS
The Company may use, from time to time, a limited hedging program to
minimize the impact of foreign currency fluctuations. As the Company exports
products, it may enter into limited hedging transactions relating to the
accounts receivable arising as a result of such shipments. These transactions
involve the use of forward contracts. At September 30, 1998, the Company had no
forward contracts outstanding.
NOTE 7. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," in the first quarter of
1998. This Statement requires that all items recognized under accounting
standards as components of comprehensive income be reported in an annual
financial statement that is displayed with the same prominence as other annual
financial statements. This Statement also requires that an entity classify items
of other comprehensive income by their nature in an annual financial statement,
including foreign currency translation adjustments and unrealized gains and
losses on marketable securities classified as available-for-sale, among others.
The Company's total comprehensive income was as follows, in thousands:
<TABLE>
<CAPTION>
Three Months Ended September 30,
1998 1997
--------------- --------------
<S> <C> <C>
Net income ........................ $ 389 $ 2,779
Other comprehensive income (loss), foreign
currency translation adjustments.............. 1,002 (118)
--------------- --------------
Total comprehensive income.................. $ 1,391 $ 2,661
=============== ==============
<CAPTION>
Nine Months Ended September 30,
1998 1997
--------------- --------------
<S> <C> <C>
Net income (loss) ........................ $ (2,782) $ 7,460
Other comprehensive income (loss), foreign
currency translation adjustments.............. 911 (1,327)
--------------- --------------
Total comprehensive income (loss)........... $ (1,871) $ 6,133
=============== ==============
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net Sales. The Company's net sales decreased by 10.9% from $16.3
million in the third quarter of 1997 to $14.5 million in the third quarter of
1998. The decrease of $1.8 million in net sales is primarily attributable to
decreased sales to automotive customers, down by $3.0 million from the same
quarter last year. Domestic automotive sales for the third quarter of 1998 were
up slightly by $0.3 million, to $9.2 million in 1998 from $8.9 million in 1997,
however, international automotive sales were down by $3.3 million from $5.7
million for 1997 to $2.4 million in 1998. Non-automotive sales were up by $1.2
million for 1998 versus 1997, at $2.9 million versus $1.7 million. The P-1000
product line accounted for 66% of sales in the third quarter of 1998, versus 53%
in 1997. The RGS and NCA systems accounted for 9% of net sales in the third
quarter of 1998, compared to 26% in 1997. Forest product sales accounted for 20%
of net sales in the third quarter of 1998, versus 10% in 1997.
New order bookings during the third quarter of 1998 totaled $17.9
million compared to $15.6 million in the third quarter of 1997. The increase of
$2.3 million is principally attributable to an increase of $3.6 million from
European and Asian customers, offset by the timing of orders from domestic
automotive customers that were down by $2.3 million on a comparative basis.
Non-automotive bookings were up by $1.0 million for the third quarter, from $1.8
million in 1997 to $2.8 million in 1998. Bookings for the P-1000 systems
accounted for 67% of the total in the third quarter of 1998, versus 56% of
bookings in 1997. RGS and NCA bookings were 6% of the total in third quarter
1998, versus 17% in 1997. Forest product bookings represented 16% of the total
in the third quarter of 1998, versus 12% in 1997.
Automotive new order bookings are dependent primarily on the timing of
customer re-tooling programs, and accordingly may vary significantly from month
to month. The amount of new order bookings during any particular period is not
necessarily indicative of the future operating performance of the Company.
Backlog at September 30, 1998 totaled $28.0 million, compared to $24.2
million at December 31, 1997 and $20.4 million at September 30, 1997. The level
of order backlog at any particular time is not necessarily indicative of the
future operating performance of the Company. The Company expects to be able to
fill substantially all of the orders in backlog within the next six months.
Gross profit. Gross profit decreased from $10.0 million in the third
quarter of 1997 to $8.0 million in the third quarter of 1998. Gross profit as a
percentage of net sales decreased from 61.6% in the third quarter of 1997 to
55.5% in the third quarter of 1998, due primarily to the lower sales volume in
the quarter and, to a lesser extent, higher manufacturing and installation
expenses.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased from $3.9 million in the third quarter of 1997
to $5.0 million in the third quarter
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of 1998. This change is principally due to increased personnel and related
expenses to support increased sales and marketing programs and the planned 1998
operating activity, as well as litigation expenses. As a percentage of sales,
selling, general and administrative expenses increased from 23.9% in the third
quarter of 1997, to 34.6% in the third quarter of 1998 due to the lower sales
base and, to a lesser extent, the overall increase in expenses during the
quarter.
Engineering, research and development expense. Engineering, research
and development expenses increased from $2.2 million in the third quarter of
1997, to $2.5 million in the third quarter of 1998, due primarily to increased
personnel, engineering supplies and contracted design work to support the new
product development efforts. As a percentage of net sales, research and
development expense increased from 13.7% in the third quarter of 1997 to 17.6%
in the third quarter of 1998, primarily due to the lower sales base.
Interest income, net. Interest income decreased from $231,000 in the
third quarter of 1997, to $91,000 in the third quarter of 1998 due to lower cash
balances and related investments.
Income (loss) before provision for income taxes. During the third
quarter of 1997, Perceptron had income before provision for income taxes of $4.1
million, representing 25.3% of net sales, compared to income before provision
for income taxes of $584,000, representing 4.0% of net sales, in the third
quarter of 1998.
Provision (credit) for income taxes. For the three months ended
September 30, 1997, the Company recorded a $1.3 million provision for income
taxes, representing an estimated effective tax rate of 32.5%. This compares to a
tax provision for income taxes of $195,000 in 1998, or an effective rate of
33.4%.
Net income. During the third quarter of 1997, Perceptron had net income
of $2.8 million representing 17.1% of net sales, as compared to net income of
$389,000, representing 2.7% of net sales, in the third quarter of 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net Sales. The Company's year to date net sales decreased by 30.9% from
$47.4 million in 1997 to $32.8 million in 1998. The decrease of $14.6 million in
net sales is primarily attributable to decreased sales to automotive customers,
down by $14.6 million from the same period last year. Non-automotive sales were
$6.5 million in each nine month period. Domestic automotive sales for the nine
months ended September 30, 1998 were down $9.4 million, from $27.5 million in
1997 to $18.1 million in 1998, and international automotive sales were down $5.2
million from $13.4 million for 1997 to $8.2 million in 1998. The P-1000 product
accounted for 52% of sales in the nine months ended September 30, 1998, versus
62% in 1997. The RGS and NCA systems accounted for 19% of net sales in the nine
months ended September 30,1998, as compared to 18% in 1997. Forest product sales
accounted for 20% of net sales in the nine months ended September 30,1998,
versus 14% in 1997.
New order bookings during the nine months ended September 30, 1998
totaled $36.7 million compared to $44.7 million in 1997. The decrease of $8.0
million is principally attributable to reduced orders from domestic automotive
customers, down by $10.1 million on a comparative basis, offset in part by an
increase of $0.7 million on a comparative basis from European and
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Asian customers. Non-automotive bookings were up by $1.4 million for the nine
months, from $5.6 million in 1997 to $7.0 million in 1998. Bookings for the
P-1000 systems accounted for 60% of the total for the nine months ended
September 30, 1998, versus 61% of bookings in 1997. RGS and NCA bookings were 7%
of the total for the nine months ended September 30, 1998, versus 13% in 1997.
Forest product bookings represented 19% of the total for the nine months ended
September 30, 1998, versus 12% in 1997.
Gross Profit. Gross profit decreased by $11.6 million for the nine
month period, from $29.1 million for 1997 to $17.5 million for 1998. Gross
profit as a percentage of net sales decreased from 61.3% for the nine months of
1997 to 53.4% for 1998, primarily as a result of the lower sales volumes for
1998.
Selling, general and administrative expenses. Selling, general, and
administrative expenses increased by $2.3 million, from $12.0 million for the
nine months of 1997 to $14.3 million for 1998. This change is primarily due to
increased personnel and related expenses to support the 1998 planned operating
activity. As a percentage of sales, SG&A expenses increased from 25.2% in the
nine month period 1997 to 43.7% for 1998.
Engineering, research and development expense. Engineering, research
and development expenses increased by $1.2 million, from $6.7 million in the
nine month period of 1997 to $7.9 million during 1998, due primarily to
increased personnel. As a percentage of net sales, research and development
expenses increased from 14.2% in the nine months of 1997 to 24.0% in 1998,
primarily due to the lower sales base.
Interest income, net. Interest income decreased from $661,000 in the
nine month period of 1997 to $509,000 in 1998, as a result of lower cash
balances.
Income (loss) before provision for income taxes. During the nine months
ended September 30, 1997, Perceptron had income before provision for income
taxes of $11.1 million, or 23.3% of net sales, as compared to a loss of $4.2
million in the comparable period of 1998, or (12.8%) of net sales.
Provision for income taxes. For the nine months ended September 30,
1998, the Company recorded a $1.4 million tax benefit for income taxes,
representing an estimated effective tax rate of (33.5%). This compares to a
provision for income taxes of $3.6 million in 1997, or an effective rate of
32.5%.
Net income. During the nine months ended September 30, 1997, Perceptron
had net income of $7.5 million, or 15.7% of net sales, as compared to a loss of
$2.8 million in the comparable period of 1998, or (8.5%) of net sales.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and marketable securities as of
September 30, 1998, totaled $10.0 million, as compared with $16.4 million as of
December 31, 1997. This decrease was due primarily to the net loss recorded for
the nine months ended September 30, 1998 and the increase in inventory, payments
on accrued expenses and the repurchase of 123,000 shares of stock, partially
offset by accounts receivable collections in the nine months.
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The Company has unsecured credit facilities totaling $5.0 million U.S.
and 1.0 million DM. These facilities may be used to finance working capital
needs and equipment purchases or capital leases. Any borrowings for working
capital needs and equipment purchases will bear interest at the bank's prime
rate (8% at November 10, 1998) or Euro dollar rate. The credit facilities expire
on May 31, 1999, unless canceled earlier at the option of either the Company or
the bank, and are generally due on demand. As of September 30, 1998, Perceptron
had no short-term or long-term debt.
The Company's working capital decreased to $42.9 million at September
30, 1998, from $45.6 million at December 31, 1997. Accounts receivable decreased
from $30.7 million as of December 31, 1997 to $25.8 million as of September 30,
1998 as a result of collections. In addition, an income tax receivable in the
amount of $2.2 million has been recorded as of September 30, 1998. The increase
of approximately $4.7 million in inventory is due primarily to an increase in
component parts inventory in preparation for future 1998 and 1999 deliveries.
The decrease of $1.3 million in current liabilities is due primarily to the
payment of 1997 accounts payable and performance bonuses.
The Company does not believe that inflation has had any significant
impact on historical operations, and does not expect any significant near-term
inflationary impact.
The Company believes that available cash on hand and existing credit
facilities will be sufficient to fund its currently anticipated 1998 cash flow
requirements.
While no automotive orders have been lost due to the strike at General
Motors Corporation, the uncertain nature of the impact of the strike could
affect the timing of some installations later in the year. Following the
settlement of the strike, the overtime requirements of the plants to fulfill
vehicle demands may delay system installations, startups, and training in the
affected plants. Because of the softening market in the lumber industry caused
by reduced prices for dimension lumber, some sawmills are now seeking process
optimization solutions, such as those offered by the Company, while others have
delayed their purchases of such solutions. While we continue to see an increased
interest for our forest products, the timing of various orders may be impacted.
The Company is continuing development efforts on a number of new products
including certain paint inspection products which were expected to be introduced
in 1998 and which the Company now expects to introduce early in 1999.
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EURO CONVERSION
A single currency called the "euro" will be introduced in Europe on
January 1, 1999. Eleven of the fifteen member countries of the European Union
have agreed to adopt the euro as their common legal currency on that date. Fixed
conversion rates between these participating countries' existing currencies (the
"legacy currencies") and the euro will be established as of that date. The
legacy currencies are scheduled to remain legal tender as denominations of the
euro until at least January 1, 2002 (but not later than July 1, 2002). During
this transition period, parties may settle transactions using either the euro or
a participating country's legacy currency.
Conversion to the euro may reduce the amount of Perceptron's exposure
to changes in foreign exchange rates, due to the netting effect of having assets
and liabilities denominated in a single currency as opposed to the various
legacy currencies. Conversely, because there will be less diversity in
Perceptron's exposure to foreign currencies, movements in the euro's value in
U.S. dollars could have a more pronounced effect, whether positive or negative,
on Perceptron.
YEAR 2000 ISSUE
YEAR 2000 OVERVIEW
An issue affecting the Company is the potential inability of many
computer systems and applications to process information in the year 2000 and
beyond. This could result in system failures or miscalculations leading to
disruptions in the Company's activities and operations (the "Year 2000" issue).
Programs that will operate in the Year 2000 unaffected by the change in year
from 1999 to 2000 are referred to herein as "Year 2000 compliant". The
disclosure below is intended to summarize the Company's actions to minimize the
risk. Certain portions of the discussion set forth below contain "forward
looking statements" within the meaning of the Securities Exchange Act of 1934,
as amended, including, but not limited to, those relating to the Year 2000
compliance of the Company's products and systems, future costs to remediate Year
2000 issues, the timetable in which such remediation is to occur, the
alternatives available to the Company to become fully Year 2000 compliant, the
Company's requirements and the impact on the Company of an inability of it or
its key suppliers and customers to become fully Year 2000 compliant. Actual
results could differ materially from those in the forward looking statement due
to a number of uncertainties set forth below.
13
<PAGE> 14
YEAR 2000 STATE OF READINESS
The Company has forward-date tested the current version of its
principal products and believes that the current versions, and all versions
currently under warranty, are Year 2000 compliant. The Company's products
operate on computers and operating systems supplied by third party vendors. The
Company's customers have been advised to conduct their own forward-date tests on
such systems and to contact the third party vendors regarding available upgrades
or other remediation efforts.
The Company's principal customers are automotive companies and forest
and wood products processors and system integrators who sell to such customers.
The Company's principal customers are large businesses, principally large
automotive manufacturers. The Company has received numerous communications from
these customers about their Year 2000 compliance efforts. For these reasons, the
Company expects most of these customers will become Year 2000 compliant in a
timely fashion. However, the Company does not plan to monitor their progress in
this regard. If any of the Company's customers are unable to become Year 2000
compliant in a timely fashion, it is possible they could suspend product
purchases from the Company until their systems are Year 2000 compliant.
The Company is currently developing a plan to determine whether its
principal vendors and suppliers (all of which are referred to as "Third Party
Suppliers") are Year 2000 compliant. The plan will include the identification of
principal Third Party Suppliers, formal communications with the Third Party
Suppliers regarding their Year 2000 compliance efforts and, with respect to its
critical Third Party Suppliers, some form of additional verification of
compliance, which could include site visits. The Company expects to initiate
this process during the first quarter of 1999. The Company believes that most of
its supply of needed products or services are provided by single source
suppliers. However, the Company believes that alternative sources of its supply
of needed products and services exist or can be developed and the Company plans
to explore such alternate sources during calendar year 1999 for any supplier
which the Company believes is at risk of not becoming Year 2000 compliant in a
timely fashion. The most reasonably likely worst case scenario for the Company
with respect to the Year 2000 problem is the failure of one or more critical
Third Party Suppliers to be Year 2000 compliant such that its supply of needed
products or services is interrupted. This could result in the Company not being
able to produce one or more of its systems for a period of time, which in turn
could result in lost sales and profits. In the event that the Company
identifies any Third Party Supplier that is at risk of not becoming Year 2000
compliant in a timely fashion, the Company plans to stockpile sufficient
inventories of the products provided by such supplier to permit it to continue
to operate until such supplier can become Year 2000 compliant or an alternate
source can be developed.
The Company has established a project team headed by the Vice President
of Operations to identify internal systems which are not Year 2000 compliant and
complete the corrections or plans required to mitigate the Year 2000 issue. The
Company has identified two categories of internal systems that require review:
(1) informational technology ("IT") systems used to process
mission critical information, such as personal computers
and networks, and
14
<PAGE> 15
(2) non-IT systems, such as office equipment and machinery,
telephone and data communication systems, climate
control and security systems, which may contain
microcontrollers with embedded technology.
The Company is developing a strategy to address the potential exposures
related to the impact on its IT systems for the Year 2000 and beyond. An
inventory of key financial and operational systems is being completed. Detailed
plans for assessing, and implementing and testing any necessary modifications
to, these key IT systems to make them Year 2000 compliant are being developed.
The Company's principal IT systems are located at its headquarters in
Plymouth, Michigan. These systems consist of a financial system, which the
Company has forward-date tested and believes is Year 2000 compliant, and an
operations system provided by a third party vendor. This third-party vendor
offers an upgraded version which is represented to be Year 2000 compliant.
Alternatively, the Company believes that the current version of the operations
system can be remediated by a third party to be Year 2000 compliant. Completion
of this remediation is expected in the first half of 1999. The Company also has
a number of engineering systems, used primarily for testing, developed by the
Company's internal staff. The Company intends to forward-date test these systems
during the first quarter of 1999 and either remediate or replace them through
internal staff efforts during 1999. The Company intends to assess the IT systems
of its subsidiaries beginning in the first quarter of 1999.
The Company maintains networks of personal computers. Using internal
personnel, the Company plans to assess the Company's personal computer networks
for Year 2000 compliance and to make necessary modifications. The assessment
will begin in the first quarter of 1999. Completion of this project is expected
in the first half of 1999. The Company's personal computer systems generally
operate using "shrinkwrapped" software (such as Microsoft Windows 95, Microsoft
Word and Excel). To the extent any of the programs used by the personal computer
systems are not Year 2000 compliant, the Company believes that Year 2000
compliant upgrades are or will be readily available for purchase.
In the event that the Company's personal computer networks were found
not to be Year 2000 compliant, and could not be remediated in a timely or
cost-efficient manner, the Company would accelerate the replacement of
non-compliant components of such networks with Year 2000 compliant components.
However, since the Company continuously upgrades its personal computers as part
of its normal operations, many of the older personal computers are likely to be
eliminated prior to 2000.
A failure of one or more of the Company's internal systems to become
Year 2000 compliant, particularly the Company's principal internal information
technology systems, could require the Company to manually process information or
could prevent or limit access to mission critical information.
The Company's non-IT systems consist principally of security, climate
control, telephone and data communication systems. The Company will begin the
initial assessment of these systems in the first quarter of 1999, with any
required remediation expected in the first half of 1999. Most of the Company's
operations are conducted from its headquarters in Plymouth, Michigan, which was
built in 1996, and included new non-IT systems. If the Company's non-IT
15
<PAGE> 16
systems cannot be remediated to become compliant, and if it is necessary for the
Company's operations, the Company will replace those systems before the end of
1999. The Company believes that there are alternative providers of these systems
which are Year 2000 compliant, but to date it has not explored the time required
to implement a new system or the additional cost to the Company.
YEAR 2000 COSTS
Most of the costs incurred by the Company to date on Year 2000
compliance issues have been internal staff costs and costs relating to normal
product upgrades, which the Company has not separately tracked. As a result, the
Company is not able to reasonably estimate the amount of such expenditures. The
Company presently estimates that its future costs relating to Year 2000
compliance issues, including replacement systems, will be less than $100,000.
The Company would have incurred many of the costs for these efforts in any event
because of the normal process of product and equipment upgrades. These cost
estimates are subject to a number of uncertainties, which could result in actual
costs exceeding the estimated amounts including, but not limited to, undetected
errors or defects discovered in connection with the assessment and remediation
process or unanticipated difficulties in completing the remediation in a timely
fashion, resulting in the need either to replace more of the systems than
originally expected and/or hire more personnel or third party firms to assist in
the remediation process or the Company being required to assist any of its Third
Party Suppliers to become Year 2000 compliant. Costs related to the Year 2000
issue are funded through operating cash flows. The Year 2000 costs have not
caused the Company to defer any other significant information technology
program.
YEAR 2000 RISKS AND CONTINGENCY PLANS
The Company's Year 2000 project team plans to evaluate business
disruption scenarios, coordinate the establishment of more detailed Year 2000
contingency plans, and identify and implement preemptive strategies. The Company
plans to develop more detailed contingency plans for critical business processes
during 1999 as the Company identifies areas of greater risk for Year 2000
non-compliance internally or by its customers and Third Party Suppliers.
Estimates of time, costs and risks associated with the Year 2000 issue
are based on currently available information. Developments that could affect
estimates include, but are not limited to, the availability and cost of trained
personnel; the ability to locate and correct all relevant computer code and
systems; cooperation and remediation success of the Company's suppliers and
customers (and their suppliers and customers); and the ability to correctly
anticipate risks and implement suitable contingency plans in the event of system
failures at the Company or its suppliers or customers (and their suppliers and
customers).
Some commentators have stated that a significant amount of litigation
will arise out of Year 2000 compliance issues. While the Company believes that
its efforts to address Year 2000 issues for which it is responsible should be
successful, a description of its most reasonably likely worst case Year 2000
scenarios have been described above. In addition, it is possible that there will
be undetected errors or defects associated with Year 2000 date functions in the
Company's current products or internal systems or those of its Third Party
Suppliers (and their suppliers and customers). If any of the foregoing scenarios
should occur, it is possible that the Company could be involved in litigation.
Because of the unprecedented nature of litigation in this area, it is uncertain
how the Company may be affected by it. In the event of such litigation or the
occurrence
16
<PAGE> 17
of one or more of the most reasonably likely worst case Year 2000 scenarios, it
is possible the Company's revenues, net income or financial condition could be
materially adversely affected.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information," effective
for 1998, establishes standards for reporting information about operating
segments in annual financial statements and, beginning in 1999, requires
reporting of selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
Perceptron, Inc. will adopt SFAS 131 for its consolidated financial statements
for the year ending December 31, 1998. Management is evaluating the impact, if
any, the Statement will have on the company's present segment reporting.
Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities," was issued by
the Financial Accounting Standards Board in June 1998. This Statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires recognition of all derivatives as either assets
or liabilities on the balance sheet and measurement of those instruments at fair
value. If certain conditions are met, a derivative may be designated
specifically as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment (a fair value
hedge), (b) a hedge of the exposure to variable cash flows of a forecasted
transaction (a cash flow hedge), or (c) a hedge of the foreign currency exposure
of a net investment in a foreign operation, and an unrecognized firm commitment,
an available-for-sale security, or a foreign-currency-denominated forecasted
transaction. Perceptron, Inc. will comply with requirements of SFAS 133 when
adopted. This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Perceptron, Inc. expects to adopt SFAS 133
beginning January 1, 2000. The effect of adopting SFAS 133 is not expected to be
material.
SAFE HARBOR STATEMENT
Certain statements in this Management's Discussion and Analysis of
Financial Condition and Results of Operation may be "forward looking statements"
within the meaning of the Securities Exchange Act of 1934, including the
Company's expectation as to 1998 revenue and earnings levels, the timing of
receipt and shipment of orders in 1998 and the timing of new product releases.
Actual results could differ materially from those in the forward looking
statements due to a number of uncertainties, including, but not limited to those
discussed above, the dependence of the Company's revenue on a number of sizable
orders from a small number of customers, the timing of orders and shipments
which can cause the Company to experience significant fluctuations in its
quarterly and annual revenue and operating results, timely receipt of required
supplies and components which could result in delays in anticipated shipments,
general product demand and market acceptance risks, the ability of the Company
to successfully compete with alternative and similar technologies, the timing
and continuation of the automotive industry's retooling programs, the ability of
the Company to resolve technical issues inherent in the development of new
products and technologies, the ability of the Company to identify and satisfy
market needs, general product development and commercialization difficulties,
the quality and cost of competitive products already in existence or developed
in the future, the level of interest existing and potential new customers may
have in new products and technologies generally, rapid or unexpected
technological changes, the impact of undetected errors or defects associated
with the Year 2000 date functions on the Company and its suppliers, and the
effect of economic conditions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
17
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously disclosed in Item 1 of the Form 10-Q for the quarter
ended March 31, 1998, the Company has a suit pending in the U.S. District Court
for the Eastern District of Michigan against Sensor Adaptive Machines, Inc.
("SAMI") and Timothy Pryor ("Pryor") alleging breach of non-compete agreements
provided by SAMI and Pryor to the Company prior to their expiration in July 1995
and seeking damages and equitable relief. SAMI and Pryor filed counterclaims
against the Company alleging, in part, that the Company is engaged in unlawful
monopolization and tortious interference with business practice and seeking
damages. In response to a motion for summary disposition filed by the Company,
the counterclaim for unlawful monopolization was dismissed by the court in June
1998. The Company believes that the remaining counterclaims are without merit
and intends to vigorously pursue its claims and defend the remaining
counterclaims. The trial on this matter started in October 1998.
As previously disclosed in Item 1 of the Form 10-Q for the quarter
ended June 30, 1998, Speroni, S.p.A. ("Speroni") filed suit against the Company
on June 2, 1998, in the U.S. District Court for the Eastern District of
Michigan. This suit was dismissed by the Court on September 25, 1998, with
prejudice. Speroni has appealed the dismissal. The suit alleged tortious
interference by the Company with the business relationships and expectancies
between Speroni and its customers and with exclusive distributorship contracts
between Perceptron B.V., a wholly-owned subsidiary of the Company, and Speroni
relating to distribution of the Company's P-1000 products in Italy and France.
Speroni sought unspecified compensatory damages and punitive damages of $10
million. Perceptron B.V. has terminated its exclusive distributorship contracts
with Speroni because of Speroni's breaches. Perceptron B.V. has sought
arbitration of this matter, requesting the I.C.C. (International Chamber of
Commerce) International Court of Arbitration (the "ICC") to confirm the
terminations of the exclusive distributorship contracts and to award Perceptron
B.V. at least $2.3 million in damages. Speroni has filed counterclaims with the
ICC, alleging breach of the exclusive distributorship contracts by Perceptron
B.V., and seeking damages of $6.5 million. The Company intends to vigorously
pursue its claims and defend Speroni's claims.
ITEM 5. OTHER INFORMATION
Perceptron's Chief Financial Officer, John G. Zimmerman, has announced
he will be leaving the Company, effective November 13, 1998. A candidate search
is now underway to identify Mr. Zimmerman's replacement. The Company's
Controller, Sylvia Smith, will assume Mr. Zimmerman's responsibilities until a
replacement is identified.
The Company also reported that Harry T. Rein has resigned from
Perceptron's Board of Directors after more than 14 years of dedicated service,
citing his long tenure and the escalating demands on his time from his
businesses.
18
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
27. Financial Data Schedule
(B) Reports on Form 8-K
None
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PERCEPTRON, INC.
(Registrant)
Date: November 13, 1998 By: /s/ Alfred A. Pease
--------------------------
Alfred A. Pease, President
and Chief Executive Officer
Date: November 13, 1998 By: /s/ John G. Zimmerman
--------------------------
John G. Zimmerman
Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 13, 1998 By: /s/ Sylvia M. Smith
--------------------------
Sylvia M. Smith
Controller and
Chief Accounting Officer
20
<PAGE> 21
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> SEP-30-1998
<CASH> 9,978,000
<SECURITIES> 0
<RECEIVABLES> 25,961,000
<ALLOWANCES> (140,000)
<INVENTORY> 12,693,000
<CURRENT-ASSETS> 51,817,000
<PP&E> 15,374,000
<DEPRECIATION> (4,335,000)
<TOTAL-ASSETS> 64,307,000
<CURRENT-LIABILITIES> 8,952,000
<BONDS> 0
0
0
<COMMON> 82,000
<OTHER-SE> 55,273,000
<TOTAL-LIABILITY-AND-EQUITY> 64,307,000
<SALES> 32,792,000
<TOTAL-REVENUES> 32,792,000
<CGS> 15,291,000
<TOTAL-COSTS> 22,194,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (509,000)
<INCOME-PRETAX> (4,184,000)
<INCOME-TAX> (1,402,000)
<INCOME-CONTINUING> (2,782,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,782,000)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> (.34)
</TABLE>
