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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED OR [X] TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM JANUARY 1, 1999 TO JUNE 30, 1999.
COMMISSION FILE NUMBER: 0-20206
PERCEPTRON, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-2381442
(State or other jurisdiction or (I.R.S. Employer
incorporation or organization) Identification No.)
47827 Halyard Drive
Plymouth, Michigan 48170-2461
(734) 414-6100
(Registrant's telephone number, including area code)
Securities registered pursuant to section 12(b) of the act: None
Securities registered pursuant to section 12(g) of the act:
COMMON STOCK, $0.01 PAR VALUE
RIGHTS TO PURCHASE PREFERRED STOCK
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on September
15, 1999, as reported by The Nasdaq Stock Market, was approximately $32,600,000
(assuming, but not admitting for any purpose, that all directors and executive
officers of the registrant are affiliates).
The number of shares of Common Stock, $0.01 par value, issued and outstanding as
of September 15, 1999, was: 8,169,152.
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PART I
ITEM 1: DESCRIPTION OF BUSINESS
GENERAL
Perceptron, Inc. ("Perceptron" or the "Company") designs, develops, manufactures
and markets information-based measurement and inspection focused solutions for
process improvement. The Company's systems provide process information to
address a number of measurement, guidance and inspection applications. Among the
product solutions offered by the Company are: (1) Gauging systems that provide
for 100% inline measurement for reduction of dimensional process variation; (2)
Systems that guide robots to perform precise tasks on the assembly line; (3)
Systems that inspect and detect defects on painted surfaces, and; (4) Forest
products sawmill systems that optimize the lumber production process.
Perceptron's product offerings are designed to improve quality, increase
productivity and decrease costs in the automotive and forest products
industries, as well as in a variety of other industries such as aerospace and
steel production.
The Company has two primary business segments: The Automotive business unit
segment and the Forest Products business unit segment. The Company has been
selling to the automotive industry since its inception in 1981. In 1997, the
Company acquired Autospect, Inc. ("Autospect") in order to develop products to
expand its offerings to the automotive paint shops. Products that are released
and are under development include those that identify defects in bare metal
prior to paint, measure the thickness of wet paint non-destructively, and
inspect finished painted bodies for a variety of defects. In 1999, the Company
merged Autospect with and into the Company and Autospect is now operated as part
of the Automotive business unit. The Company's Forest Products business unit was
created with the 1997 acquisitions of Trident Systems, Inc. and Nanoose Systems
Corporation. In October 1998, the Company expanded its forest products offerings
by acquiring the assets and ultrasound intellectual property from Sonic
Industries, Inc. and Sonic Technologies, Inc. The Company has engineering,
selling, assembly and installation resources in place to support customer
requirements for both of these market segments.
The Company's current principal products are based upon proprietary
three-dimensional image processing and feature extraction software algorithms
combined with two distinct three-dimensional object imaging technologies:
TriCam(TM) and LASAR(TM). TriCam(TM) technology uses structured laser light
triangulation techniques to obtain accurate three-dimensional measurements.
TriCam(TM) systems are used to measure formed parts for process control, to
provide robot guidance for automated assembly tasks and to perform non-contact
alignment functions. TriCam(TM) is also used by the Forest Products business
unit to measure three-dimensional shapes of trees, logs, boards and by-products.
LASAR(TM) provides accurate three-dimensional measurements of a full scene over
a larger field of view than does TriCam(TM). The LASAR(TM) product is used by
the Forest Products business unit for the three-dimensional measurement of
stems, logs, and cants.
The Company was incorporated in Michigan in 1981. Its headquarters are located
at 47827 Halyard Drive, Plymouth, Michigan 48170-2461, (734) 414-6100. The
Company also has operations in Ann Arbor, Michigan; Atlanta, Georgia; Hatboro,
Pennsylvania; British Columbia, Canada; Munich, Germany; Seoul, South Korea;
Rotterdam, The Netherlands; Sao Paulo, Brazil and Tokyo, Japan.
MARKETS
The Company has a multiple market approach, with the main focus being the
automotive industry. The Company has product offerings encompassing the entire
automobile manufacturing line, including stamping, general assembly, paint, trim
and final assembly. Perceptron's purchase of Trident and Nanoose in 1997 and
Sonic assets in 1998 increased its product and marketing efforts in the forest
and wood products markets. The Company believes that there may be potential
applications for its three-dimensional measurement systems in non-automotive
industries
as diverse as aerospace, food processing, appliances, robot and autonomous
vehicle guidance, and others. The foregoing statement is a "forward looking
statement" within the meaning of the Securities Exchange Act of 1934, as amended
("Exchange Act"). See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Safe Harbor Statement".
PRODUCTS AND APPLICATIONS
AUTOMOTIVE BUSINESS UNIT
Assembly Process Control System ("P-1000"): The P-1000 system, which uses TriCam
sensors, has been sold primarily to automotive manufacturers to measure large
formed vehicle body parts and assembled vehicle bodies. This system, which has
also been sold to the appliance industry, is used by manufacturers of large
formed parts and assemblies for process control. Installed directly in the
customer's manufacturing line, typically in connection with new model re-tooling
programs, the P-1000 system rapidly measures critical dimensions and performs
analyses to reduce part-to-part variation and deviations
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from design intent. By continually measuring and analyzing sources of variation,
the manufacturer can more quickly identify and correct manufacturing process
faults, thereby preventing defects from reaching the ultimate customer.
The P-1000 enables customers to reduce cost and increase both quality and
throughput by measuring and analyzing sources of variation to achieve continuous
process improvement. In addition, the P-1000 enables customers to shorten the
time it would otherwise take to launch a new product.
Intelligent Process Network ("IPNet(TM)"): IPNet(TM) is a sophisticated and
innovative new process control solution that links Internet technology with
plant-floor process management. The PC-based IPNet(TM) system provides the
capability for collection of in-line measurement information at any point in the
build or assembly process and the ability to monitor, analyze and distribute
that information throughout a plant or enterprise. IPNet(TM) uses Perceptron's
new line of digital sensors, and features an Internet Explorer graphical
interface, distributed and modular scalability to accommodate various sized
systems, and an open architecture that permits the integration of third-party
devices.
Robot Guidance System for automated assembly ("RGS"): The RGS system, which is
used for flexible assembly, incorporates TriCam(TM) sensors and high-speed
digital process electronics and proprietary software to provide robots
three-dimensional visual guidance to perform a variety of automated assembly
tasks. The RGS optically locates the position on an object and instructs a robot
to perform work on the located object. This product was developed in cooperation
with Mercedes-Benz, which provided specifications to enable the system to
address a broad range of applications. Other automotive companies, including
General Motors, Ford, Volvo, BMW and Opel, are currently using RGS systems.
The RGS system is currently used primarily by automotive companies in the
following applications, among others; windshield insertion, door assembly and
installation, hood and trunk lid installation, fuel tank installation, fender
mounting and instrument panel installation.
Non-Contact Wheel Alignment System ("NCA"): The NCA system, which uses
TriCam(TM) three-dimensional machine vision technology, was developed in close
cooperation with Ford Motor Company, which helped fund and was instrumental in
testing the technology. The NCA system is incorporated into original equipment
manufacturers' ("OEMs") wheel alignment equipment and offers a fast and accurate
non-contact method to align wheels, which reduces costly in-plant maintenance of
mechanical wheel alignment equipment. The Company supplies NCA systems to the
automotive market through a number of OEMs. In connection with the settlement of
certain litigation filed by the Company against Fori Automation alleging
infringement of certain of the Company's patents relating to non-contact wheel
alignment systems, the Company has licensed such patents to Fori on a
non-exclusive basis.
ScanWorks(TM): The ScanWorks(TM) measurement and dimensional analysis software
incorporates proprietary feature extraction algorithms, CAD data input, CAD to
scan comparison, data filtering and motion device interfaces in an operator
friendly, WindowsNT Graphical User Interface ("GUI"). The ScanWorks(TM) GUI
links the operator with measurement products such as the Company's OptiFlex-Pro
(formerly called Optical Checking Fixture) and OEM products. OptiFlex-Pro is a
non-contact three-dimensional surface scanner.
Dimensional Data Management ("DDM"): The DDM is a system that consolidates
in-line measurement data and provides data analysis tools to help identify,
trace, and eliminate sources of process variation and deviation from design
intent. The DDM product consists of both server and client software. The server
collects and stores dimensional data in a single database from Perceptron
measurement systems. The client software provides multiple users, both local and
remote, with the capability of monitoring and analyzing dimensional data.
QMS-I: The QMS-I is a measurement system for coated surfaces. The QMS-I checks
the painted surface quality of each vehicle as it exits the paint oven,
providing in-line quality trend analysis and process control information by
vehicle color, model, shift, etc. It generates four objective, repeatable, and
reproducible ratings of coated surfaces. Measurements are taken in seconds, and
data analysis is automated. With this information corrective action can be taken
before quality drops below acceptable levels. The QMS-I interfaces with the
Autospect "Paint Process Monitor" ("PPM"), a network that sends trend and
quality data to the plant and corporate paint supervision. The information
provided allows quick reaction to process changes, resulting in improved quality
and cost savings. The QMS-Battery Portable ("QMS-BP"), a hand-held meter
providing the same readings as the QMS-I, is used to monitor incoming parts and
is used in paint laboratories.
PaintScan: The PaintScan system (formerly Industrial Dirt Counter) checks the
amount of dirt and other defects that affect the painted surface quality of a
vehicle. The system prints out a profile of the vehicle and shows the location
of the defects to assist in repair. The system also provides trend analysis and
process control information to assist management in controlling the process. The
PaintScan system is in the final stages of Beta testing at a customer site.
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FOREST PRODUCTS BUSINESS UNIT
General: The Forest Products business unit sells a complete line of products for
mill wide scanning and optimization. These systems are based on an architecture
of optimization modules that contain common user interfaces, reporting systems
and scanning interfaces. The system runs on the WindowsNT platform.
Scanning and optimization systems are sold directly to sawmills and to a large
number of sawmill machinery manufacturers and systems integrators. One of the
distinct advantages of the Perceptron system is that it can operate on any
manufacturer's equipment. This allows the sawmill to choose the best mechanical
system for its own operations and receive the benefit of the Company's scanning
and optimization systems within the facility.
True Shape Bucking System ("TSB"): The TSB system optimizes the process of
cutting tree stems into logs. The system utilizes TriCam(TM) or LASAR(TM)
scanners to create a high density 3D surface map of a tree stem that needs to be
cut or "bucked" into logs. The stem is either scanned as it is conveyed lineally
through an arrangement of TriCam(TM) sensors or is scanned at rest with a
LASAR(TM) sensor. Optimization software then fits the customer's final products
into the model of the tree stem to determine the highest value manner in which
to cut up the stem to feed the sawmill. By controlling the raw material as it
enters the sawmill, mill production rates can be increased, more lumber can be
extracted from the same input raw material and higher quality lumber can be
produced.
True Shape Log Optimizer System ("TSO"): The TSO system optimizes the process of
log breakdown. The system utilizes TriCam(TM) or LASAR(TM) scanners to create a
high-density 3D surface map of a log. Optimization software fits the customer's
final products into the model of the log to determine the highest value manner
in which to cut up the log.
The TSO system enables lumber manufacturers to optimize the value from the logs
in the sawmill by using analysis algorithms to statistically evaluate the log
topography to optimize what grade lumber should be cut from the log. The
addition of a TSO to a sawmill increases the amount and value of the final
products that can be derived from the input logs.
True Shape Log Sorter System ("TSS"): The TSS system optimizes the process of
log sorting. Certain customers prefer to sort logs into batches with common
characteristics and then feed them into the sawmill at high rates with a fixed
cutting scenario or pattern. The system utilizes TriCam(TM) scanners to create a
high-density 3D surface map of a log. Optimization software fits all of the
potential customer cutting scenarios into the log models and sorts the logs by
the pattern that will produce the highest value.
The TSS system allows lumber manufacturers to optimize the value of the logs
entering the sawmill based on pre-defined patterns. This technique provides an
increased value over past systems that simply measured the small end diameter of
the log as the sorting criteria.
True Shape Cant Optimizer System ("TSC"): The TSC system optimizes the process
of cant (a log with two cut sides) breakdown. The system utilizes TriCams,
Transverse TriCams (a TriCam(TM) derivative sensor in which the cant is scanned
as it is conveyed transversely though an arrangement of special TriCams) or
LASAR(TM) scanners to create a high-density 3D surface map of the cant.
Optimization software fits the customer's final products into the model of the
cant to determine the highest value manner in which to cut up the cant in the
sawmill. The TSC system can model either straight sawing systems or the recently
popular curve sawing systems. The optimization software can also process
grade-input data to facilitate high-grade cutting patterns for maximum grade
utilization.
True Shape Edger Optimizer System ("TSE"): The TSE system optimizes the process
of flitch edging (a flitch is an un-edged board cut from the side of a log) by
utilizing TriCams or Transverse TriCams scanners to create a high-density 3D
surface map of the flitch. Optimization software fits the customer's final board
products into the model of the flitch to determine the highest value manner in
which to cut up the flitch in the sawmill.
True Shape Trimmer Optimizer System ("TST"): The TST system optimizes the
processes of board trimming by utilizing Transverse TriCams scanners to create a
high-density 3D surface map of the untrimmed board. Optimization software fits
the customer's final board products into the untrimmed board model to determine
the highest value manner in which to trim the board.
Mill Controller System: The Mill Controller system is a software package that
allows sawmill operators to define what orders they need filled for their
customers. The system links this information with the optimizers in the sawmill
to produce the lumber required to fill these orders.
The Mill Controller adds a level of control to the sawmill operator that was
previously unavailable. Typical optimizer systems attempt to maximize recovered
value from raw material without regard to the actual orders that the sawmill
needs to fill. By utilizing the Mill Controller, the sawmill can now balance
value-based recovery with the time based requirement to fill orders.
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Lumber Analyzer System: The Lumber Analyzer system utilizes ultrasonic
technology to find defects in finished lumber. Defects such as splits, rot,
voids and cracks are important to secondary manufacturers who process dried
lumber into finished products such as furniture and moldings. The application of
a Lumber Analyzer system can save secondary manufacturers money by identifying
these defects and improving cutting decisions and raw material utilization. The
Lumber Analyzer system is in Beta testing at a customer site.
SALES AND MARKETING
To date, the Company has marketed its systems either directly to the end users
of the Company's systems, or to system integrators, value-added resellers
("VARs") or OEMs who in turn sell to the same end users and offer access to new
markets.
The Company's direct sales efforts are conducted by the Company's account
executives. These account executives develop a close consultative selling
relationship with the Company's customers. Perceptron's senior management works
in close collaboration with customers' senior executives. The Company intends to
continue this marketing strategy for its automotive and aerospace process
control systems and for selected forest and wood products applications.
With respect to the RGS system for robot guidance, the NCA system for wheel
alignment, various aerospace sales activities and sales to the forest and wood
products industry, the Company's marketing strategy is focused primarily on
sales to selected system integrators, OEMs and VARs who integrate the Company's
products into their systems for sale to end user customers.
The Company has formed an Emerging Markets business unit. This unit is charged
with finding and developing applications for existing software and hardware
products in aerospace markets as well as bringing to market several new software
product offerings.
The Company's principal customers have historically been automotive companies
that the Company either sells to directly or through system integrators or OEMs.
The Company's products are typically purchased for installation in connection
with new model re-tooling programs undertaken by these companies. Because sales
are dependent on the timing of customers' re-tooling programs, sales by customer
vary significantly from year to year, as do the Company's largest customers. For
the six months ended June 30, 1999, approximately 25% of total revenues were
derived from three automotive companies (General Motors, Ford and
DaimlerChrysler). For the years ended December 31, 1998, 1997 and 1996,
approximately 22%, 38% and 46%, respectively, of total revenues were derived
from the same three customers. For the six months ended June 30, 1999 and years
ended December 31, 1998, 1997 and 1996, 8%, 13%, 17% and 16% of net sales,
respectively, were to system integrators and OEMs for the benefit of the same
three automotive companies. During the six months ended June 30, 1999, sales to
DaimlerChrysler and KUKA Schweissanlagen each exceeded 10% of the Company's
total net sales.
MANUFACTURING AND SUPPLIERS
The Company's manufacturing operations consist primarily of final assembly and
testing, along with integrating the Company's software with individual
components, including printed circuit boards, which are manufactured by third
parties according to Company developed designs. With a low level of vertical
integration, the Company believes it gains significant manufacturing
flexibility, while minimizing total product costs.
The Company purchases a number of component parts and assemblies from single
source suppliers. With respect to most of its components, the Company believes
that alternate suppliers are readily available. Significant delays or
interruptions in the delivery of components or assemblies by suppliers, or
difficulties or delays in shifting manufacturing capacity to new suppliers,
could have a material adverse effect on the Company. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Year
2000 Readiness Disclosure".
INTERNATIONAL OPERATIONS
Europe: The Company's European operations have contributed approximately 39%,
30%, 23% and 20% of the Company's revenues during the six months ended June 30,
1999 and the years ended 1998, 1997 and 1996, respectively. The Company's
wholly-owned subsidiary, Perceptron Europe B.V. ("Perceptron B.V."), is located
in Rotterdam, The Netherlands. Perceptron B.V. holds a 100% equity interest in
Perceptron Europe GmbH ("Perceptron GmbH"), which is located outside of Munich,
Germany. The Company currently employs 41 people in its European operations.
Asia: The Company operates a direct sales and application office in Seoul, Korea
and a branch sales office in Tokyo, Japan.
South America: The Company has a direct sales office in Sao Paulo, Brazil to
service automotive customers in South America.
The Company's foreign operations are subject to certain risks typically
encountered in such operations, including fluctuations in foreign currency
exchange rates and controls, expropriation and other economic and local policies
of foreign governments,
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and the laws and policies of the U.S. and local governments affecting foreign
trade and investment. For information regarding net sales, operating profit
(loss) and identifiable assets of the Company's foreign operations, see Note 14
to the Consolidated Financial Statements, "Segment and Geographic Information".
COMPETITION
The Company believes that the principal competitive factors in the Company's
automotive markets are total capability as a process control system and, with
certain of the Company's products, system price. There are a number of companies
that sell similar and/or alternative technologies and methods into the same
markets as the Company.
The Company believes that the principal competitive factors in the Company's
forest and wood products markets are its capability as a process control system
and the value added when installed in a wood mill. In the forest and wood
products markets, there are a number of companies that sell similar and/or
alternative technologies and methods into the same markets as the Company.
The Company believes that there may be other entities, some of which may be
substantially larger and have substantially greater resources than the Company,
which may be engaged in the development of technology and products, which could
prove to be competitive with those of the Company. In addition, the Company
believes that certain existing and potential customers may be capable of
internally developing their own technology. There can be no assurance that the
Company will be able to successfully compete with any such entities, or that any
competitive pressures will not result in price erosion or other factors, which
will adversely affect the Company's financial performance.
BACKLOG
As of June 30, 1999, the Company had a total backlog of $27.8 million, compared
to $23.5 million at December 31, 1998 and $24.2 million as of December 31, 1997.
The Automotive business unit's backlog was $22.5 million, $17.9 million and
$18.4 million at June 30, 1999, December 31, 1998 and 1997, respectively. The
Forest Products business unit's backlog was $5.3 million, $5.6 million and $5.8
million at June 30, 1999, December 31, 1998 and 1997, respectively. Most of the
backlog is subject to cancellation by the customer. 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 its backlog by June 30, 2000.
RESEARCH AND DEVELOPMENT
As of June 30, 1999, 114 persons employed by the Company were focused primarily
on research, development and engineering relating to three-dimensional machine
vision systems and related software. For the six months ended June 30, 1999 and
years ended December 31, 1998, 1997 and 1996, the Company's research,
development and engineering expenses were $6.5 million, $11.4 million, $8.9
million and $7.3 million, respectively.
The Company engages in research and development ("R&D") to enhance its existing
products, to adapt existing products to new applications and to develop new
products to meet new market opportunities. The Company is involved in a
continuous product improvement program for its products intended to enhance
performance, reduce costs and incorporate new technological advances. To this
end, the Company is engaged in strategic alliances with a number of research and
development institutions. Recent customer recognition of the power of Web-based
or Web-like informational navigation for manufacturing operations has involved
the Company in pilot projects for widely distributed measurement systems and
remote information accessibility.
The Company has received a NIST-ATP award to participate in a joint venture to
develop a robot guidance system for powertrain assembly automation. The
Company's in-kind development contribution is approximately $500,000 over a
four-year period that began in 1998. The joint venture is administered by the
National Center for Manufacturing Sciences and includes a major automotive
manufacturer.
In late 1995, Autospect received a $1.8 million NIST grant that provided funding
over three years for development of a system to measure the thickness of wet
film (e.g. paint). During 1998, 1997 and 1996, the Company recorded
reimbursements of $800,000, $600,000 and $400,000, respectively, which offset
the related costs. Prototype testing was completed in 1998. The system was
installed in a manufacturing environment during the first six months of 1999 and
is currently being tested.
PATENTS, TRADE SECRETS AND CONFIDENTIALITY AGREEMENTS
The Company owns eleven U.S. patents and ten pending U.S. patent applications,
which relate to various products and processes manufactured, used, and/or sold
by the Company. In addition, the Company also owns corresponding foreign patents
in Canada, Europe and Japan and has several patent applications pending in
foreign locations. These U.S. patents expire from 2004 through 2016 and the
Company's existing foreign patent rights expire from 2008 through 2011.
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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 these customers, including one customer
who was a party to a patent infringement suit relating to this matter, have
settled such claims. 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 any such
claim or any possible customer claim for indemnity relating to claims against
these customers, it is not possible to estimate the ultimate effect, if any, of
this matter on the Company's financial position.
The Company has registered, and continues to register, various trade names and
trademarks, including SCANWORKS, OPTIFLEX, PERCEPTRON, DATACAM, LASAR, VERISTAR,
DRISCAN, TRICAM, AUTOSPECT, IPNET and PAINTSCAN, among others, which are used in
connection with the conduct of its business.
The Company's software products are copyrighted and generally licensed to
customers pursuant to license agreements that restrict the use of the products
to the customer's own internal purposes on designated Perceptron equipment.
EMPLOYEES
As of June 30, 1999, the Company employed 338 persons. None of the employees are
covered by a collective bargaining agreement and the Company believes its
relations with its employees to be good.
ITEM 2: FACILITIES
Perceptron's principal domestic facilities consist of a 70,000 square foot
building located in Plymouth, Michigan, owned by the Company, a 20,500 square
foot leased facility in Ann Arbor, Michigan, a 13,000 square foot leased
building in Atlanta, Georgia and a 3,500 square foot leased facility in Hatboro,
Pennsylvania. In addition, the Company leases a 1,350 square meters facility in
Munich, Germany, a 1,000 square foot facility in Rotterdam, The Netherlands, a
6,200 square foot facility in British Columbia, Canada, and offices in Sao
Paulo, Brazil, Seoul, Korea and Tokyo, Japan. Primary facilities used by the
Automotive business unit are Plymouth and Ann Arbor, Michigan and the German and
The Netherlands locations. Primary facilities used by the Forest Products
business unit are Plymouth, Michigan, Atlanta, Georgia, and the Canadian
location. The Company believes that its current facilities are sufficient to
accommodate its requirements through the year 2000.
ITEM 3: LEGAL PROCEEDINGS
On December 11, 1998, a jury in a civil case in the U.S. District Court for the
Eastern District of Michigan returned a favorable judgement for the Company and
awarded damages of over $732,000. The suit, filed by the Company in June 1996,
charged Sensor Adaptive Machines, Inc. ("SAMI") with violation of a covenant not
to compete. SAMI filed counterclaims against the Company alleging, in part, that
the Company was engaged in unlawful monopolization and tortious interference
with business practice and sought 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 jury found that the remaining
counterclaims were without merit. On March 4, 1999, the Company's motion for
interest was granted. SAMI has appealed the judgement including the
counterclaims against the Company.
On September 25, 1998, the U.S. District Court for the Eastern District of
Michigan dismissed, with prejudice, a suit filed against the Company by Speroni,
S.p.A. ("Speroni"). Speroni has appealed the dismissal. The suit alleged
tortious interference in conjunction with exclusive distributorship contracts
covering the sale of P-1000 products in Italy and France between Perceptron
B.V., a wholly-owned subsidiary of the Company, and Speroni. Speroni sought
unspecified compensatory damages and punitive damages. Perceptron B.V.
terminated the exclusive distributorship contracts in 1997 for breach of
contract by Speroni and has sought arbitration of this matter with the
International Chamber of Commerce International Court of Arbitration ("ICC"), to
confirm the terminations and to award damages. Speroni has filed counterclaims
with the ICC alleging breach of the exclusive distributorship contracts and
seeking damages of $6.5 million. An arbitration hearing has been conducted and
Perceptron B.V. is awaiting the decision of the arbitrator. The Company intends
to vigorously pursue its claims and defend Speroni's claims.
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ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on June 24, 1999 at which
the following action was taken:
1. The Shareholders elected the following persons as the Company's Board
of Directors, and the results of the vote on this matter were as follows:
<TABLE>
<CAPTION>
Name For Withheld Broker Non-Votes
------------------ ----------- --------- ----------------
<S> <C> <C> <C>
David J. Beattie 5,644,548 497,849 -
Philip J. DeCocco 5,643,816 498,581 -
Robert S. Oswald 5,644,704 497,693 -
Alfred A. Pease 5,644,066 498,331 -
Terryll R. Smith 5,643,860 498,537 -
</TABLE>
2. The Shareholders approved an amendment to the Company's 1992 Stock
Option Plan to increase the shares of Common Stock available for grant under
such plan by 300,000 shares. As to this proposal, 2,244,284 shares voted "for",
1,188,964 shares voted "against", 749,448 shares "abstained", and 1,955,651
shares were "broker non-votes".
3. The Shareholders approved amendments to the Company's Directors Stock
Option Plan which (i) extended the expiration date to make new grants of options
under the Directors Plan from February 9, 2000 until February 9, 2005; (ii)
increased the total number of shares of the Company's Common Stock available for
grant under such plan by 150,000 shares; (iii) granted to each Director, at the
time of the 1999 Annual Meeting, an additional option to purchase 10,000 shares
of Common Stock, in lieu of the 1,500 shares of Common Stock which would
otherwise have been granted in 1999 under the Directors Plan; and (iv) revised
the number of shares of Common Stock granted to each Director at the time of
each Annual Meeting (other than the 1999 Annual Meeting), from 1,500 shares to
3,000 shares of Common Stock. As to this proposal, 2,785,780 shares voted "for",
638,679 shares voted "against", 758,237 shares "abstained", and 1,955,651 shares
were "broker non-votes".
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<PAGE> 9
PART II
ITEM 5: MARKET FOR THE REGISTRANTS'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
Perceptron's Common Stock is traded on The Nasdaq Stock Market's National Market
under the symbol "PRCP". The following table shows the reported high and low
sales prices of Perceptron's Common Stock for the calendar year periods
indicated:
<TABLE>
<CAPTION>
Period Prices
------ ------
Low High
---------- ----------
<S> <C> <C>
1996
First Quarter................................................... $ 17.75 $ 27.00
Second Quarter.................................................. $ 25.50 $ 39.00
Third Quarter................................................... $ 24.50 $ 37.75
Fourth Quarter.................................................. $ 23.50 $ 37.50
1997
First Quarter................................................... $ 25.25 $ 38.13
Second Quarter.................................................. $ 25.25 $ 30.75
Third Quarter................................................... $ 24.88 $ 34.50
Fourth Quarter.................................................. $ 19.13 $ 30.75
1998
First Quarter................................................... $ 17.75 $ 24.50
Second Quarter.................................................. $ 9.38 $ 20.50
Third Quarter................................................... $ 5.63 $ 11.88
Fourth Quarter.................................................. $ 4.25 $ 11.25
1999
First Quarter................................................... $ 3.53 $ 9.88
Second Quarter.................................................. $ 3.75 $ 6.25
Third Quarter (July 1, 1999 through September 15, 1999)......... $ 3.56 $ 5.75
</TABLE>
No cash dividends or distribution on Perceptron's Common Stock have been paid
and it is not anticipated that any will be paid in the foreseeable future. In
addition, the payment of cash dividends or other distributions is prohibited
under the terms of Perceptron's revolving credit agreement with its bank. See
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations Liquidity and Capital Resources", for a discussion of other
restrictions on the payment of dividends.
The approximate number of shareholders of record on September 15, 1999, was 279.
9
<PAGE> 10
ITEM 6: SELECTED CONSOLIDATED FINANCIAL INFORMATION
PERCEPTRON, INC. AND SUBSIDIARIES
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
Six Months Ended Six Months Ended ---------------------------------------------------
Statement of Operations Data(1): June 30, 1999(2) June 30, 1998 1998 1997 1996 1995 1994
-------------- ------------- ---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $21,256 $18,310 $49,635 $65,102 $58,975 $43,154 $33,224
Gross profit 10,488 9,458 27,193 40,025 35,367 26,184 19,248
Operating income (loss) (6,660) (5,156) (5,776) 14,861 9,306 7,699 6,046
Income (loss) before income taxes (7,349) (4,768) (5,143) 16,009 10,245 8,227 6,179
Net income (loss) (4,860) (3,171) (3,339) 10,806 7,150 8,491 6,179
Net income (loss) per diluted
average common share (.59) (.38) (.41) 1.28 .86 1.07 .80
Weighted average common
shares outstanding - diluted 8,185 8,250 8,239 8,412 8,309 7,955 7,695
<CAPTION>
As of December 31,
As of As of ---------------------------------------------------
Balance Sheet Data: June 30, 1999 June 30, 1998 1998 1997 1996 1995 1994
------------- ------------- ---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital $34,569 $41,582 $40,094 $45,604 $34,444 $28,119 $19,023
Total assets 61,334 62,030 66,408 68,142 61,456 42,017 25,750
Long-term liabilities 4,265 - 1,040 - - - -
Shareholders' equity 48,064 54,124 54,852 57,879 46,447 31,049 20,346
</TABLE>
- ------------------------------------------------
1 No cash dividends have been declared or paid during the periods presented.
2 In 1999, the Company elected to change its reporting period from a calendar
year ending December 31 to a fiscal year ending June 30. As a result, 1999
represents a six-month transition period.
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<PAGE> 11
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Perceptron, Inc. ("Perceptron" or the "Company") designs, develops, manufactures
and markets information-based measurement and inspection focused solutions for
process improvement primarily for the automotive and forest products industries.
The Company's current principal products are based upon proprietary
three-dimensional image processing and feature extraction software algorithms
combined with two distinct three-dimensional object imaging technologies:
TriCam(TM) and LASAR(TM). TriCam(TM) technology uses structured laser light
triangulation techniques to obtain accurate three-dimensional measurements.
TriCam(TM) systems are used to measure formed parts for process control, to
provide robot guidance for automated assembly tasks and to perform non-contact
alignment functions. TriCam(TM) is also used by the Forest Products business
unit to measure three-dimensional shapes of trees, logs, boards and by-products.
LASAR(TM) provides accurate three-dimensional measurements of a full scene over
a larger field of view than does TriCam(TM). The LASAR(TM) product is used by
the Forest Products business unit for the three-dimensional measurement of
stems, logs and cants.
The Company has two business segments: the Automotive business unit segment and
the Forest Products business unit segment. The Company's Automotive business
unit has sold its products primarily to North American, European and, to a
lesser extent, Asian and South American automobile manufacturers. Historically,
sales to automotive customers have typically depended primarily on new model
re-tooling programs. Accordingly, sales may vary significantly among customers
on a year-to-year and quarter-to-quarter basis. The Company's Forest Products
business unit has sold its products primarily to North American sawmills,
sawmill machinery manufacturers and systems integrators.
On June 24, 1999, the Company elected to change its reporting period from a
calendar year ending December 31, to a fiscal year ending June 30. As a result,
this Form 10-K represents a transition period report covering the period January
1, 1999 through June 30, 1999. The first full year to be reported on a fiscal
year basis will be for the twelve-month period ended June 30, 2000.
In October 1998, the Company acquired the assets and ultrasound intellectual
property, and assumed certain liabilities, of Sonic Industries, Inc. and Sonic
Technologies, Inc. ("Sonic") of Hatboro, Pennsylvania. Sonic designs and markets
ultrasound scanning systems, principally for forest product applications.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999, COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Overview. The Company reported a net loss of $4.9 million ($0.59 per share) for
the six months ended June 30, 1999 compared to a loss of $3.2 million ($0.38 per
share) in the same 1998 period. Net sales of $21.3 million for the six months
ended June 30, 1999 were up $3.0 million, or 16%, over the comparable 1998
period sales of $18.3 million. Automotive sales accounted for 85% of total sales
during the six months ended June 30, 1999 compared to 81% in the same 1998
period. Forest Product sales represented 15% of total sales for 1999 compared to
19% in the six months ended June 30, 1998. Net Domestic sales remained flat at
$12.4 million for both the 1999 and 1998 six-month periods ended June 30. Net
International sales increased $2.9 million from $5.9 million in the six months
ended June 30, 1998 to $8.8 million in the 1999 six-month period. Gross profit
as a percent of net sales for the 1999 period was 49.3% compared to 51.7% in
1998 principally reflecting both competitive pricing pressure on the Company's
mature product lines and the effect of currency declines principally in the
Deutsch mark. Operating expenses were up $2.5 million in the six months ended
June 30, 1999 compared to 1998, reflecting higher costs for research and
development work on new products, the Company's global marketing initiatives,
incremental expenses associated with the ultrasound technology acquisition and
certain non-recurring and unusual items for aged accounts receivable primarily
related to the Company's Autospect and Trident Systems operations. The six month
comparison also reflects reduced net interest income of $417,000 as a result of
lower cash balances and higher other expenses of $671,000 for legal fees related
to a civil action discussed in Item 3, "Legal Proceedings".
Automotive. Sales in the six months ended June 30, 1999 increased $3.2 million,
or 22%, to $18.0 million compared to $14.8 million in 1998. P-1000 sales
accounted for approximately 60% of net Automotive sales in the 1999 period
compared to approximately 51% in the same period of 1998. RGS and NCA systems
sales accounted for 18% of net sales in 1999 compared to 32% in 1998. The
variance in RGS and NCA sales is a function of the timing of orders by the
Company's customers. Other product sales, which during the 1999 six-month period
included early sales of the Company's new products (principally the Company's
web-based Intelligent Process Network ("IPNet") and the first developmental
system to inspect wet film paint thickness), represented 15% of net 1999
Automotive sales as compared to 12% in the six-month 1998 period.
Training and service revenues accounted for the remainder of net sales in both
years.
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<PAGE> 12
Forest Products. Sales in the six months ended June 30, 1999 were $3.3 million,
down $200,000 or 8% from the comparable 1998 period sales of $3.5 million. The
lower sales level in the 1999 period reflected postponement of capital purchases
in late 1998 by mills affected by the soft dimension lumber market. During the
six months ended June 30, 1999, the Company sold its first Lumber Analyzer
system, an ultrasound technology product that the Company acquired in the fourth
quarter of 1998.
Bookings & Backlog. New order bookings for the six months ended June 30, 1999
were $25.6 million compared to $18.8 million in the 1998 period. Automotive
bookings totaled $22.6 million in the 1999 period compared to $14.7 million a
year ago. The increased Automotive bookings in 1999 is primarily related to
orders for the Company's new IPNet product and RGS and NCA systems. Forest
Product bookings were $3.0 million in 1999 compared to $4.1 million a year ago.
The 1999 period includes a $1.1 million two-year blanket order for the Lumber
Analyzer system. The new order bookings net of sales resulted in a backlog at
June 30, 1999 of $27.8 million compared to $24.7 million in 1998. The amount of
new order bookings and the level of backlog during any particular period is not
necessarily indicative of the future operating performance of the Company.
Gross Profit. Gross profit was $10.5 million, or 49.3% of sales, in the six
months ended June 30, 1999, as compared to $9.5 million, or 51.7% of sales, in
the 1998 six months. The percentage decrease reflected both competitive pricing
pressure on the Company's mature product lines and the effect of currency
declines principally in the Deutsch mark.
Selling, General and Administrative Expenses (SG&A). SG&A expenses increased
from $9.3 million in the six months ended June 30, 1998 to $10.7 million in the
same 1999 period. The increase was due to SG&A costs incurred by the ultrasound
division of the Forest Products business unit which were not in the 1998 period,
increased personnel and related expenses to support the Company's global
marketing activities, and bad debt expenses incurred during 1999. The bad debt
expenses incurred in 1999 primarily were for the final resolution of aged
accounts receivable primarily related to the Company's Autospect and Trident
Systems operations.
Engineering, Research and Development Expenses (R&D). Engineering and R&D
expenses increased from $5.3 million in the six months ended June 30, 1998 to
$6.5 million in the 1999 period. The increase in expenses primarily reflect the
Company's continued investments in new product development including engineering
costs for ultrasound technology that were not in the 1998 period. The Company
began to realize revenue from some of the new products during the six-month
period ended June 30, 1999.
Other Income and Deductions. Other income and deductions decreased from income
of $388,000 in the six months ended June 30, 1998 to deductions of $689,000 in
the 1999 period. The $1.1 million net unfavorable change was primarily due to
$671,000 of legal expenses related to a civil action for which the Company was
awarded a favorable judgement. The Company is in the process of trying to
collect on this judgement. The six month comparison was also impacted by reduced
interest income from lower cash balances and higher interest expense related to
borrowings under the Company's Revolving Credit Agreement and the debt assumed
in October 1998 related to the ultrasound technology acquisition.
Outlook. Based on the backlog as of June 30, 1999, the current rate of new
orders and the prospects for its new products, the Company's near-term sales
outlook is good and, as a result, performance over the next several quarters is
expected to improve relative to comparable periods one year ago. The foregoing
statements contain "forward looking statements" within the meaning of the
Securities Exchange Act of 1934. Actual results could differ materially from
those in the forward looking statements due to a number of uncertainties,
including those described under Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Safe Harbor Statement", below.
YEAR ENDED DECEMBER 31, 1998, COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net Sales. Net sales of $49.6 million in 1998 decreased by $15.5 million, or
24%, compared with net sales of $65.1 million in 1997. Net Domestic sales
decreased from $49.5 million in 1997 to $34.7 million in 1998. Net International
sales decreased from $15.6 million in 1997 to $14.9 million in 1998. The total
decrease in net sales for 1998 was principally accounted for by a $12.4 million,
or 32%, decrease in sales of P-1000 systems and a $3.0 million, or 29%, decrease
in sales of RGS and NCA systems. Because the P-1000 system has been widely
received, particularly in North America, by the automotive industry for several
years, the sales decline for this system was not unexpected. The RGS and NCA
systems' decrease was primarily due to the timing of new orders. Forest
Products' sales were up slightly compared with 1997.
P-1000 systems accounted for 54% of net sales in 1998 and 60% of net sales in
1997. The RGS and NCA systems combined accounted for 15% of net sales in 1998
and 16% in 1997. Forest Products sales accounted for 20% of net sales in 1998
and 15% of net sales in 1997. Training and service revenues and other product
sales accounted for the remainder of net sales in both years.
New order bookings for 1998 totaled $48.9 million, compared to $66.1 million in
1997. Domestic orders declined from $50.4 million in 1997 to $32.9 million in
1998 while International orders were up from $15.7 million in 1997 to $16.0
million in 1998.
12
<PAGE> 13
P-1000 systems accounted for 60% of new order bookings in 1998 and 50% in 1997.
RGS and NCA bookings accounted for 6% of bookings in 1998 and 17% in 1997.
Forest Product bookings were 20% of the total in 1998 and 19% in 1997. Training
and service and other product sales accounted for the remainder of net bookings
in both years. The decrease in new order bookings in 1998 compared with 1997 was
principally due to RGS and NCA systems and, to a lesser extent, lower orders for
P-1000 systems, Forest Product systems, and Autospect paint inspection systems.
RGS and, in particular NCA systems, orders were down due to the timing of new
blanket purchase orders from several customers. The Forest Product systems'
order decline reflected; (1) forest industry cash constraints related to weak
demand for lumber and (2) reduced orders for LASAR based systems due to required
system reengineering. Autospect paint inspection systems' new orders were lower
than anticipated due to delays in new product development.
Gross profit. Gross profit was $27.2 million, or 54.8%, of sales in 1998
compared with $40.0 million, or 61.5%, of sales in 1997. The percentage decrease
was due primarily to the lower sales volume which led to under-absorbed fixed
overhead and, to a lesser extent, sales mix and higher manufacturing, warranty
and installation costs.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $20.1 million, or 40.6%, of sales in 1998 compared
with $16.0 million, or 24.5%, of sales in 1997. This increase was due primarily
to added personnel and associated expenses, such as travel and telephone,
required to support the development of domestic and international markets for
Automotive and Forest Products. Incremental cost increases associated with the
acquisitions during 1997 and 1998 also contributed to the year over year
spending increase.
Engineering, research and development. Engineering, research and development
expenses increased from $8.9 million, or 13.7% of sales in 1997, to $11.4
million, or 22.9% of sales in 1998. The increase was primarily due to additional
personnel as well as higher material and testing expenditures to support
products under development.
Intangible asset write-off. During 1998, the Company developed a new suite of
non-contact three-dimensional measurement technologies, which superceded certain
existing technologies recorded as intangible assets. As a result, the carrying
value of these intangible assets was evaluated for impairment. This evaluation
resulted in a write-off of intangible assets with a net book value of $1.5
million.
Interest income, net. Interest income, net, decreased from approximately $0.9
million in 1997 to $0.7 million in 1998, due to lower average cash balances
during 1998.
YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Sales The Company's net sales increased by 10% from $59.0 million in 1996 to
$65.1 million in 1997. Net Domestic sales increased from $46.1 million in 1996
to $49.5 million in 1997. Net International sales increased from $12.9 million
in 1996 to $15.6 million in 1997. The total increase in net sales for 1997 was
accounted for by a 5% increase in sales of P-1000 systems, a 45% increase in
sales of RGS and NCA systems, and a 21% increase in the sale of Forest Product
systems in North America.
P-1000 systems accounted for 63% of net sales in 1996 and 60% of net sales in
1997. The RGS and NCA systems combined accounted for 12% of net sales in 1996
and 16% in 1997. Forest Products sales accounted for 13% of net sales in 1996
and 15% of net sales in 1997. Training and service revenues and other product
sales accounted for the remainder of net sales in both years.
New order bookings for 1996 totaled $64.7 million, compared to $66.1 million in
1997. Domestic orders were up from $49.7 million in 1996 to $50.4 million in
1997 and International orders were up from $15.0 million in 1996 to $15.7
million in 1997. P-1000 systems accounted for 66% of new order bookings in 1996
and 50% in 1997. RGS and NCA bookings accounted for 13% of bookings in 1996 and
17% in 1997. Forest Product bookings were 10% of the total in 1996 and 19% in
1997. Training and service and other product sales accounted for the remainder
of net bookings in both years. The increase in new order bookings in 1997 was
principally due to Forest Product orders, orders for RGS and NCA systems and
orders for Autospect paint inspection products, offset by a decline in P-1000
orders.
Gross profit. Gross profit increased from $35.4 million in 1996 to $40.0 million
in 1997, and as a percentage of net sales increased from 60.0% in 1996 to 61.5%
in 1997. The percentage increase is due primarily to increased sales of higher
gross margin products and, to a lesser extent, to the lower gross profit
percentage associated with sales by the Company of a new product, which was
integrated into equipment acquired from an original equipment manufacturer
("OEM"), and sold as a complete system in 1996.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by 4% from $15.4 million in 1996 to $16.0
million in 1997. This increase is due primarily to increases in personnel and
various operating expenses required to support the increased 1997 operating
activity and, to a lesser extent, to costs associated with the recent
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<PAGE> 14
acquisitions partially offset by decreased management performance bonuses.
Additionally, 1996 expenses included a non-recurring charge related to a special
compensation program at one of the acquired companies. As a percentage of net
sales, selling, general and administrative expenses decreased from 26.1% in 1996
to 24.5% in 1997.
Engineering, research and development. Engineering, research and development
expenses increased by 23%, from $7.3 million in 1996, to approximately $8.9
million in 1997, due primarily to increased personnel and, to a lesser extent,
to increased expenditures for materials associated with products under
development. As a percentage of net sales, engineering, research and development
expenses increased from 12.4% in 1996 to 13.7% in 1997.
Non-cash stock compensation expense. During 1996, some participants in the
Company's stock option plan used Perceptron stock options to pay the exercise
price of stock options issued under the plan. Accounting rules required the
recording of a non-cash compensation expense relating to these exercises. The
Company took action to eliminate the provision in its stock option plans which
otherwise might have resulted in similar non-cash stock compensation expense in
1997 and future years.
Interest income, net. Interest income, net, increased from approximately $0.7
million in 1996 to $0.9 million in 1997, due to increased cash balances and
related investing activities during 1997.
Income before provision for income taxes. In 1996, Perceptron had income before
provision for income taxes of approximately $10.2 million representing 17.4% of
net sales, as compared to 1997 income before provision for income taxes of
approximately $16.0 million representing 24.6% of net sales. Without the
non-cash stock compensation charge, the results for 1996 would have been $13.4
million, or 22.8% of net sales in 1996.
Net income. Net income in 1997 was $10.8 million, or 16.6% of net sales,
resulting in $1.28 per diluted share. In 1996, net income was $7.2 million, or
12.1% of net sales, resulting in $.86 per diluted share. Excluding the non-cash
stock option compensation expense, the 1996 net income would have been $9.2
million, 15.6% of net sales, or $1.11 per diluted share.
LIQUIDITY AND CAPITAL RESOURCES
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1999
The Company's cash and cash equivalents were $4.2 million at June 30, 1999,
compared to $5.8 million at December 31, 1998. The decrease of $1.6 million in
cash for the six months resulted primarily from $3.4 million used in operations
and $1.0 million used for capital spending, offset by $3.0 million of cash
provided from financing activities.
The use of cash for operations reflected the net loss for the quarter adjusted
for non-cash items, offset by reductions in working capital requirements.
Receivables decreased $4.3 million as a result of collections and a lower sales
level in the first six months of 1999 compared to the last six months of 1998.
The increase of $959,000 in inventory primarily represented purchases of
component parts needed to fulfill orders. The decrease in accounts payable and
other current assets and liabilities totaling $1.2 million primarily reflected
the timing of payments and a lower expense level in the second quarter of 1999
compared to the fourth quarter of 1998.
Financing activities during the six-month period ended June 30, 1999 reflected
net working capital borrowings of $3.2 million. Also in the first quarter of
1999, the Company completed its stock repurchase program with the purchase of
50,000 shares of its common stock for $257,000. The Company may buy shares of
its common stock on the open market or in privately negotiated transactions from
time to time, based on market prices, to meet the continuing share requirements
of the Company's stock-based incentive programs.
At June 30, 1999, the Company had a $15.0 million unsecured Revolving Credit
Agreement ("Revolver") that expires on May 31, 2001. Proceeds under the Revolver
may be used for general corporate purposes and can be designated as a Floating
Rate Loan or as a Eurodollar Rate Loan. Interest on Floating Rate borrowings is
calculated daily at 1/2% below the bank's prime rate which was 8.25% as of
August 31, 1999 and is payable on the last day of each month. Interest on
Eurodollar Rate borrowings is calculated at a Eurodollar Rate for the period
chosen (approximately 7% as of September 2, 1999) and is payable on the last day
of the applicable period. Quarterly, the Company pays a commitment fee of 1/4%
per annum on the daily unused portion of the Revolver. The Revolver prohibits
the Company from paying dividends. In addition, the Revolver contains various
financial covenants that restrict dividend payments by requiring the Company to
maintain a Fixed Charge Coverage Ratio and a Total Liabilities to Tangible Net
Worth Ratio. Effective June 30, 1999, the Revolver was amended to revise certain
of the covenants. The Company had $3.2 million outstanding under the Revolver at
June 30, 1999.
At June 30, 1999, the Company's principal bank had agreed to provide unsecured
bank credit facilities of 1.0 million Deutsch mark and $1.0 million Canadian
dollar. These facilities may be used to finance working capital needs and
equipment purchases or capital leases. Any borrowings will bear interest at the
bank's prime rate (8.25% as of August 31, 1999). The credit facilities expire on
May 31, 2000, unless canceled earlier by the Company or the bank. The Company
had no borrowings outstanding under these credit facilities at June 30, 1999.
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<PAGE> 15
The Company believes that available cash on hand and existing credit facilities
will be sufficient to fund its currently anticipated fiscal year 2000 cash flow
requirements. The Company does not believe that inflation has significantly
impacted historical operations and does not expect any significant near-term
inflationary impact.
The Company expects to spend approximately $2.2 million during fiscal year 2000
for capital equipment, although there is no binding commitment to do so.
For a discussion of certain contingencies relating to the Company's financial
position and results of operations, see Note 10 to the Consolidated Financial
Statements, "Contingencies".
FOR THE TWELVE-MONTH PERIOD ENDED DECEMBER 31, 1998
The Company's cash and cash equivalents as of December 31, 1998 were $5.8
million, compared with $14.4 million as of December 31, 1997. The use of cash
was due primarily to; (1) $2.6 million for operations after adjusting for
non-cash charges, (2) increased inventories of $3.3 million and other working
capital needs of $1.1 million, (3) capital spending of $2.4 million, (4) stock
repurchase of $1.6 million and (5) the acquisition of Sonic assets for $1.1
million. These cash outflows were partially offset by; (1) the sale of
marketable securities of $2.0 million and (2) proceeds from exercises of stock
options of $1.2 million. The inventory increase was due primarily to higher
levels of work-in-process and finished goods inventories to support future
deliveries. The Company repurchased 123,000 shares of its common stock during
1998. Repurchased shares primarily will be used to offset the Company's
requirements for share issuances under its various stock-based incentive
programs.
EURO CONVERSION
A single currency called the "euro" was introduced in Europe on January 1, 1999.
Eleven of the fifteen member countries of the European Union 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 were 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 the Company'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 the
Company'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
the Company.
YEAR 2000 READINESS DISCLOSURE
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" capability 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 compliance of
the Company's products and systems to operate under the Year 2000 issue, future
costs to remediate Year 2000 issues, the timetable in which such remediation is
to occur, the alternatives available to the Company to fully address Year 2000
issues, the Company's requirements and the impact on the Company of an inability
of it or its key suppliers and customers to fully address Year 2000 issues.
Actual results could differ materially from those in the forward looking
statement due to a number of uncertainties set forth below.
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 capable of operating in the Year 2000. 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. Because
of the size and level of Year 2000 compliance activity by these customers, the
Company expects most of these customers will become Year 2000 capable in a
timely fashion. However, the Company is
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<PAGE> 16
not monitoring their progress in this regard. If any of the Company's customers
are unable to become Year 2000 capable in a timely fashion, it is possible they
could suspend product purchases from the Company until their systems have
addressed the Year 2000 issue.
The Company is in the process of contacting its principal vendors and suppliers
(all of which are referred to as "Third Party Suppliers") to determine if they
are Year 2000 capable. The Company also intends to order extra material from
critical Third Party Suppliers of its product components and parts during the
fourth quarter of 1999 to provide buffer stock in the event supply is disrupted.
The failure of one or more critical Third Party Suppliers (including utility and
similar providers) to be Year 2000 capable such that its supply of needed
products or services is interrupted 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. The Company has established a project team to
identify internal systems which are not Year 2000 capable and complete the work
required to mitigate the Year 2000 issue. The Company's principal information
technology ("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 capable, and an operations system provided by a
third party vendor. Another third party vendor was engaged to make the operating
system Year 2000 compliant. The work has been completed and the system tested
off-site and found to be compliant. The changes will be implemented and tested
live at the Company's headquarters early in the fourth calendar quarter of 1999.
The Company also has a number of engineering systems, used primarily for
testing, developed by the Company's internal staff. The Company forward-date
tested these systems during the first calendar quarter of 1999 and believes it
has completed the remediation and testing necessary to make them Year 2000
compliant. The Company's subsidiaries believe that they have completed the
modifications and testing necessary to make their IT systems, which are
generally small networks of personal computers, Year 2000 compliant.
The Company maintains networks of personal computers. Using internal personnel,
the Company has assessed its personal computer networks for Year 2000
compliance. Modifications necessary to effect individual personal computer Year
2000 compliance have been completed and modifications required to achieve Year
2000 compliance to certain components of the network are expected to be
completed during the fourth calendar quarter of 1999. The Company's personal
computer systems generally operate using "shrink-wrapped" 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 capable upgrades are or will be readily
available for purchase.
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 has contacted the vendors
that support these systems, at the Company's headquarters, each of which
believes its system to be Year 2000 compliant.
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 described below. Costs related to the Year 2000
issue are funded through operating cash flow. The Year 2000 costs have not
caused the Company to defer any other significant information technology
programs.
YEAR 2000 RISKS AND CONTINGENCY PLANS
The Company's Year 2000 project team has evaluated business disruption
scenarios, principally related to the Company's internal systems for processing
information and the purchase of goods and services to maintain timely
production. The team has developed and implemented the plans disclosed
previously under "Year 2000 State of Readiness." 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); 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);
unanticipated difficulties with the assessment or remediation process resulting
in the need to replace more systems or hire more personnel or third party firms
to assist in the process than expected and the Company being required to assist
any of its Third Party Suppliers to become Year 2000 compliant.
16
<PAGE> 17
Some commentators have stated that a significant amount of litigation will arise
out of Year 2000 compliance issues. 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). 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 of production
disruptions related to Third Party Suppliers, internal issues, or customers, it
is possible the Company's revenues, net income or financial condition could be
materially adversely affected.
MARKET RISK INFORMATION
Perceptron's primary market risk is related to foreign exchange rates. This risk
is derived from sales by its international operations, which are primarily
located in Germany and The Netherlands and for which products are produced in
the U.S. The Company is also subject to interest rate risk in connection with
its borrowings. At June 30, 1999, the Company did not have any market risk
instruments for trading purposes.
FOREIGN CURRENCY RISK
The Company has limited foreign currency exchange risk in its international
operations due to the percentage of contracts entered into in U.S. dollars and
the short time period between sales commitment and delivery for contracts in the
non-U.S. currencies. The Company's percentage of sales commitments in U.S.
Dollars at June 30, 1999 was 79%. For sales commitments entered into in the
non-U.S. currencies, the currency rate risk exposure is predominantly less than
one year with the majority in the 120 to 150 day range. See also "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Euro
Conversion".
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 shipment. These transactions involve the use of
forward contracts. At June 30, 1999, the Company had no forward contracts
outstanding.
INTEREST RATE RISK
The Company is subject to interest rate risk in connection with borrowings under
its variable rate revolving line of credit and from fixed rate debt assumed in
conjunction with the purchase of ultrasound intellectual property in October
1998. However, this risk is limited due to the limited level of debt the Company
has outstanding. The Company's exposure to interest rate risk arises primarily
from changes in the prime rate and changes in Eurodollar rates in the London
interbank market. See Note 7 of Notes to Consolidated Statements for a
description of the Company's outstanding debt.
NEW ACCOUNTING PRONOUNCEMENTS
In 1999, the Company adopted Statement of Position ("SOP") 98-1, "Accounting for
the Costs of Computer Software Developed for Internal Use." SOP 98-1 requires
the capitalization of internal-use software and specifically identifies which
costs should be capitalized and which costs should be expensed. Adoption of this
SOP did not have a material effect on the Company's consolidated financial
statements.
In 1999, the Company adopted SOP 98-5, "Reporting on the Costs of Start-Up
Activities". SOP 98-5 generally requires costs of start-up and organizational
activities to be expensed as incurred and is effective for fiscal years
beginning after December 15, 1998. Adoption of this SOP did not have material
effect on the Company's consolidated financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". In June 1999, the FASB delayed the
implementation date making the statement effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000. SFAS No. 133 requires
recognition of all derivative financial instruments as either assets or
liabilities in the consolidated balance sheet, measured at fair value and sets
forth conditions in which a derivative instrument may be designated as a hedge.
The statement requires that changes in the fair value of derivatives be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to be recorded to other comprehensive income or to offset related results
on the hedged item in earnings. The Company from time to time engages in hedging
activities to minimize the impact of foreign currency fluctuations. Management
is currently assessing the effect that this pronouncement may have on the
Company's consolidated financial statements.
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 fiscal 2000 and future revenue and earnings levels, the timing
of new product releases and the expansion of the
17
<PAGE> 18
Company into new markets. Actual results could differ materially from those in
the forward looking statements due to a number of uncertainties, including, but
not limited to, 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, particularly economic conditions in the domestic
and worldwide Automotive and Forest Products industries, both of which have from
time to time been subject to cyclical downturns due to the level of demand for,
or supply of, the products produced by companies in these industries.
ITEM 7A: QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Information required pursuant to this item is incorporated by reference herein
from Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Market Risk Information".
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.................................................... 19
Consolidated Financial Statements:
Balance Sheets - June 30, 1999, December 31, 1998 and 1997.................. 20
Statements of Income for the six months ended June 30, 1999 and
for the years ended December 31, 1998, 1997 and 1996........................ 21
Statements of Cash Flows for the six months ended June 30, 1999 and
for the years ended December 31, 1998, 1997 and 1996........................ 22
Statements of Shareholders' Equity for the six months ended June 30, 1999
and for the years ended December 31, 1998, 1997 and 1996.................... 23
Notes to Consolidated Financial Statements.................................. 24
</TABLE>
18
<PAGE> 19
[PRICEWATERHOUSECOOPERS LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Perceptron, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholders' equity, and of cash flows
present fairly, in all material respects, the financial position of Perceptron,
Inc. and its subsidiaries at June 30, 1999, December 31, 1998 and 1997, and the
results of their operations and their cash flows for the six months ended June
30, 1999 and for each of the three years in the period ended December 31, 1998,
in conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule referred to in item 14(A)(2) for the
six months ended June 30, 1999 and for each of the three years in the period
ended December 31, 1998 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Detroit, Michigan
August 11, 1999
19
<PAGE> 20
PERCEPTRON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT JUNE 30, --------------------
(In Thousands) 1999 1998 1997
----------- -------- --------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,205 $ 5,753 $ 14,448
Marketable securities - - 2,000
Receivables:
Billed receivables, net of allowance for doubtful accounts
of $218,000, $200,000 and $175,000, respectively 21,128 27,357 28,000
Unbilled and other receivables 4,611 4,242 2,692
Inventories, net of reserves of $600,000, $519,000 and $860,000, respectively 12,323 11,365 8,019
Prepaid expenses and deferred tax asset 1,307 1,893 708
--------- --------- ---------
Total current assets 43,574 50,610 55,867
--------- --------- ---------
PROPERTY AND EQUIPMENT
Building and land 5,990 5,990 5,982
Machinery and equipment 9,774 8,950 6,638
Furniture and fixtures 1,469 1,438 1,312
--------- --------- ---------
17,233 16,378 13,932
Less - Accumulated depreciation and amortization (6,121) (5,131) (3,308)
--------- --------- ---------
Net property and equipment 11,112 11,247 10,624
--------- --------- ---------
OTHER ASSETS
Intangible assets, net of accumulated amortization
of $279,000, $94,000 and $394,000, respectively (Note 6) 1,692 1,829 1,651
Deferred tax asset 4,956 2,722 -
--------- --------- ---------
Total other assets 6,648 4,551 1,651
--------- --------- ---------
TOTAL ASSETS $ 61,334 $ 66,408 $ 68,142
========= ========= =========
LIABILITIES AND COMMON SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,550 $ 3,666 $ 2,979
Accrued liabilities and expenses 4,816 5,726 5,298
Income taxes payable 633 841 631
Accrued compensation and stock option expense 6 283 1,355
--------- --------- ---------
Total current liabilities 9,005 10,516 10,263
--------- --------- ---------
LONG-TERM LIABILITIES
Notes payable (Note 7) 4,265 1,040 -
--------- --------- ---------
Total long-term liabilities 4,265 1,040 -
--------- --------- ---------
TOTAL LIABILITIES 13,270 11,556 10,263
--------- --------- ---------
SHAREHOLDERS' EQUITY
Preferred stock - no par value, authorized 1,000,000 shares, issued none - - -
Common stock, $0.01 par value, authorized 19,000,000 shares, issued and
outstanding 8,169,000, 8,219,000 and 8,207,000, respectively 82 82 82
Accumulated other comprehensive income (loss) (3,340) (1,669) (2,411)
Additional paid-in capital 40,979 41,236 41,666
Retained earnings 10,343 15,203 18,542
--------- --------- ---------
Total shareholders' equity 48,064 54,852 57,879
--------- --------- ---------
TOTAL LIABILITIES AND COMMON SHAREHOLDERS' EQUITY $ 61,334 $ 66,408 $ 68,142
========= ========= =========
</TABLE>
The notes to the consolidated financial statements are an integral part of these
statements.
20
<PAGE> 21
PERCEPTRON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
SIX MONTHS DECEMBER 31,
ENDED ---------------------------------------
(In Thousands, Except Per Share Amounts) JUNE 30, 1999 1998 1997 1996
------------- -------- ------- -------
<S> <C> <C> <C> <C>
NET SALES $ 21,256 $ 49,635 $65,102 $58,975
COST OF SALES 10,768 22,442 25,077 23,608
-------- -------- ------- -------
GROSS PROFIT 10,488 27,193 40,025 35,367
-------- -------- ------- -------
OPERATING EXPENSES
Selling, general and administrative 10,693 20,113 16,220 15,565
Engineering, research and development 6,455 11,384 8,944 7,294
Non-cash intangible asset write-off (Note 6) -- 1,472 -- --
Non-cash stock compensation (Note 12) -- -- -- 3,202
-------- -------- ------- -------
Total operating expenses 17,148 32,969 25,164 26,061
-------- -------- ------- -------
OPERATING INCOME (LOSS) (6,660) (5,776) 14,861 9,306
-------- -------- ------- -------
OTHER INCOME AND (DEDUCTIONS)
Foreign currency gain (loss) (18) (23) 257 196
Interest income, net -- 656 891 743
Other (Note 3) (671) -- -- --
-------- -------- ------- -------
Total other income (deductions) (689) 633 1,148 939
-------- -------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES (7,349) (5,143) 16,009 10,245
INCOME TAX EXPENSE (BENEFIT) (2,489) (1,804) 5,203 3,095
-------- -------- ------- -------
NET INCOME (LOSS) $ (4,860) $ (3,339) $10,806 $ 7,150
======== ======== ======= =======
EARNINGS (LOSS) PER SHARE
BASIC $ (0.59) $ (0.41) $ 1.34 $ 0.93
DILUTED $ (0.59) $ (0.41) $ 1.28 $ 0.86
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
BASIC 8,185 8,239 8,065 7,661
DILUTED 8,185 8,239 8,412 8,309
</TABLE>
The notes to the consolidated financial statements are an integral part of these
statements.
21
<PAGE> 22
PERCEPTRON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
SIX MONTHS DECEMBER 31,
ENDED --------------------------------
(In Thousands) JUNE 30, 1999 1998 1997 1996
------------- -------- -------- ---------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(4,860) $ (3,339) $ 10,806 $ 7,150
Adjustments to reconcile net income to net cash provided from
(used for) operating activities:
Depreciation and amortization 1,268 2,488 1,754 904
Deferred income taxes (1,950) (3,190) -- --
Non-cash write-off of intangible asset (Note 6) -- 1,472 -- --
Non-cash stock compensation expense (Note 12) -- -- 167 3,202
Other 18 -- -- 293
Changes in assets and liabilities, exclusive of changes shown
separately 2,141 (4,393) (9,417) (9,640)
------- -------- -------- --------
Net cash provided from (used for) operating activities (3,383) (6,962) 3,310 1,909
------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of short-term debt 8,847 2,000 $ -- 980
Repayment of short-term debt (5,622) (2,000) (980) (200)
Repurchase of company stock (257) (1,642) -- --
Proceeds from the exercise of stock options -- 1,212 1,941 2,671
------- -------- -------- --------
Net cash provided from (used for) financing activities 2,968 (430) 961 3,451
------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (995) (2,400) (2,356) (5,703)
Sales and maturities of marketable securities -- 2,000 500 --
Purchases of marketable securities -- -- -- (2,500)
Purchase of Sonic assets (Note 6) -- (1,114) -- --
------- -------- -------- --------
Net cash (used for) investing activities (995) (1,514) (1,856) (8,203)
------- -------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (138) 211 (391) (175)
------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,548) (8,695) 2,024 (3,018)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,753 14,448 12,424 15,442
------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,205 $ 5,753 $ 14,448 $ 12,424
======= ======== ======== ========
CHANGES IN ASSETS AND LIABILITIES, EXCLUSIVE OF CHANGES SHOWN SEPARATELY
Billed, unbilled and other receivables, net 4,310 $ (667) $ (6,600) $ (9,996)
Inventories (959) (3,262) (843) (2,138)
Accounts payable (220) 687 (1,913) 588
Other current assets and liabilities (990) (1,151) (61) 1,906
------- -------- -------- --------
$ 2,141 $ (4,393) $ (9,417) $ (9,640)
======= ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 93 $ 6 $ 31 $ 24
Cash paid during the year for income taxes 322 1,288 2,889 2,711
Non-cash transactions:
Previously recorded compensation expense attributable to
options exercised -- -- 167 534
Intangible assets acquired by assumption of note payable and for
stock, respectively (Note 6) -- 1,040 -- 2,300
</TABLE>
The notes to the consolidated financial statements are an integral part of these
statements.
22
<PAGE> 23
PERCEPTRON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER ADDITIONAL RETAINED TOTAL
COMMON STOCK COMPREHENSIVE PAID-IN EARNINGS SHAREHOLDERS'
(In Thousands) SHARES AMOUNT INCOME CAPITAL (DEFICIT) EQUITY
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1996 7,420 $ 74 $ (474) $ 30,863 $ 586 $ 31,049
Comprehensive income
Net income 7,150 7,150
Other comprehensive income
Foreign currency translation adjustments (455) (455)
---------
Total comprehensive income 6,695
---------
Shares issued for intangible assets 82 1 2,299 2,300
Stock options exercised, net of shares tendered 447 5 2,062 2,067
Tax benefit relating to stock option plans 600 600
Previously recorded stock option compensation
attributable to options exercised 534 534
Non-cash compensation expense
attributable to options exercised 3,202 3,202
----------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1996 7,949 $ 80 $ (929) $ 39,560 $ 7,736 $ 46,447
============================================================================
Comprehensive income
Net income 10,806 10,806
Other comprehensive income
Foreign currency translation adjustments (1,482) (1,482)
---------
Total comprehensive income 9,324
---------
Stock options exercised, net of shares tendered 258 2 1,852 1,854
Tax benefit relating to stock option plans 87 87
Previously recorded stock option compensation
attributable to options exercised 167 167
----------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1997 8,207 $ 82 $ (2,411) $ 41,666 $ 18,542 $ 57,879
============================================================================
Comprehensive income (loss)
Net loss (3,339) (3,339)
Other comprehensive income
Foreign currency translation adjustments 742 742
---------
Total comprehensive income (loss) (2,597)
---------
Stock options exercised, net of shares tendered 135 1 988 989
Tax benefit relating to stock option plans 223 223
Stock repurchased (123) (1) (1,641) (1,642)
----------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1998 8,219 $ 82 $ (1,669) $ 41,236 $ 15,203 $ 54,852
============================================================================
Comprehensive income (loss)
Net loss (4,860) (4,860)
Other comprehensive income
Foreign currency translation adjustments (1,671) (1,671)
---------
Total comprehensive income (loss) (6,531)
---------
Stock repurchased (50) - (257) (257)
----------------------------------------------------------------------------
BALANCES, JUNE 30, 1999 8,169 82 (3,340) 40,979 10,343 $ 48,064
============================================================================
</TABLE>
23
<PAGE> 24
PERCEPTRON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
Perceptron, Inc. and its wholly-owned subsidiaries (collectively, the "Company")
are involved in the design, development, manufacture, and marketing of
information-based measurement and inspection focused solutions for process
improvements primarily for the automotive and forest products industries.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
On, June 24, 1999, the Company elected to change its reporting period from a
calendar year ending December 31, to a fiscal year ending June 30. As a result,
the financial statements include the transition period January 1, 1999 through
June 30, 1999. The first full year to be reported on a fiscal year basis will be
for the twelve-month period ended June 30, 2000.
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 to the current period presentation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's wholly-owned foreign subsidiaries have
been translated in accordance with Statement of Financial Accounting Standards
("SFAS") No. 52, with the functional currency being the local currency in the
foreign country. Under this standard, translation adjustments are accumulated in
a separate component of shareholders' equity. Gains and losses on foreign
currency transactions are included in the consolidated statement of income under
"Other Income and Deductions".
CONCENTRATION OF CREDIT RISK
The Company markets and sells its products primarily to automotive assembly
companies and to system integrators or original equipment manufacturers
("OEMs"), who in turn sell to automotive assembly companies. The Company also
markets and sells its forest products to lumber mills and to OEMs, who in turn,
sell to end-users. The Company's accounts receivable are principally from a
small number of large customers. The Company performs ongoing credit evaluations
of its customers. To date, the Company has not experienced any significant
losses related to the collection of accounts receivable.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with maturities of
three months or less to be cash equivalents. Fair value approximates carrying
value because of the short maturity of the cash equivalents. Those with a
greater life are recorded as marketable securities.
PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS
Property and equipment are recorded at cost. Depreciation related to machinery
and equipment and furniture and fixtures is primarily computed on a
straight-line basis over estimated useful lives ranging from 3 to 10 years.
Depreciation on buildings is computed on a straight-line basis over 37 1/2
years. Intangible assets are being amortized generally over 5 years.
When assets are retired, the costs of such assets and related accumulated
depreciation or amortization are eliminated from the respective accounts, and
the resulting gain or loss is reflected in the consolidated statement of income.
24
<PAGE> 25
INVENTORIES
Inventories are stated at the lower of cost or market. The cost of inventories
is determined by the first-in, first-out ("FIFO") method. Inventories, net of
reserves, are comprised of the following (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT JUNE 30, -----------------------------------
1999 1998 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Component parts $ 6,553 $ 5,794 $ 5,507
Work in process 1,683 2,235 902
Finished goods 4,087 3,336 1,610
-------------- ------------- -------------
Total $ 12,323 $ 11,365 $ 8,019
============== ============= =============
</TABLE>
EARNINGS PER SHARE
Basic earnings per share ("EPS") is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Other
obligations, such as stock options and warrants, are considered to be
potentially dilutive common shares. Diluted EPS assumes the issuance of
potential dilutive common shares outstanding during the period and adjusts for
any changes in income and the repurchase of common shares that would have
occurred from the assumed issuance unless such effect is anti-dilutive. A
reconciliation of both calculations is shown below (in thousands except per
share amounts).
<TABLE>
<CAPTION>
NET INCOME WEIGHTED AVG. EARNINGS (LOSS)
(LOSS) COMMON SHARES PER SHARE
--------------- ---------------- ----------------
<S> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1999
Basic EPS $ (4,860) 8,185 $ (.59)
Effect of dilutive securities:
Stock options and warrants - -
--------------- ----------------
Diluted EPS $ (4,860) 8,185 $ (.59)
================ ================
YEAR ENDED DECEMBER 31, 1998
Basic EPS $ (3,339) 8,239 $ (.41)
Effect of dilutive securities:
Stock options and warrants - -
--------------- ----------------
Diluted EPS $ (3,339) 8,239 $ (.41)
================ ================
YEAR ENDED DECEMBER 31, 1997
Basic EPS $ 10,806 8,065 $ 1.34
Effect of dilutive securities:
Stock options and warrants - 347
--------------- ----------------
Diluted EPS $ 10,806 8,412 $ 1.28
=============== ================
YEAR ENDED DECEMBER 31, 1996
Basic EPS $ 7,150 7,661 $ .93
Effect of dilutive securities:
Stock options and warrants - 648
--------------- ----------------
Diluted EPS $ 7,150 8,309 $ .86
=============== ================
</TABLE>
Options to purchase 1,188,000 and 914,000 shares of common stock were
outstanding in the six months ended June 30, 1999 and year ended December 31,
1998, respectively and were not included in the computation of diluted EPS
because the effect would have been antidilutive.
REVENUE RECOGNITION
The Company's products are generally configured to customer specifications.
Certain customers may require a demonstration of the system prior to shipment.
At the time of satisfactory demonstration, a written customer acceptance is
completed. Revenue is recognized upon the earlier of written customer acceptance
or shipment of the product to the customer.
RESEARCH AND DEVELOPMENT
Research and development costs, including software development costs, are
expensed as incurred.
25
<PAGE> 26
IMPAIRMENT OF LONG-LIVED ASSETS AND CERTAIN IDENTIFIABLE INTANGIBLES
The Company evaluates the carrying value of long-lived assets and long-lived
assets to be disposed of for potential impairment on an ongoing basis. The
Company considers projected future operating results, trends and other
circumstances in making such estimates and evaluations.
FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, which include cash,
marketable securities, accounts receivable, accounts payable, and amounts due to
banks or other lenders, approximate their fair values at June 30, 1999, December
31, 1998 and 1997. Fair values have been determined through information obtained
from market sources and management estimates.
2. TRANSITION PERIOD COMPARATIVE DATA
The following table presents certain financial information for six months ended
June 30, 1999 and 1998 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------------
1999 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
Net sales $ 21,256 $ 18,310
Gross profit 10,488 9,458
Income (loss) before income taxes (7,349) (4,768)
Income tax expense (benefit) (2,489) (1,597)
Net income (loss) (4,860) (3,171)
Earnings (loss) per share
Basic (.59) (.38)
Diluted (.59) (.38)
Weighted average common shares outstanding
Basic 8,185 8,250
Diluted 8,185 8,250
</TABLE>
3. LITIGATION EXPENSES
During the six months ended June 30, 1999, the Company expensed $671,000 of
legal expenses related to a civil action for which the Company was awarded a
favorable judgement (see Note 10). The Company is in the process of trying to
collect on this judgement.
4. MARKETABLE SECURITIES
The Company had no marketable securities at June 30, 1999. In 1998 and 1997,
proceeds from sales of available for sale securities were $2,000,000 and
$500,000, respectively; no gross gains or losses were realized on those sales.
At December 31, 1997, marketable securities, which were classified as available
for sale, consisted of mortgage backed securities whose fair value approximated
cost.
5. LEASES
The following is a summary, as of June 30, 1999, of the future minimum annual
lease payments required under the Company's operating leases having initial or
remaining non-cancelable terms in excess of one year (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR OPERATING
----------- ---------
<S> <C>
2000 $ 1,126
2001 962
2002 619
2003 53
2004 27
2005 and beyond 46
----------
Total minimum lease payments $ 2,833
==========
</TABLE>
Rental expense for operating leases in the six months ended June 30, 1999 and
calendar years 1998, 1997 and 1996 was $725,000, $1,318,000, $719,000 and
$480,000, respectively.
26
<PAGE> 27
6. INTANGIBLE ASSETS
In October 1998, the Company purchased the assets, including ultrasound
intellectual property, of Sonic Industries, Inc. and Sonic Technologies, Inc.
(Sonic) and assumed certain liabilities and long-term debt (see Note 7).
Intangible assets, including goodwill, totaled $1,848,000 and are being
amortized over five years.
During 1998, the Company developed a new suite of non-contact three-dimensional
measurement technologies, which superseded certain existing technologies
recorded as intangible assets. As a result, the carrying value of these
intangible assets were evaluated for impairment. This evaluation resulted in a
write-off of intangible assets with a net book value of $1,472,000.
In November 1996, the Company's German subsidiary acquired the assets of a
division of HGV Vosseler GmbH ("Vosseler"), engaged in the development and sale
of non-contact three-dimensional measurement systems for aggregate consideration
consisting of 82,150 shares of Common Stock and DM 300,000 and recorded $2.3
million in intangible assets relating to the acquisition.
7. SHORT-TERM AND LONG-TERM NOTES PAYABLE
At June 30, 1999, the Company's principal bank had agreed to provide short-term
unsecured credit facilities of 1.0 million Deutsch mark and $1.0 million
Canadian dollar. The facilities may be used to finance working capital needs and
equipment purchases or capital leases. Any borrowings will bear interest at the
bank's prime rate (8.25% as of August 31, 1999). The credit facilities expire on
May 31, 2000, unless canceled earlier by the Company or the bank. The Company
had no borrowings outstanding under these credit facilities at June 30, 1999.
In May 1999, the Company entered in to a long-term $15 million unsecured
Revolving Credit Agreement (Revolver) that expires on May 31, 2001. Proceeds
under the Revolver may be used for general corporate purposes and can be
designated as a Floating Rate Loan or as a Eurodollar Rate Loan. Interest on
Floating Rate borrowings is calculated daily at 1/2% below the bank's prime rate
(8.25% as of August 31, 1999) and is payable on the last day of each month.
Interest on Eurodollar Rate borrowings is calculated at a Eurodollar Rate for
the period chosen (approximately 7% as of September 2, 1999) and is payable on
the last day of the applicable period. Quarterly, the Company pays a commitment
fee of 1/4% per annum on the daily unused portion of the Revolver. The Revolver
prohibits the Company from paying dividends. In addition, the Revolver contains
various financial covenants that, among other things, restrict dividend payments
by requiring the Company to maintain a Fixed Charge Coverage Ratio and a Total
Liabilities to Tangible Net Worth Ratio and require the Company to maintain
certain levels of earnings before interest, depreciation and amortization, and
taxes. Effective June 30, 1999, the Revolver was amended to revise certain of
the covenants. The Company had $3.2 million outstanding under the Revolver at
June 30, 1999.
In conjunction with the Company's October 1, 1998 purchase of Sonic assets,
discussed in Note 6, the Company assumed a long-term note payable totaling
$1,040,000. The note is payable in full on November 1, 2003 and requires
quarterly payments of interest at 7.5% per annum on the outstanding principal
balance. The note may be prepaid without penalty in whole or in part at anytime.
8. COMMITMENTS AND OTHER
As part of the purchase of the Sonic intellectual property (see Note 6), the
Company agreed to pay contingent royalty payments on sales using the Sonic
technology over a five year period beginning October 1, 1998. The maximum total
amount of royalties is capped at $6 million on sales of $90 million. The Company
has prepaid approximately $1.9 million of the contingent royalty payments
generally through the assumption of liabilities in connection with the
acquisition of the Sonic assets. These prepaid royalties generally offset the
first contingent royalties due.
The Company has received a NIST-ATP award to participate in a joint venture to
develop a robot guidance system for powertrain assembly automation. The
Company's in-kind development contribution is approximately $500,000 over a
four-year period that began in 1998. The joint venture is administered by the
National Center for Manufacturing Sciences and includes a major automotive
manufacturer.
In late 1995, Autospect received a $1.8 million NIST grant that provided funding
over three years for development of a system to measure the thickness of wet
film (e.g. paint). During 1998, 1997 and 1996, the Company recorded
reimbursements of $800,000, $600,000 and $400,000, respectively, which offset
the related costs. Prototype testing was completed in 1998 and the system was
installed in a manufacturing environment during the first six months of 1999 and
is currently being tested.
The Company may use, from time to time, a limited hedging program to minimize
the impact of foreign currency fluctuations. As the Company exports product, it
may enter into limited hedging transactions relating to the accounts receivable
arising as
27
<PAGE> 28
a result of such shipment. These transactions involve the use of forward
contracts. At June 30, 1999, December 31, 1998 and 1997, the Company had no
forward contracts outstanding.
9. INFORMATION ABOUT MAJOR CUSTOMERS
The Company sells its products directly to both domestic and international
automotive assembly companies. During the six months ended June 30, 1999, 25% of
net sales were derived from three automotive companies. During 1998, 1997 and
1996, 22%, 38% and 46% of net sales, respectively, were derived from these same
three automotive companies. The Company also sells to system integrators or
OEMs, who in turn sell to these same automotive companies. For the six months
ended June 30, 1999 and for the years ended December 31, 1998, 1997 and 1996,
8%, 13%, 17% and 16% of net sales, respectively, were to system integrators and
OEMs for the benefit of the same three automotive companies. In the six months
ended June 30, 1999, the Company had sales to DaimlerChrysler and KUKA
Schweissanlagen, each of which exceeded 10% of the Company's total net sales.
10. 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.
On December 11, 1998, a jury in a civil case in the U.S. District Court for the
Eastern District of Michigan returned a favorable judgement for the Company and
awarded damages of over $732,000. The suit, filed by the Company in June 1996,
charged Sensor Adaptive Machines, Inc. ("SAMI") with violation of a covenant not
to compete. SAMI filed counterclaims against the Company alleging, in part, that
the Company was engaged in unlawful monopolization and tortious interference
with business practice and sought 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 jury found that the remaining
counterclaims were without merit. On March 4, 1999, the Company's motion for
interest was granted. SAMI has appealed the judgement including the
counterclaims against the Company.
On September 25, 1998, the U.S. District Court for the Eastern District of
Michigan dismissed, with prejudice, a suit filed against the Company by Speroni,
S.p.A. ("Speroni"). Speroni has appealed the dismissal. The suit alleged
tortious interference in conjunction with exclusive distributorship contracts
covering the sale of P-1000 products in Italy and France between Perceptron
B.V., a wholly-owned subsidiary of the Company, and Speroni. Speroni sought
unspecified compensatory damages and punitive damages. Perceptron B.V.
terminated the exclusive distributorship contracts in 1997 for breach of
contract by Speroni and has sought arbitration of this matter with the
International Chamber of Commerce International Court of Arbitration ("ICC"), to
confirm the terminations and to award damages. Speroni has filed counterclaims
with the ICC alleging breach of the exclusive distributorship contracts and
seeking damages of $6.5 million. An arbitration hearing has been conducted and
Perceptron B.V. is awaiting the decision of the arbitrator. The Company intends
to vigorously pursue its claims and defend Speroni's claims.
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 these customers, including one customer
who was a party to a patent infringement suit relating to this matter, have
settled such claims. 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 any such
claim or any possible customer claim for indemnity relating to claims against
these customers, it is not possible to estimate the ultimate effect, if any, of
this matter on the Company's financial position.
11. 401(K) PLAN
The Company has a 401(k) tax deferred savings plan that covers all eligible
employees. The Company may make discretionary contributions to the plan. On
January 1, 1998, the Company merged the Autospect and Trident 401(k) plans into
the Perceptron 401(k) plan. The Company's contributions to these plans during
the six months ended June 30, 1999, and the years 1998, 1997 and 1996, were
$218,000, $439,000, $361,000 and $292,000, respectively.
28
<PAGE> 29
12. STOCK OPTION PLANS
The Company maintains 1992 and 1998 Stock Option Plans covering substantially
all company employees and certain other key persons and a Director Stock Option
Plan covering all non-employee directors. The 1992 and Director Plans are
administered by a committee of the Board of Directors. The 1998 Plan is
administered by the President of the Company. Activity under these Plans is
shown in the following table:
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------- -------------------- ------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares subject to option
Outstanding at beginning of period 1,239,186 $ 19.14 1,088,765 $ 21.39 1,061,511 $ 16.04 1,120,943 $ 8.49
New grants (based on fair value of
common stock at dates of grant) 148,200 4.91 397,399 8.72 310,927 27.81 403,800 26.12
Exercised - - (134,931) 7.28 (258,653) 7.92 (430,129) 6.07
Terminated and expired (100,995) 18.28 (112,047) 22.89 (25,020) 16.60 (33,103) 11.72
Outstanding at end of period 1,286,391 17.56 1,239,186 19.14 1,088,765 21.39 1,061,511 16.04
Exercisable at end of period 525,054 22.46 468,824 23.00 313,180 19.04 199,287 10.09
</TABLE>
The following table summarizes information about stock options at June 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- --------------------------------
WEIGHTED AVERAGE
RANGE OF REMAINING WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE
- ------------------- ---------- ------------------ ----------------- ---------- --------------------
<S> <C> <C> <C> <C> <C>
$ 3.81 to $ 6.76 342,388 9.16 years $ 5.829 20,000 $ 5.620
$ 7.40 to $ 21.88 328,581 7.21 years $ 12.346 148,553 $ 14.318
$ 22.55 to $ 25.88 330,508 7.16 years $ 24.251 192,215 $ 23.894
$ 26.25 to $ 36.50 284,914 7.53 years $ 29.898 164,286 $ 30.205
- -------------------- ---------- ------------------ ----------------- ---------- --------------------
$ 3.81 to $ 36.50 1,286,391 7.79 years $ 17.558 525,054 $ 22.463
- -------------------- ---------- ------------------ ----------------- ---------- --------------------
</TABLE>
Option prices for options granted under these Plans must not be less than fair
market value of the Company's stock on the date of grant. At June 30, 1999,
options covering 525,054 shares were exercisable and options covering 875,458
shares were available for future grants under these plans.
Options outstanding under the 1992 and 1998 Stock Option Plans generally become
exercisable at 25% per year beginning one year after the date of grant and
expire ten years after the date of grant. Options outstanding under the Director
Stock Option Plan are either an initial option or an annual option. Initial
options of 15,000 shares are granted as of the date the non-employee director is
first elected to the Board of Directors and become exercisable in full on the
first anniversary of the date of grant. Annual options are granted as of the
date of the respective annual meeting to each non-employee director serving at
least six months prior to the annual meeting and become exercisable in three
annual increments of 33 1/3% after the date of grant and expire ten years from
the date of grant. In 1999, the Directors Stock Option Plan was amended to
increase the amount of the annual options from 1,500 to 3,000 shares of Common
Stock for grants beginning in the year 2000 and to grant each Director at the
time of the 1999 Annual Meeting, an additional option to purchase 10,000 shares
of Common Stock in lieu of the 1,500 shares of Common Stock which would
otherwise have been granted.
The estimated fair value as of the date options were granted during the six
months ended June 30, 1999 and years 1998, 1997 and 1996, using the
Black-Scholes option-pricing model was as follows:
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Weighted average estimated fair
value per share of options
granted during the year $ 3.96 $ 5.57 $ 12.82 $ 16.55
Assumptions:
Amortized dividend yield - - - -
Common stock price volatility 94.17% 73.69% 42.57% 57.94%
Risk-free rate of return 6.00% 4.25% 6.20% 5.78%
Expected option term (in years) 5 5 5 6
</TABLE>
The Company adopted the disclosure requirements of Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," effective with the 1996 financial statements, but elected to
continue to measure compensation cost using the intrinsic value method, in
accordance with APB Opinion No. 25 ("APB 25"), "Accounting for
29
<PAGE> 30
Stock Issued to Employees." Accordingly, compensation cost for stock options has
been recognized under the provisions of APB 25. If compensation cost had been
determined based on the estimated fair value of options granted during the six
months ended June 30, 1999 and years 1998, 1997 and 1996, consistent with the
methodology in SFAS 123, the Company's net income and income per share would
have been adjusted to the pro forma amounts indicated below (in thousands except
per share amounts):
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net income (loss)
As reported $ (4,860) $ (3,339) $ 10,806 $ 7,150
Pro forma $ (6,062) $ (5,377) $ 8,379 $ 4,051
Earnings (loss) per share - diluted
As reported $ (.59) $ (.41) $ 1.28 $ .86
Pro forma $ (.74) $ (.65) $ 1.00 $ .49
</TABLE>
NON-CASH STOCK COMPENSATION EXPENSE
In 1996, some participants in the Company's stock option plan used Perceptron
stock options to pay the exercise price of stock options issued under the plan.
Accounting rules required the recording of a non-cash compensation expense
relating to these option exercises during 1996.
13. INCOME TAXES
Income before income taxes for U.S. and foreign operations was as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
SIX MONTHS ENDED -----------------------------------------------------
JUNE 30, 1999 1998 1997 1996
----------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. $ (8,289) $ (7,881) $ 9,070 $ 5,884
Foreign 940 2,738 6,939 4,361
----------- ----------- ----------- -----------
Total $ (7,349) $ (5,143) $ 16,009 $ 10,245
============ =========== =========== ===========
</TABLE>
The income tax provision (benefit) reflected in the statement of income consists
of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
SIX MONTHS ENDED -----------------------------------------------------
JUNE 30, 1999 1998 1997 1996
----------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Current provision (benefit):
U.S. federal $ - $ - $ 2,591 $ 1,184
Foreign 389 1,366 1,227 1,136
Deferred taxes (2,878) (3,170) 1,385 775
------------ ------------ ----------- -----------
Total provision (benefit) $ (2,489) $ (1,804) $ 5,203 $ 3,095
============ =========== =========== ===========
</TABLE>
The Company's deferred tax assets are substantially represented by the tax
benefit of net operating losses and the tax benefit of future deductions
represented by reserves for bad debts, warranty expenses and inventory
obsolescence. The components of deferred tax assets were as follows (in
thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT -----------------------------------------------------
JUNE 30, 1999 1998 1997 1996
----------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Minimum tax credits $ - $ - $ - $ 400
Investment tax credits - - - 100
Research activities and
general business credits - - - 600
Benefit of net operating losses 4,892 2,202 - -
Other, principally reserves 65 175 180 465
----------- ----------- ----------- -----------
Deferred tax asset $ 4,957 $ 2,377 $ 180 $ 1,565
=========== =========== =========== ===========
</TABLE>
30
<PAGE> 31
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
SIX MONTHS ENDED -----------------------------------------------------
Rate reconciliation: JUNE 30, 1999 1998 1997 1996
----------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Provision at U.S. statutory rate (34.0%) (34.0%) 34.0% 34.0%
Recognition of net operating loss
carry-forwards and other credits - - - 2.0%
Net effect of taxes on foreign
activities 0.1% (1.0%) (1.5%) (4.0%)
Change in valuation allowance - - - (2.0%)
-------------- ----------- ----------- -----------
Effective tax rate (33.9%) (35.0%) 32.5% 30.0%
=============== ============ ========== ==========
</TABLE>
No provision was made with respect to retained earnings as of June 30, 1999 that
have been retained for use by foreign subsidiaries. It is not practicable to
estimate the amount of unrecognized deferred tax liability for the undistributed
foreign earnings. At June 30, 1999, the Company had net operating losses for
Federal income tax purposes of $4,892,000 that expire in 2019 and 2020.
14. SEGMENT AND GEOGRAPHIC INFORMATION
The Company has two reportable segments: Automotive and Forest Products. The
Automotive business unit segment designs, manufactures, and markets
information-based measurement and inspection focused solutions for process
improvements within the automotive industry. The Forest Products business unit
segment employs the same technology, providing products and services to the
forest products industry. The accounting policies of the segments are the same
as those described in the summary of significant policies. The Company evaluates
performance based on operating income. The Company primarily accounts for
geographic sales and transfers based on cost plus a transfer fee and/or royalty
fees and allocates company-wide costs based on revenues and/or labor as
appropriate. The Company's reportable segments are strategic business units that
offer similar products and services to different industries. They have separate
management teams because each business unit requires different marketing
strategies. The business units were created as a result of a combination of
existing businesses and acquisitions.
<TABLE>
<CAPTION>
REPORTABLE SEGMENTS ($000'S) AUTOMOTIVE FOREST PRODUCTS CONSOLIDATED
--------------- ---------------- ---------------
<S> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1999
Net sales $ 17,977 $ 3,279 $ 21,256
Depreciation and amortization 977 296 1,273
Operating (loss) (3,357) (3,303) (6,660)
Assets 53,370 7,964 61,334
Capital expenditures 754 241 995
YEAR ENDED DECEMBER 31, 1998
Net sales $ 39,555 $ 10,080 $ 49,635
Depreciation and amortization 2,191 297 2,488
Operating (loss) (4,425) (1,351) (5,776)
Assets 58,654 7,754 66,408
Capital expenditures 2,080 320 2,400
YEAR ENDED DECEMBER 31, 1997
Net sales $ 55,472 $ 9,630 $ 65,102
Depreciation and amortization 1,645 109 1,754
Operating income 14,452 409 14,861
Assets 63,785 4,357 68,142
Capital expenditures 2,195 161 2,356
YEAR ENDED DECEMBER 31, 1996
Net sales $ 53,669 $ 5,306 $ 58,975
Depreciation and amortization 804 100 904
Operating income (loss) 10,684 (1,378) 9,306
Assets 59,528 1,928 61,456
Capital expenditures 5,563 140 5,703
</TABLE>
31
<PAGE> 32
The Company operates in two primary geographic areas: Domestic (United States)
and International (primarily Europe, with limited operations in Canada, Asia and
South America).
<TABLE>
<CAPTION>
GEOGRAPHIC REGIONS ($000'S) DOMESTIC INTERNATIONAL(1) CONSOLIDATED
--------------- ---------------- ----------------
<S> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1999
Net external sales $ 12,416 $ 8,840 $ 21,256
Operating income (loss) (5,504) (1,156) (6,660)
Identifiable assets 42,366 18,968 61,334
YEAR ENDED DECEMBER 31, 1998
Net external sales $ 34,731 $ 14,904 $ 49,635
Operating income (loss) (5,212) (564) (5,776)
Identifiable assets 49,080 17,328 66,408
YEAR ENDED DECEMBER 31, 1997
Net external sales $ 49,484 $ 15,618 $ 65,102
Operating income 10,067 4,794 14,861
Identifiable assets 52,897 15,245 68,142
YEAR ENDED DECEMBER 31, 1996
Net external sales $ 46,120 $ 12,855 $ 58,975
Operating income 5,481 3,825 9,306
Identifiable assets 48,725 12,731 61,456
</TABLE>
- ------------------------------------------
(1)The Company's German subsidiary had net external sales of $5.8 million,
$11.0 million, $10.2 million and $6.7 million in the six months ended
June 30, 1999 and years ended December 31, 1998, 1997 and 1996,
respectively. Total assets of the Company's German subsidiary were $11.5
million, $10.7 million, $9.6 million and $9.1 million as of June 30,
1999 and December 31, 1998, 1997 and 1996, respectively.
32
<PAGE> 33
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected unaudited quarterly financial data for the six months ended June 30,
1999 and for the years ended December 31, 1998 and 1997, are as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------
<S> <C> <C> <C> <C>
1999a 3-31 6-30
--------- --------
Net sales $ 8,934 $ 12,322
Gross profit 4,237 6,251
Net income (loss) (2,631) (2,229)b
Basic earnings (loss) per share (.32) (.27)
Diluted earnings (loss) per share (.32) (.27)
1998 3-31 6-30 9-30 12-31
--------- -------- --------- ---------
Net sales $ 8,755 $ 9,555 $ 14,482 $ 16,843
Gross profit 4,439 5,019 8,043 9,692
Net income (loss) (1,664) (1,507) 389 (557)c
Basic earnings (loss) per share (.20) (.18) .05 (.07)
Diluted earnings (loss) per share (.20) (.18) .05 (.07)
1997 3-31 6-30 9-30 12-31
--------- -------- --------- ---------
Net sales $ 12,383 $ 18,806 $ 16,255 $ 17,658
Gross profit 6,930 12,158 10,005 10,932
Net income 911 3,771 2,779 3,345
Basic earnings per share .11 .47 .34 .41
Diluted earnings per share .11 .45 .33 .40
</TABLE>
- ------------------------------------------
a In 1999, the Company elected to change its reporting period from a
calendar year ending December 31 to a fiscal year ending June 30. As a
result, 1999 represents a six-month transition period.
b The second quarter of 1999 includes unusual litigation expenses of
$671,000 (see Note 3) and bad debt expenses for final resolution of aged
accounts receivable primarily related to the Company's Autospect and
Trident operations.
c In the fourth quarter of 1998, the Company wrote-off $1,472,000 of
intangible assets (see Note 6).
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
No response to Item 9 is required.
33
<PAGE> 34
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table lists the members of the Board of Directors and executive
officers of the Company. The directors shall serve until the fiscal 2000 Annual
Meeting of Shareholders or until the election and qualification of their
successors or until their resignation or removal. The officers listed below were
appointed by the Board of Directors and serve in the capacities indicated.
Executive officers are normally appointed annually by the Board of Directors and
serve at the pleasure of the Board.
<TABLE>
<CAPTION>
Position, Principal Occupations
Name and Age and Other Directorships
- -------------------------------- -----------------------------------------------------------------
<S> <C>
David J. Beattie, 57............. Mr. Beattie has been a director of the Company since 1997. Mr.
Beattie has been Senior Vice President, Sales and Marketing of
McNaughton - McKay Electric Company ("MME") since February 1997,
where he is responsible for all sales and marketing activities,
strategic planning, engineering and related services. In addition,
he serves as Chief Operating Officer of MME's Southern Region. He
has been employed by MME since 1978 in various capacities
including Chief Engineer, Sales Manager and Vice President. MME is
a distributor of industrial automation products and services. Mr.
Beattie served as a director of Trident Systems, Inc. prior to its
acquisition by the Company in April 1997.
Philip J. DeCocco, 61............ Mr. DeCocco has been a director of the Company since 1996. Mr.
DeCocco has been President of Sturges House, Inc., a company
founded by Mr. DeCocco, since 1983. Sturges House, Inc. offers
executive recruiting and management consulting services in human
resources, strategic planning, executive development and
organization design and development to various companies.
Robert S. Oswald, 58............. Mr. Oswald has been a director of the Company since 1996. Mr.
Oswald has been Chairman, President and Chief Executive Officer of
Robert Bosch Corporation, a manufacturer of automotive components
and systems, since July 1996 and prior to that time, from January
1994 to June 1996, was President and Chief Executive Officer of
such company. Mr. Oswald serves as a director and member of the
management board of Robert Bosch, Gmbh and a director of Robert
Bosch Corporation.
Alfred A. Pease, 53.............. Mr. Pease has been a director of the Company since 1996 and
Chairman of the Board since July 1996. Since February 1996, Mr.
Pease has been President and Chief Executive Officer of the
Company. From November 1993 to February 1996, Mr. Pease was
President and founder of Digital Originals, Inc., a manufacturer
of digital imaging products and related software.
Terryll R. Smith, 49............. Mr. Smith has been a director of the Company since 1996. Mr.
Smith served as President and Chief Executive Officer of
picoNetworks, an integrated circuits and software services
company, from December 1998 to August 1999. From February 1996 to
March 1998, Mr. Smith was Group Vice President, Sales and
Marketing of Advanced Micro Devices, Inc. ("AMD"), a manufacturer
of integrated circuits. From January 1994 to February 1996, Mr.
Smith was Group Vice President, Applications Solutions Products of
AMD.
John J. Garber, 57............... Mr. Garber has been Vice President - Finance and Chief
Financial Officer of the Company since February 1999. Prior to
that, he was, from September 1991 to February 1999, the Chief
Financial Officer of Newcor, Inc., whose principal business is the
precision machining of components for the automotive, medium and
heavy-duty truck and agricultural industries.
Dean J. Massab, 37............... Mr. Massab has been Vice President - Automotive Business Unit
of the Company since June 1998. Prior to that, he was Vice
President, Marketing and Advanced Business Development from
January 1997 until June 1998, and Director of North American
Automotive Sales and Support from December 1994 until January
1997. From October 1992 to December 1994, Mr. Massab was the
Manager, North American Operations of Schlatter, Inc., a flexible
welding systems business.
</TABLE>
34
<PAGE> 35
<TABLE>
<S> <C>
Frank H.W. Schoenwitz, 62........ Mr. Schoenwitz has been Vice President - European Business Unit
of the Company since February 1998. Prior to that, he was the
President and Chief Executive Officer from August 1987 to February
1998 of WELDUN International, a wholly-owned subsidiary of the
Robert Bosch Corporation.
</TABLE>
ITEM 11: COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
All of the members of the Board of Directors who are not employed by the Company
(other than the Chairman of the Board) (the "Eligible Directors") receive an
annual retainer of $10,000, paid quarterly in the amount of $2,500. All Eligible
Directors who serve on more than one committee of the Board of Directors receive
$2,000 for each committee in excess of one on which he serves. All Eligible
Directors receive $1,250 for each Board meeting attended. In addition, directors
are reimbursed for their out-of-pocket expenses incurred in attending Board and
committee meetings. Directors are also eligible to participate in the Company's
1992 Stock Option Plan (the "1992 Plan").
All Eligible Directors participate in the Directors Stock Option Plan (the
"Directors Plan"). Any Eligible Director who is first elected or appointed after
February 9, 1995 will receive an option to purchase 15,000 shares of Common
Stock on the date of his or her election or appointment ("Initial Option"). In
addition, each Eligible Director who has been a director for six months before
the date of each Annual Meeting of Shareholders held during the term of the
Directors Plan automatically will be granted, as of the date of such Annual
Meeting, an option to purchase an additional 3,000 shares of Common Stock except
in 1999 (an "Annual Option"). In 1999, each Eligible Director received an option
to purchase an additional 10,000 shares of Common Stock. The Directors Plan
expires on February 9, 2005. The exercise price of options granted under the
Directors Plan is equal to the average closing price of the Company's Common
Stock as quoted on The Nasdaq Stock Market's National Market for the last five
trading days of the month in which the date of grant of the option occurs. Each
option granted under the Directors Plan as an Initial Option becomes exercisable
in full on the first anniversary of the date of grant. Options granted as Annual
Options become exercisable in three annual increments of 33 1/3% of the shares
subject to the option. The exercisability of such options is accelerated in the
event of the occurrence of certain changes in control of the Company. All
options granted under the Plan are exercisable for a period of ten years from
the date of grant, unless earlier terminated due to the termination of the
Eligible Director's service as a director of the Company.
35
<PAGE> 36
EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table sets forth certain information as to compensation paid by
the Company for services rendered in all capacities to the Company and its
subsidiaries during the six-month transition period ended June 30, 1999 and
fiscal years ended December 31, 1996, 1997, and 1998 to (i) the Company's Chief
Executive Officer, and (ii) the Company's executive officers at June 30, 1999
(other than the Chief Executive Officer) whose aggregate annual salary and bonus
are expected to exceed $100,000 for the 1999 calendar year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
----------------------------------------------------- ------------
Name and Other Annual All Other
Principal Position Year Salary($) Bonus($) Compensation($)(1) Options(#) Compensation($)
------------------ ---- --------- -------- ------------------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Alfred A. Pease 1996 175,000 104,778 42,120 (3) 200,000 51,177 (4)
President, Chief 1997 214,000 37,878 20,821 (3) 30,000 29,925 (5)
Executive Officer 1998 230,000 0 0 -- 6,800 (6)
and Chairman of the 1999 115,000 0 0 25,000 5,000 (8)
Board (2)
John J. Garber 1999 60,615 15,000 (9) 0 35,000 391 (8)
Vice President Finance
and Chief Financial
Officer (9)
Dean J. Massab 1998 123,788 0 0 30,000 5,153 (6)
Vice President 1999 68,023 0 0 -- 2,825 (8)
Automotive
Business Unit (10)
Frank H. W. Schoenwitz 1998 132,917 25,000 (11) 91,400 (12) 33,000 42,834 (6)(7)
Vice President 1999 72,500 0 52,085 (12) -- 7,168 (8)
European Business
Unit (11)
</TABLE>
- --------------------------
(1) Perquisites and other personal benefits were provided to all of the persons
named in the Summary Compensation Table. Disclosure of such amounts is not
required because such amounts were less than 10% of the total annual salary
and bonuses reported for each of the respective individuals for each period
presented.
(2) Mr. Pease became President and Chief Executive Officer in February 1996 and
Chairman of the Board in July 1996.
(3) Includes payment of certain tax "gross up" amounts of $42,120 and $20,821
for certain taxable income received by Mr. Pease in 1996 and 1997 as
described under "All Other Compensation."
(4) "All Other Compensation" includes reimbursements for temporary housing,
moving and travel expenses related to Mr. Pease's relocation to Michigan in
1996 totaling $22,925 and reimbursements for closing costs in the amount of
$28,252 related to the sale of Mr. Pease's former residence in 1996.
(5) "All Other Compensation" includes (i) $23,396 of reimbursements for closing
costs relating to Mr. Pease's purchase of a new residence in 1997
following his relocation to Michigan; (ii) $4,750 in contributions made by
the Company to Mr. Pease's account under the Company's 401(k) Plan with
respect to the fiscal year ended December 31, 1997; and (iii) the dollar
value of any life insurance premiums paid by the Company in the fiscal year
ended December 31, 1997 with respect to term life insurance for the benefit
of Mr. Pease of $1,779.
(6) "All Other Compensation" is comprised of (i) $23,396 of reimbursements for
closing costs relating to purchase of a new residence in 1997. (ii) $4,750
in contributions made by the Company to Mr. Pease's account under the
Company's 401(k) Plan with respect to the fiscal year ended December 31,
1998; and (iii) the dollar value of any life insurance premiums paid by the
Company in the fiscal year ended December 31, 1998 with respect to term
life insurance for the benefit of the named executives as follows: Mr.
Pease of $1,799.
36
<PAGE> 37
(7) "All Other Compensation" includes reimbursements for temporary housing,
moving and travel expenses related to Mr. Schoenwitz's relocation to
Germany and reimbursements for closing costs in 1998 totaling $63,434.
(8) "All Other Compensation" is comprised of (i) contributions made by the
Company to the accounts of the named executive officers under the Company's
401(k) Plan with respect to the six-month transition period ended June 30,
1999 as follows: Mr. Pease $5,000; and Mr. Massab $2,624; (ii) the dollar
value of any life insurance premiums paid by the Company in the six-month
transition period ended June 30, 1999 with respect to term life insurance
for the benefit of the named executives as follows: Mr. Garber $391; Mr.
Massab $201; and Mr. Schoenwitz $2,168; and (iii) reimbursements of moving
costs related to Mr. Schoenwitz's relocation to Germany of $5,000.
(9) Mr. Garber received a signing bonus when he became Vice President -
Finance and Chief Financial Officer in February 1999.
(10) Mr. Massab became Vice President - Automotive Business Unit in June 1998.
(11) Mr. Schoenwitz received a signing bonus when he became Vice President -
European Business Unit in February 1998.
(12) Includes payment of certain tax "gross up" amounts of $91,400 and $52,085
for certain taxable income received by Mr. Schoenwitz in 1998 and 1999.
GRANTS OF OPTIONS
The following table sets forth certain information concerning individual grants
of stock options to each of the persons named in the Summary Compensation Table
made during the six-month transition period ended June 30, 1999. All grants
described in the following table were made under the Company's 1992 Stock Option
Plan and contain the Option Acceleration Provision (as defined under "Item 11 --
Compensation of Directors and Officers -- Executive Officers -- Termination of
Employment and Change of Control Arrangements").
OPTION GRANTS IN TRANSITION PERIOD
<TABLE>
<CAPTION>
Potential Realizable
Value At Assumed
Individual Grants Annual Rates of
-------------------------------------- Stock Price
Number of Percent of Total Appreciation for
Securities Options Granted To Exercise or Option Term(3)
Underlying Option Employees In Base Price Expiration --------------------
Name Granted(#) Fiscal Year(1) ($/Sh) Date(2) 5%($) 10%($)
- ------------------------ ----------------- -------------------- ------ ------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Alfred A. Pease 25,000(4) 35.7 6.20 12/31/08 114,786 274,589
John J. Garber 35,000(5) 50.0 5.24 02/28/09 126,586 310,138
Dean J. Massab 0 0 -- -- -- --
Frank H. W. Schoenwitz 0 0 -- -- -- --
</TABLE>
- ------------------------
(1) Options to purchase a total of 70,000 shares of Common Stock were granted
to team members in the six-month transition period ended June 30, 1999.
(2) Options expire on the date indicated, or, if earlier, one year after the
optionee's death or permanent disability or three months after the
optionee's termination of employment.
(3) Represents the value of such options at the end of its ten year term
(without discounting to present value) assuming the market prices of the
Common Stock appreciates from the grant date at an annually compounded rate
of 5% or 10%. These amounts represent rates of appreciation only. Actual
gains, if any, will be dependent on overall market conditions and on the
future performance of the Common Stock. There can be no assurance that the
amounts reflected in this table will be achieved.
(4) Consists of 12,500 of nonqualified options and 12,500 of incentive stock
options. Nonqualified options become exercisable in two annual installments
of 6,250 shares of Common Stock beginning January 1, 2000. The Incentive
Stock Options become exercisable in two annual installments of 6,250 shares
of Common Stock beginning on January 1, 2002.
(5) Consists of 35,000 of incentive stock options. The Incentive Stock Options
become exercisable in four annual installments of 8,750 shares of Common
Stock beginning March 1, 2000.
37
<PAGE> 38
EXERCISE AND VALUE OF OPTIONS
The following table sets forth certain information concerning exercises of stock
options during the six-month transition period ended June 30, 1999 by each of
the persons named in the Summary Compensation Table and the number of and the
value of unexercised stock options held by such persons as of June 30, 1999 on
an aggregated basis.
AGGREGATED OPTION EXERCISES IN TRANSITION PERIOD
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
Shares at Fiscal Year-End(#) at Fiscal Year-End ($)(1)
Acquired on Value -------------------------- -------------------------
Name Exercise(#) Realized($)(2) Exercisable Unexercisable Exercisable Unexercisable
- ----------------------- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Alfred A. Pease ........... 0 0 157,500 97,500 0 0
John J. Garber ........... 0 0 0 35,000 0 0
Dean J. Massab ........... 0 0 14,502 51,998 0 0
Frank H.W. Schoenwitz...... 0 0 7,500 25,500 0 0
</TABLE>
- -----------------
(1) Represents the total gain which would have been realized if all such
options had been exercised on June 30, 1999.
(2) Represents the fair market value of the shares of Common Stock relating to
exercised options, as of the date of exercise, less the exercise price of
such options.
EMPLOYMENT AGREEMENTS
Mr. Pease serves in his present capacity pursuant to the terms of an employment
agreement. Mr. Pease's agreement provides for an annual base salary of $200,000,
subject to increase at the discretion of the Management Development and
Compensation Committee ("Management Development Committee"), benefits comparable
to the Company's other executive officers, including life, disability and health
insurance and the use of a Company leased automobile and an annual performance
bonus target level of 60% of his base salary. Mr. Pease's base salary for 1999
is $230,000 and he will receive reimbursement of reasonable monthly club dues.
In addition, such agreement provides for the reimbursement of temporary housing,
travel and relocation expenses incurred by Mr. Pease, including moving expenses,
real estate brokerage commissions and certain closing and loan costs associated
with the sale of Mr. Pease's prior residence and purchase of a new residence in
the state of Michigan and certain incidental expenses related to the relocation,
plus a payment equal to the income taxes payable by Mr. Pease as a result of the
receipt of such reimbursements and tax payment. In the event Mr. Pease's
employment is terminated without cause, his salary and benefits will continue
for twelve months and he will earn a pro rata portion of any bonus that would
have been earned in the year of the termination.
In the event Mr. Pease's employment is terminated without cause, all remaining
unexercisable options for shares of Common Stock granted to him in 1996 will
become immediately exercisable. In 1996, Mr. Pease was granted options to
purchase 200,000 shares of Common Stock under the 1992 Plan. These options
become exercisable in cumulative annual installments of 25% beginning February
14, 1997 and expire on February 14, 2006.
TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS
Payments due to Mr. Pease upon termination of his employment with the Company
are described above under "Item 11 -- Compensation of Directors and Executive
Officers -- Executive Officers -- Employment Agreements."
Agreements relating to stock options granted under the 1992 Plan to each of the
executive officers named in the Summary Compensation Table, as well as certain
other officers of the Company, also provide that such options become immediately
exercisable in the event that the optionee's employment is terminated without
cause, or there is a diminishment of the optionee's responsibilities, following
a Change of Control of the Company or, if, in the event of a Change of Control,
such options are not assumed by the person surviving the Change of Control or
purchasing the assets in the Change of Control. A "Change of Control" is
generally defined as a merger of the Company in which the Company is not the
survivor, certain share exchange transactions, the sale or transfer of all or
substantially all of the assets of the Company, or any person or group of
persons (as defined by Section 13(d) the Securities Exchange Act of 1934, as
amended) acquires more than 50% of the Common Stock ("Option Acceleration
Provision").
38
<PAGE> 39
ITEM 12: SHARE OWNERSHIP OF MANAGEMENT AND CERTAIN SHAREHOLDERS
PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to beneficial ownership
of the Common Stock by each person known by management of the Company to be the
beneficial owner of more than five percent of its outstanding Common Stock. The
number of shares reported is as of the dates indicated in the footnotes below.
The percentage of class is based on 8,169,152 shares of Common Stock outstanding
on September 15, 1999. The information as to each person has been furnished by
such person and, except as where otherwise indicated, each person has sole
voting power and sole investment power with respect to all shares beneficially
owned by such person.
<TABLE>
<CAPTION>
Name and Address Amount and Nature
of Beneficial Owner of Beneficial Owner Percent of Class
- ---------------------------------------------------------- ------------------- ----------------
<S> <C> <C>
BankAmerica Corporation, NB Holdings Corporation,
NationsBank NA, TradeStreet Investment Associates, Inc.
and NationsBanc Advisors Inc.
100 North Tryon St.
Charlotte, NC 28255 432,350(1) 5.3
Franklin Resources, Inc.,
Charles B. Johnson and Rupert H. Johnson, Jr.
777 Mariners Island Boulevard
San Mateo, California 94404 911,360(2) 11.2
Royce & Associates, Inc. Royce Management Co.
and Charles M. Royce
1414 Avenue of the Americas
New York, New York 10019 727,300(3) 8.9
Schwartz Investment Counsel, Inc.
and Schwartz Investment Trust
3707 W. Maple Rd.
Bloomfield Hills, Michigan 48301 473,800(4) 5.8
T. Rowe Price Associates, Inc., and
T. Rowe Price Small-Cap Value Fund, Inc.
100 E. Pratt Street
Baltimore, Maryland 21202 650,800(5) 8.0
Wellington Management Company, LLP
and Wellington Trust Company, NA
75 State Street
Boston, Massachusetts 02109 689,600(6) 8.4
</TABLE>
- ---------------------
(1) Based upon their statement on Schedule 13G dated on February 4, 1999 and
filed with the Securities and Exchange Commission on February 5, 1999,
NationsBank NA has sole power to vote and dispose of 53,300 shares of
Common Stock and TradeStreet Investment Associates Inc. has sole power to
vote and dispose of 379,050 shares of Common Stock. Further, based upon
their statement on Schedule 13G, the shares are beneficially owned
indirectly by BankAmerica Corporation, a parent holding company of the
following: NB Holdings Corporation, which is a holding company of its
subsidiaries: NationsBank NA, a bank, and NationsBanc Advisors Inc. and
TradeStreet Investment Associates Inc., both registered Investment
Advisors. BankAmerica and NB Holdings share the power to vote and dispose
of 432,350 shares of Common Stock and NationsBanc Advisors Inc. shares
the power to vote and dispose of 234,450 shares of Common Stock.
(2) Based upon their statement on Schedule 13G dated January 29, 1999 and
filed with the Securities and Exchange Commission on February 2, 1999,
Franklin Advisers, Inc. has sole power to vote and dispose of 890,500
shares of Common Stock and Franklin Management, Inc. has sole power to
dispose of 20,860 shares of Common Stock. Further, based upon their
statement on Schedule 13G, the shares of Common Stock are beneficially
owned by one or more open or closed-end investment companies or other
managed accounts which are advised by direct and indirect investment
advisory subsidiaries (the "Adviser Subsidiaries") of Franklin Resources,
Inc. ("FRI"). Such advisory contracts grant to such Adviser Subsidiaries
all investment and/or voting power over the securities owned by such
advisory clients. Charles B. Johnson and Rupert H. Johnson, Jr. each own
in excess of 10% of the outstanding common stock of FRI and are the
principal shareholders of FRI.
39
<PAGE> 40
(3) Based upon their statement on Schedule 13G dated on February 8, 1999 and
filed with the Securities and Exchange Commission on February 10, 1999,
Royce & Associates, Inc. ("Royce") has sole power to vote and dispose of
710,200 shares of Common Stock and Royce Management Company ("RMC") has
sole power to vote and dispose of 17,100 shares of Common Stock. Further,
based upon their statement on Schedule 13G, Charles M. Royce may be
deemed to be a controlling person of Royce and RMC, and as such may be
deemed to beneficially own the shares of Common Stock beneficially owned
by Royce and RMC.
(4) Based upon their statement on Schedule 13G dated and filed with the
Securities and Exchange Commission on February 8, 1999, Schwartz
Investment Counsel, Inc. has sole power to vote and dispose of 243,500
shares of Common Stock and shared power to vote and dispose of 30,300
shares of Common Stock. Schwartz Investment Trust on behalf of its series
fund, Schwartz Value Fund, has sole power to vote and dispose of 200,000
shares of Common Stock.
(5) Based upon their statement on Schedule 13G dated and filed with the
Securities and Exchange Commission on February 11, 1999, T. Rowe Price
Associates, Inc. has sole power to dispose of, and T. Rowe Price
Small-Cap Value Fund, Inc. has sole power to vote, 650,800 shares of
Common Stock.
(6) Based upon its statement on Schedule 13G dated December 31, 1998 and
filed with the Securities and Exchange Commission on February 8, 1999,
Wellington Management Company, LLP has shared power to vote 168,600
shares and shared power to dispose of 689,600 shares of Common Stock.
Further, based upon its statement on Schedule 13G, virtually all of
Wellington Management Company's accounts involve outside persons who have
the right to receive or direct the receipt of dividends from, or the
proceeds from the sale of, securities in such accounts with respect to
the Common Stock. However, no such person's rights relate to more than
five percent of the Common Stock.
BENEFICIAL OWNERSHIP BY DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information with respect to beneficial ownership
of the Common Stock by each of the directors and director nominees, the persons
named in the Summary Compensation Table and by all directors and executive
officers as a group as of September 15, 1999, unless otherwise indicated. The
information as to each person has been furnished by such person and, except as
where otherwise indicated, each person has sole voting power and sole investment
power with respect to all shares beneficially owned by such person.
<TABLE>
<CAPTION>
Name and Address Amount and Nature
of Beneficial Owner(1) of Beneficial Ownership Percent of Class
---------------------- ----------------------- ----------------
<S> <C> <C>
David J. Beattie(2)(3).......................... 15,500 *
Philip J. DeCocco(2)(4)......................... 17,000 *
Robert S. Oswald (2)(5)......................... 26,500 *
Alfred A. Pease (2)(6).......................... 168,900 2.1
Terryll R. Smith (2)(7)......................... 16,500 *
Dean J. Massab(8)............................... 22,169 *
Frank H.W. Schoenwitz(9)........................ 8,250 *
John J. Garber.................................. 2,000 *
Directors and executive officers as a group
(8 persons)(3)(4)(5)(6)(7)(8)(9)............. 276,819 3.4
</TABLE>
- ------------------------------------
* Less than 1% of class
(1) The address for Messrs. Beattie, DeCocco, Oswald, Pease, Smith, Massab,
Schoenwitz, and Garber is 47827 Halyard Drive, Plymouth, Michigan 48170.
(2) Serves as a member of the Board of Directors of the Company.
(3) Represents options to purchase 15,500 shares of Common Stock, which are
presently exercisable or which are exercisable within 60 days of
September 15, 1999.
(4) Includes options to purchase 16,500 shares of Common Stock, which are
presently exercisable or which are exercisable within 60 days of
September 15, 1999.
(5) Includes options to purchase 16,500 shares of Common Stock, which are
presently exercisable or which are exercisable within 60 days of
September 15, 1999.
(6) Includes options to purchase 165,000 shares of Common Stock, which are
presently exercisable or which are exercisable within 60 days of
September 15, 1999.
40
<PAGE> 41
(7) Represents options to purchase 16,500 shares of Common Stock, which are
presently exercisable or which are exercisable within 60 days of
September 15, 1999.
(8) Includes options to purchase 22,002 shares of Common Stock, which are
presently exercisable or which are exercisable within 60 days of
September 15, 1999.
(9) Represents options to purchase 8,250 shares of Common Stock, which are
presently exercisable or which are exercisable within 60 days of
September 15, 1999.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Under the securities laws of the United States, the Company's directors, its
executive (and certain other) officers, and any persons holding more than ten
percent of the Common Stock are required to report their ownership of the Common
Stock and any changes in that ownership to the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc. Specific due
dates for these reports have been established and the Company is required to
report in this transition report any failure to file by these dates during the
Company's last fiscal year. All of these filing requirements were satisfied by
the Company's officers, directors and ten percent shareholders, except that Mr.
Garber failed to file on a timely basis one report relating to a single
transaction in Common Stock beneficially owned by him. In making these
statements, the Company has relied on the written representations of its
directors, officers and ten percent shareholders and copies of the reports that
have been filed with the Commission.
41
<PAGE> 42
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
A. Financial Statements and Schedules Filed
1. Financial Statements - see Item 8 of this report.
2. Financial Statement Schedule - the schedule filed with this
report is listed on page 44.
3. Exhibits - the exhibits filed with this report are listed
on pages 46 through 49.
B. Reports on Form 8-K: The Company's current report on Form 8-K,
dated July 6, 1999, which disclosed information under Item 8
concerning the Company's election to change its reporting
period from a calendar year ending December 31 to a fiscal
year ending June 30. The first full year to be reported on a
fiscal year basis will be for the twelve-month period ended
June 30, 2000.
42
<PAGE> 43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Transition Report on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized.
PERCEPTRON, INC.
(Registrant)
By: /S/ Alfred A. Pease
------------------------------------
Alfred A. Pease, Chairman, President
and Chief Executive Officer
Date: September 24, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/S/ Alfred A. Pease Chairman of the Board, September 24, 1999
- ----------------------------------- President, Chief Executive Officer
Alfred A. Pease
/S/ John J. Garber Vice President and Chief September 24, 1999
- ----------------------------------- Financial Officer (Principal Financial Officer)
John J. Garber
/S/ Sylvia M. Smith Controller (Principal Accounting Officer) September 24, 1999
- -----------------------------------
Sylvia M. Smith
/S/ David J. Beattie Director September 24, 1999
- -----------------------------------
David J. Beattie
/S/ Philip J. DeCocco Director September 24, 1999
- -----------------------------------
Philip J. DeCocco
/S/ Robert S. Oswald Director September 24, 1999
- -----------------------------------
Robert S. Oswald
/S/ Terryll R. Smith Director September 24, 1999
- -----------------------------------
Terryll R. Smith
</TABLE>
43
<PAGE> 44
PERCEPTRON, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS SCHEDULE
Financial Statements Schedule:
Designation Description Page
- ----------- ----------- ----
Schedule II Valuation and qualifying accounts 45
The schedules not filed are omitted because they are not required, the
information required to be contained therein is disclosed elsewhere in the
financial statements or the amounts involved are not sufficient to require
submission.
44
<PAGE> 45
PERCEPTRON, INC. AND SUBSIDIARIES
SCHEDULE II, VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
CHARGED TO
BEGINNING COSTS AND ENDING
BALANCE EXPENSE CHARGE-OFFS BALANCE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Allowance for doubtful accounts $ 35,000 $ 84,000 $ 11,000 $ 108,000
Inventory reserves $ 670,000 $ 200,000 $ 10,000 $ 860,000
DECEMBER 31, 1997
Allowance for doubtful accounts $ 108,000 $ 104,000 $ 37,000 $ 175,000
Inventory reserves $ 860,000 $ 0 $ 0 $ 860,000
DECEMBER 31, 1998
Allowance for doubtful accounts $ 175,000 $ 98,000 $ 73,000 $ 200,000
Inventory reserves $ 860,000 $ 47,000 $ 388,000 $ 519,000
JUNE 30, 1999
Allowance for doubtful accounts $ 200,000 $ 458,000 $ 440,000 $ 218,000
Inventory reserves $ 519,000 $ 245,000 $ 164,000 $ 600,000
</TABLE>
45
<PAGE> 46
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBITS
- ----------- -----------------------
3. Restated Articles of Incorporation and Bylaws.
3.1 Restated Articles of Incorporation, as amended to
date, are incorporated herein by reference to Exhibit
3.1 of the Company's Report on Form 10-Q for the
Quarter Ended March 31, 1998.
3.2 Bylaws, as amended to date, are incorporated herein
by reference to Exhibit 19 of the Company's Report on
Form 10-Q for the Quarter Ended September 30, 1992.
4. Instruments Defining the Rights of Securities
Holders.
4.1 Articles IV, V and VI of the Company's Restated
Articles of Incorporation are incorporated herein by
reference to Exhibit 3.1 of the Company's Report on
Form 10-Q for the Quarter Ended March 31, 1998.
4.2 Articles I, II, III, VI, VII, X and XI of the
Company's Bylaws are incorporated herein by reference
to Exhibit 19 of the Company's Report on Form 10-Q
for the Quarter Ended September 30, 1992.
4.3* Credit Agreement, dated May 28, 1999, between
Perceptron, Inc. and Bank One, Michigan and First
Amendment to Credit Agreement, dated August 24, 1999.
Other instruments, notes or extracts from
agreements defining the rights of holders of
long-term debt of the Company or its subsidiaries
have not been filed because (i) in each case the
total amount of long-term debt permitted thereunder
does not exceed 10% of the Company's consolidated
assets, and (ii) the Company hereby agrees that it
will furnish such instruments, notes and extracts
to the Securities and Exchange Commission upon its
request.
4.4 Form of certificate representing Rights (included as
Exhibit B to the Rights Agreement filed as Exhibit
4.5) is incorporated herein by reference to Exhibit 2
of the Company's Report on Form 8-K filed March 24,
1998. Pursuant to the Rights Agreement, Rights
Certificates will not be mailed until after the
earlier of (i) the tenth business day after the
Shares Acquisition Date (or, if the tenth day after
the Shares Acquisition Date occurs before the Record
Date, the close of business on the Record Date) (or,
if such Shares Acquisition Date results from the
consummation of a Permitted Offer, such later date as
may be determined before the Distribution Date, by
action of the Board of Directors, with the
concurrence of a majority of the Continuing
Directors), or (ii) the tenth business day (or such
later date as may be determined by the Board of
Directors, with the concurrence of a majority of the
Continuing Directors, prior to such time as any
person becomes an Acquiring Person) after the date of
the commencement of, or first public announcement of
the intent to commence, a tender or exchange offer by
any person or group of affiliated or associated
persons (other than the Company or certain entities
affiliated with or associated with the Company),
other than a tender or exchange offer that is
determined before the Distribution Date to be a
Permitted Offer, if, upon consummation thereof, such
person or group of affiliated or associated persons
would be the beneficial owner of 15% or more of such
outstanding shares of Common Stock.
4.5 Rights Agreement, dated as of March 24, 1998, between
Perceptron, Inc. and American Stock Transfer & Trust
Company, as Rights Agent, is incorporated herein by
reference to Exhibit 2 of the Company's Report on
Form 8-K filed March 24, 1998.
10. Material Contracts.
46
<PAGE> 47
10.1 Registration Agreement, dated as of June 13, 1985, as
amended, among the Company and the Purchasers
identified therein, is incorporated by reference to
Exhibit 10.3 of the Company's Form S-1 Registration
Statement (amended by Exhibit 10.2) No. 33-47463.
10.2 Patent License Agreement, dated as of August 23,
1990, between the Company and Diffracto Limited, is
incorporated herein by reference to Exhibit 10.10 of
the Company's Report on Form S-1 Registration
Statement No. 33-47463.
10.3 Form of Proprietary Information and Inventions
Agreement between the Company and all of the
employees of the Company is incorporated herein by
reference to Exhibit 10.11 of the Company's Form S-1
Registration Statement No. 33-47463.
10.4 Form of Confidentiality and Non-Disclosure Agreement
between the Company and certain vendors and customers
of the Company is incorporated herein by reference to
Exhibit 10.12 of the Company's Form S-1 Registration
Statement No. 33-47463.
10.5 Two Forms of Agreement Not to Compete between the
Company and certain officers of the Company, is
incorporated herein by reference to Exhibit 10.50 of
the Company's Report on Form 10-Q for the Quarter
Ended June 30, 1996.
10.6@ Form of Non-Qualified Stock Option Agreements under
1998 Global Team Member Stock Option Plan after
September 1, 1998 is incorporated by reference to
Exhibit 10.6 of the Company's Report on Form 10-K for
the Year Ended December 31, 1998.
10.7@ Amended and Restated 1992 Stock Option Plan is
incorporated herein by reference to Exhibit 10.53 of
the Company's Report on Form 10-Q for the Quarter
Ended September 30, 1996.
10.8@ First Amendment to Amended and Restated 1992 Stock
Plan is incorporated by reference to Exhibit 10.39 of
the Company's Report on Form 10-Q for the Quarter
Ended March 31, 1997.
10.9@ Form of Stock Option Agreements for July 1993 Stock
Option Grants is incorporated herein by reference to
Exhibit 10.23 of the Company's Report on Form 10-Q
for the Quarter Ended September 30, 1993, and Exhibit
10.32 of the Company's Report on Form 10-Q for the
Quarter Ended March 31, 1994.
10.10@ Form of Stock Option Agreements for Performance
Options is incorporated herein by reference to
Exhibit 10.27 of the Company's Annual Report on Form
10-K for the Year Ended December 31, 1993. The
performance standards under these options were waived
effective March 2, 1994.
10.11@ First Amendments to Stock Option Agreements for
Performance Options is incorporated herein by
reference to Exhibit 10.20 of the Company's Annual
Report on Form 10-K for the Year Ended December 31,
1994.
10.12@ Form of Stock Option Agreements under 1992 Stock
Option Plan, (Team Members and Officers) prior to
February 9, 1995, is incorporated herein by reference
to Exhibit 10.28 of the Company's Annual Report on
Form 10-K for the Year Ended December 31, 1993.
10.13@ Forms of Master Amendments to Stock Option Agreements
(Team Members and Officers) under 1992 Stock Option
Plan, prior to February 9, 1995 is incorporated
herein by reference to Exhibit 10.22 to the Company's
Annual Report on Form 10-K for the Year Ended
December 31, 1994.
10.14@ Forms of Incentive Stock Option Agreements (Team
Members and Officers) under 1992 Stock Option Plan
after February 9, 1995 is incorporated by reference
to Exhibit 10.23 to the Company's Annual Report on
Form 10-K for the Year Ended December 31, 1994.
47
<PAGE> 48
10.15@ Forms of Incentive Stock Option Agreements (Team
Members and Officers) and Non-Qualified Stock Option
Agreements under 1992 Stock Option Plan after January
1, 1997, and Amendments to existing Stock Option
Agreements under the 1992 Stock Option Plan is
incorporated by reference to Exhibit 10.22 to the
Company's Annual Report on Form 10-K for the Year
Ended December 31, 1996.
10.16@ Incentive Stock Option Agreement, dated February 14,
1996, between the Company and Alfred A. Pease is
incorporated by reference to Exhibit 10.29 of the
Company's Annual Report on From 10-K for the Year
Ended December 31, 1995.
10.17@ Non-Qualified Stock Option Agreement, dated February
14, 1996, between the Company and Alfred A. Pease is
incorporated by reference to Exhibit 10.30 of the
Company's Annual Report on Form 10-K for the Year
Ended December 31, 1995.
10.18@ Amended and Restated Directors Stock Option Plan is
incorporated by reference to Exhibit 10.56 to the
Company's Report on Form 10-Q for the Quarter Ended
September 30, 1996.
10.19@ Form of Non-Qualified Stock Option Agreements and
Amendments under the Director Stock Option Plan is
incorporated by reference to Exhibit 10.27 to the
Company's Annual Report on Form 10-K for the Year
Ended December 31, 1996.
10.20@ 1998 Global Team Member Stock Option Plan and Form of
Non-Qualified Stock Option Agreements under such Plan
is incorporated herein by reference to Exhibit 10.20
to the Company's Annual Report on Form 10-K for the
Year Ended December 31, 1997.
10.21@ 1996 Management Bonus Plan is incorporated herein by
reference to Exhibit 10.34 to the Company's Annual
Report on Form 10-K for the Year Ended December 31,
1996.
10.22@ 1997 Management Bonus Plan is incorporated herein by
reference to exhibit 10.23 to the Company's Annual
Report on Form 10-K for the Year Ended December 31,
1997.
10.23@ Amended and Restated Employee Stock Purchase Plan is
incorporated by reference to Exhibit 10.54 of the
Company's Report on Form 10-Q for the Quarter Ended
September 30, 1996.
10.24@ Letter Agreement, dated February 14, 1996, between
the Company and Alfred A. Pease is incorporated
herein by reference to Exhibit 10.36 to the Company's
Annual Report on Form 10-K for the Year Ended
December 31, 1996.
10.25@ Forms of Incentive Stock Option Agreements (Officers)
and Non-Qualified Stock Option Agreements (Officers)
under 1992 Stock Option Plan after September 1, 1998
is incorporated by reference to Exhibit 10.25 of the
Company's Report on Form 10-K for the Year Ended
December 31, 1998.
10.26@ Second Amendment to Amended and Restated 1992 Stock
Option Plan is incorporated by reference to Exhibit
10.26 of the Company's Report on Form 10-Q for the
Quarter Ended March 31, 1999.
10.27@ First Amendment to Amended and Restated Directors
Stock Option Plan is incorporated by reference to
Exhibit 10.27 of the Company's Report on Form 10-Q
for the Quarter Ended March 31, 1999.
10.28*@ First Amendment to the 1998 Global Team Member Stock
Option Plan.
10.29*@ Second Amendment to the 1998 Global Team Member Stock
Option Plan.
21.* A list of subsidiaries of the Company.
48
<PAGE> 49
23.* Consent of Experts.
27.* Financial Data Schedule.
- -------------------------------
* Filed with the Company's Annual Report on Form 10-K for the six month
transition period ended June 30, 1999.
@ Indicates a management contract, compensatory plan or arrangement.
49
<PAGE> 50
UNDERTAKING
The Company will furnish any exhibit to this report on Form 10-K to a
shareholder upon payment of a fee of $.10 per page for photocopying, postage and
handling expenses and upon written request made to:
Investor Relations
Perceptron, Inc.
47827 Halyard Drive
Plymouth, MI 48170-2461
50
<PAGE> 1
EXHIBIT 4.3
CREDIT AGREEMENT
This Credit Agreement is dated May 28, 1999, and is between PERCEPTRON, INC., a
Michigan corporation (the "Borrower"), whose address is 47827 Halyard Drive,
Plymouth, Michigan 48170, and BANK ONE, MICHIGAN, a Michigan banking corporation
(the "Bank"), whose address is 611 Woodward Avenue, Detroit, Michigan 48226. The
parties agree as follows:
ARTICLE 1 - DEFINITIONS
"Adjusted EBITDA" for any period means EBITDA for such period, plus Rental
Expense for such period, minus Capital Expenditures for such period.
"Applicable Margin" means the percent per annum added to the Eurodollar Rate if
that rate is chosen by the Borrower, and as determined pursuant to Section 2.9
and by reference to the following matrix:
<TABLE>
<CAPTION>
Funded Debt/ Eurodollar
EBITDA Rate plus
------ ---------
<S> <C>
Equal to or greater
than 1.50%
1.00 to 1.00
Less than
1.00 to 1.00 1.25%
</TABLE>
"Business Day" means (i) with respect to any borrowing, payment or rate
selection of Eurodollar Rate Loans, a day other than Saturday or Sunday on which
the Bank is open for business in Detroit and banks are open for business in New
York and on which dealings in United States dollars are carried on in the London
interbank market, and (ii) for all other purposes, a day other than Saturday or
Sunday on which the Bank is open for business in Detroit.
"Capital Expenditures" for any period means capital expenditures of the Borrower
and its Subsidiaries for such period, as determined on a consolidated basis in
accordance with GAAP.
"Commitment" means the obligation of the Bank (a) to make Loans not exceeding
$15,000,000 minus any outstanding Letters of Credit, and (b) to issue Letters of
Credit not exceeding $1,000,000 so long as the aggregate of the Letters of
Credit plus the outstanding balance of Loans does not exceed $15,000,000.
<PAGE> 2
"Consolidated" or "consolidated" means, when used with reference to any
financial term in this Agreement, the aggregate for two or more persons of the
amounts signified by such term for all such Persons determined on a consolidated
basis in accordance with GAAP.
"Default" means an event described in Section 7.
"EBITDA" means, for any period, the operating income (before the deduction of
Interest Expense and income tax expense) of the Borrower and its Subsidiaries on
a consolidated basis for such period, plus each of the following with respect to
the Borrower and its Subsidiaries for such period to the extent utilized in
determining such income, without duplication: (i) depreciation and (ii)
amortization of deferred costs and other intangibles.
"Eurodollar Base Rate" means the rate determined by the Bank to be the rate at
which deposits in U.S. dollars are offered to the Bank by first class banks in
the London interbank market at approximately 11 a.m. (London time) two Business
Days prior to the first day of that Eurodollar Interest Period, in the
approximate amount of the relevant Eurodollar Rate Loan and having a maturity
approximately equal to that Eurodollar Interest Period.
"Eurodollar Interest Period" means a period of one, two or three months
commencing on a Business Day selected by the Borrower pursuant to this
Agreement. The Eurodollar Interest Period ends on the day which corresponds
numerically to that date one, two or three months thereafter. If there is no
numerically corresponding day in the next, second or third succeeding month,
that Eurodollar Interest Period ends on the last Business Day of the relevant
month. If a Eurodollar Interest Period would otherwise end on a day which is not
a Business Day, that Eurodollar Interest Period ends on the next succeeding
Business Day, unless that Business Day falls in a new month in which case that
Eurodollar Interest Period ends on the immediately preceding Business Day.
"Eurodollar Rate" means the sum of (i) the quotient of (a) the Eurodollar Base
Rate applicable to that Eurodollar Interest Period divided by (b) one minus the
Reserve Requirement (expressed as a decimal) applicable to that Eurodollar
Interest Period plus (ii) the Applicable Margin per annum. The Eurodollar Rate
will be rounded, if necessary, to the next higher 1/16 of 1%.
"Fixed Charge Coverage Ratio" means the ratio of Adjusted EBITDA to Fixed
Charges.
"Fixed Charges" for any period means the sum, without duplication, of the
following for such period, determined for the Borrower and its Subsidiaries on a
consolidated basis: (i) Interest Expense, plus (ii) Rental Expense, plus (iii)
income tax expense, plus (iv) the aggregate amount of all dividends, payments
and other distributions (including, without limitation, any such payments and
distributions in connection with any redemption, purchase, retirement or other
acquisition of the Borrower's capital stock) paid, payable or otherwise
accumulating with respect to any class of the Borrower's capital stock, plus (v)
all scheduled payments of principal or other sums paid or payable by the
Borrower and its Subsidiaries in respect of Funded Debt.
"Floating Rate" means a rate per annum equal to the difference of (i) the Prime
Rate minus (ii) 1/2% per annum, changing when and as the Prime Rate changes.
2
<PAGE> 3
"Funded Debt" of any Person means, without duplication, all indebtedness of such
Person to the Bank, all lease obligations of such person which, in accordance
with GAAP, are or should be capitalized on the books of such Person, and all
other indebtedness of such Person for borrowed money or that otherwise bears
interest, other than Subordinated Debt.
"GAAP" means, as of the date of determination, generally accepted accounting
principles, consistently applied.
"Interest Expense" means, for any period and in respect of any Person, the
interest expense of such Person in respect of such period, determined in
accordance with GAAP.
"Interest Period" means a Eurodollar Interest Period.
"Lending Installation" means any office, branch, subsidiary or affiliate of the
Bank.
"Letter of Credit" means a standby letter of credit issued by the Bank for the
account of the Borrower, as amended or renewed.
"Letter of Credit Documents" means all applications, reimbursement and security
agreements given by the Borrower to the Bank in the Bank's standard form for any
Letter of Credit, and any amendment or renewal.
"Lien" means any security interest, mortgage, pledge, lien, claim, charge,
encumbrance, title retention agreement, lessor's interest under a capitalized
lease or analogous instrument, in, of or on any Person's assets or properties in
favor of any other Person.
"Loan" means any loan made (or any conversion or continuation of any loan) by
the Bank to the Borrower pursuant to this Agreement and the Note.
"Material Adverse Effect" means with respect to any matter that matter (i)
could reasonably be expected to materially and adversely affect the business,
properties, condition (financial or otherwise), or results of operations of the
Borrower and its Subsidiaries, taken as a whole, or (ii) has been brought by or
before any court or arbitrator or any governmental body, agency or official, and
draws into question the validity or enforceability of any material provision of
this Agreement, the Note or any of the Letter of Credit Documents.
"Note" means a promissory note in substantially the form of Exhibit A, duly
executed and delivered to the Bank by the Borrower, including any amendment or
replacement.
"Obligations" means all unpaid principal of and accrued and unpaid interest on
the Note, all accrued and unpaid facility fees, all outstanding Letters of
Credit, and all other obligations of the Borrower to the Bank arising under this
Agreement, the Note, and the Letter of Credit Documents.
"Person" means any corporation, natural person, firm, limited liability company,
joint venture, partnership, trust, unincorporated organization, enterprise,
government or any department or agency of any government.
3
<PAGE> 4
"Prime Rate" means the rate per annum equal to the prime rate of interest
announced by the Bank from time to time, changing when and as the prime rate
changes.
"Rate Option" means the Eurodollar Rate or the Floating Rate.
"Regulation D" means Regulation D of the Board of Governors of the Federal
Reserve System from time to time in effect and includes any successor or other
regulation or official interpretation of the Board of Governors relating to
reserve requirements applicable to member banks of the Federal Reserve System.
"Rental Expense" for any period means the maximum amount of all rents and other
payments (exclusive of property taxes, property and liability insurance premiums
and maintenance costs) paid or required to be paid by the Borrower during such
period under any operating lease in respect of which the Borrower is obligated
as a lessee or user.
"Reserve Requirement" means with respect to a Eurodollar Interest Period, the
maximum aggregate reserve requirement (including all basic, supplemental,
marginal and other reserves) which is imposed under Regulation D on Eurocurrency
liabilities.
"Revolving Credit Termination Date" means May 31, 2001.
"Section" means a numbered section of this Agreement, unless another document is
specifically referenced.
"Subordinated Debt" means all debt, obligations and liabilities of the Borrower
to any Person other than the Bank which has been subordinated to the Obligations
pursuant to a subordination agreement reasonably satisfactory in form and
content to the Bank.
"Subsidiary" means any Person more than 50% of the outstanding voting securities
or other voting interests of which are at the time owned or controlled, directly
or indirectly, by the Borrower or by one or more Subsidiaries or by the Borrower
and one or more Subsidiaries, or any similar business organization which is so
owned or controlled.
"Unmatured Default" means an event which but for the lapse of time or the giving
of notice, or both, would constitute a Default.
"Year 2000 Issues" means anticipated costs, problems and uncertainties
associated with the inability of certain computer applications to effectively
handle data including dates on and after January 1, 2000, as such inability
affects the business, operations, and financial condition of the Borrower and of
the Borrower's material customers, suppliers and vendors.
The foregoing definitions are applicable to both the singular and plural forms
of the defined terms. Any accounting terms used but not otherwise defined have
the meanings given them under GAAP.
4
<PAGE> 5
ARTICLE 2 - THE LOANS
2.1 COMMITMENT TO LEND. From and including the date of this Agreement and prior
to the Revolving Credit Termination Date, the Bank agrees, on the terms of this
Agreement:
A) to make Loans to the Borrower from time to time in amounts not
exceeding, in the aggregate at any one time outstanding, the amount of the
Commitment as it is reduced from time to time by outstanding Letters of Credit.
B) to issue Letters of Credit as requested by the Borrower in amounts not
exceeding the portion of the Commitment allocated to Letters of Credit as it may
be reduced by Loans and Letters of Credit then outstanding. Notwithstanding
anything in this Agreement to the contrary, the Bank may decline to issue any
requested Letter of Credit on the basis that the beneficiary, the purpose of
issuance or the terms or the conditions of drawing are unacceptable to it in its
reasonable discretion.
2.2 FEES AND REDUCTION OF THE COMMITMENT. The Borrower agrees to pay to the
Bank a facility fee in the amount of $20,000 for this Agreement ($10,000 of
which has been received by the Bank, shall be deemed earned by the Bank and is
non-refundable), and a commitment fee of 1/4% per annum on the daily unused
amount of the Commitment from the date of this Agreement to and including the
Revolving Credit Termination Date, payable on the last day of each quarter and
on the Revolving Credit Termination Date. The Borrower may permanently reduce
the Commitment in whole, or in part in integral multiples of $100,000, upon at
least ten Business Days' written notice to the Bank, which must specify the
amount of any reduction, but the amount of the Commitment may not be reduced
below the outstanding principal amount of the Loans and Letters of Credit. All
accrued commitment fees are payable on the effective date of any termination of
the obligations of the Bank to make Loans.
2.3 LOANS. Subject to the terms of this Agreement, the Borrower may borrow,
repay and reborrow at any time prior to the Revolving Credit Termination Date.
The Loans may be Floating Rate Loans or Eurodollar Rate Loans, or a combination
of them, selected by the Borrower in accordance with Section 2.4. The Loans must
be repaid in full on the Revolving Credit Termination Date. The Bank may book
the Loans at any Lending Installation. The Borrower may from time to time prepay
outstanding Floating Rate Loans in whole or in part without penalty or premium.
A Eurodollar Rate Loan may not be paid prior to the last day of the applicable
Interest Period.
2.4 METHOD OF SELECTING RATE OPTIONS AND INTEREST PERIODS. The Borrower may
select the Rate Option and Interest Period applicable to each Loan from time to
time. The Borrower must give the Bank an irrevocable borrowing notice not later
than 3:30 p.m. Detroit time on the borrowing date of each Floating Rate Loan and
10:00 a.m. Detroit time three Business Days before the borrowing date for each
Eurodollar Rate Loan, specifying:
(I) the borrowing date of that Loan, which must be a Business Day,
(II) the amount of that Loan,
5
<PAGE> 6
(III) the Rate Option selected for that Loan, and
(IV) in the case of each Eurodollar Rate Loan, the Interest Period
applicable to it.
Each Eurodollar Rate Loan will bear interest on the outstanding principal amount
for each day during the Interest Period applicable to it from and including the
first day of that Interest Period to (but not including) the last day of that
Interest Period at the interest rate determined as applicable to that Eurodollar
Rate Loan. If at the end of an Interest Period for an outstanding Eurodollar
Rate Loan, the Borrower has failed to select a new Rate Option or to pay that
Loan, then that Loan will be converted to a Floating Rate Loan on and after the
last day of the Interest Period until paid or until the effective date of a new
Rate Option with respect to it is selected by the Borrower. An outstanding
Floating Rate Loan may be converted to a Eurodollar Rate Loan at any time
subject to the notice provisions applicable to the type of Loan selected. The
Borrower may not select a Eurodollar Rate for a Loan if there exists a Default
or Unmatured Default. The Borrower may not select an Interest Period which would
end after the Revolving Credit Termination Date. Each Eurodollar Rate Loan must
be in the minimum amount of $1,000,000 (and in multiples of $100,000 if in
excess of the minimum).
2.5 RATES APPLICABLE AFTER DEFAULT. If any Loan is not paid at maturity,
whether by acceleration or otherwise, (i) each Eurodollar Rate Loan will bear
interest for the remainder of the applicable Interest Period at the rate
otherwise applicable to that Interest Period plus 3% per annum, and (ii) each
Floating Rate Loan will bear interest at a rate per annum equal to the Floating
Rate otherwise applicable to the Floating Rate Loan plus 3% per annum. During
the continuance of any other Default, the Bank may, at its option, by notice to
the Borrower, declare that (a) each Eurodollar Rate Loan will bear interest for
the remainder of the applicable Interest Period at the rate otherwise applicable
to that Interest Period plus 3% per annum, and (b) each Floating Rate Loan will
bear interest at a rate per annum equal to the Floating Rate otherwise
applicable to the Floating Rate Loan plus 3% per annum.
2.6 METHOD OF PAYMENT. All payments of principal, interest, and fees must be
made in immediately available funds to the Bank at the Bank's address specified
pursuant to Section 9.5, or at any other Lending Installation of the Bank
specified in writing by the Bank to the Borrower, by noon (local time) on the
date when due. The Bank is authorized to charge the account of the Borrower
maintained with it for each payment of principal, interest and fees as it
becomes due.
2.7 NOTE; TELEPHONIC NOTICES. The Bank is authorized to record on its books the
date, amount, Rate Option and Interest Period of each Loan, and the date and
amount of each principal payment made under the Note. These records govern
absent manifest error, provided that neither the failure to record nor any error
in that record affects the Borrower's obligations under the Note. The Borrower
authorizes the Bank to extend Loans and effect Rate Option selections based on
telephonic notices made by any person or persons the Bank in good faith believes
to be acting on behalf of the Borrower. The Borrower agrees to deliver promptly
to the Bank a written confirmation, if that confirmation is requested by the
Bank, of each telephonic notice, signed by an authorized officer of the
Borrower. If the written confirmation differs in any material respect from the
action taken by the Bank, the records of the Bank govern, absent manifest error.
6
<PAGE> 7
2.8 INTEREST PAYMENT DATES; INTEREST BASIS. Interest accrued on the Loans is
payable (i) for Floating Rate Loans, on the last day of each month, (ii) for
Eurodollar Rate Loans, on the last day of its applicable Interest Period and
(iii) for all Loans, on any date on which the Loan is paid or prepaid, whether
due to acceleration or otherwise. Interest accrued on each Eurodollar Rate Loan,
if any, having an Interest Period longer than three months is also payable on
the last day of each three-month interval during that Interest Period. Interest
and commitment fees are calculated for actual days elapsed on the basis of a
360-day year. Interest is payable for the day a Loan is made but not for the day
of any payment on the amount paid if payment is received prior to noon (local
time) at the place of payment. If any payment of principal of or interest on a
Loan becomes due on a day which is not a Business Day, that payment must be made
on the next succeeding Business Day and, in the case of a principal payment,
that extension of time is included in computing interest.
2.9 APPLICABLE MARGIN ADJUSTMENTS. The Applicable Margin is determined based on
the ratio (the "Ratio") of (i) the Funded Debt of the Borrower as of each fiscal
quarter end (each a "Determination Date") to (ii) the EBITDA of the Borrower for
the four consecutive fiscal quarters then ending, and the pricing matrix in the
definition of Applicable Margin. Each determination and adjustment will only be
applied prospectively, and is made irrespective of any other interest rate
adjustment. Each adjustment, if any, of the Applicable Margin based upon the
Ratio as of each Determination Date shall be made as of the first day of the
second calendar quarter following such Determination Date. Without limiting any
of the other rights and remedies of the Bank under this Agreement, in the event
the Borrower shall fail to deliver the financial statements required under
Section 6.1 when required for any Determination Date, the Applicable Margin
shall be adjusted to, or remain at, as the case may be, the highest level set
forth in the definition of the term "Applicable Margin" until such time as such
financial statements are so delivered and demonstrate that the Applicable Margin
should be set at a different level in accordance with such definition and this
Section 2.9.
2.10 LETTERS OF CREDIT. Subject to the terms of this Agreement, the Borrower may
request Letters of Credit at any time prior to the Revolving Credit Termination
Date. Each request must be in the form of the Letter of Credit Documents. Each
Letter of Credit must expire on the earlier of the Revolving Credit Termination
Date or twelve months after its issuance date.
2.11 LETTER OF CREDIT COMMISSIONS. Each Letter of Credit is subject to a
commission in the amount equal to the greater of $250 or 1% per annum of the
face amount plus the costs of issuance.
ARTICLE 3 - CHANGE IN CIRCUMSTANCES
3.1 YIELD PROTECTION. If any change after the date of this Agreement (whether
or not now contemplated) in any law or governmental or quasi-governmental rule,
regulation, policy, guideline or directive (whether or not having the force of
law), or change after the date of this Agreement (whether or not now
contemplated) in any interpretation of them, or compliance by the Bank with any
of them after any such change becomes effective,
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(I) subjects the Bank or any applicable Lending Installation to any tax,
duty, charge or withholding on or from payments due from the Borrower (excluding
taxation of the overall net income of the Bank or applicable Lending
Installation), or changes the basis of taxation of payments to the Bank in
respect of its Loans or other amounts due to it under this Agreement, or
(II) imposes or increases or deems applicable any reserve, assessment,
insurance charge, special deposit or similar requirement against assets of,
deposits with or for the account of, or credit extended by, the Bank or any
applicable Lending Installation (other than reserves and assessments taken into
account in determining the interest rate applicable to Eurodollar Rate Loans),
or
(III) imposes any other condition the result of which is to increase the
cost to the Bank or any applicable Lending Installation of making, funding or
maintaining loans or reduces any amount receivable by the Bank or any applicable
Lending Installation in connection with loans, or requires the Bank or any
applicable Lending Installation to make any payment calculated by reference to
the amount of loans held or interest received by it, by an amount deemed
material by the Bank, or
(IV) affects the amount of capital required or expected to be maintained
by the Bank or any Lending Installation or any corporation controlling the Bank,
and the Bank determines the amount of capital required is increased by or based
on the existence of this Agreement or its obligation to make Loans under this
Agreement or of commitments of this type,
then, within 15 days of the Bank's demand, the Borrower must pay the Bank that
portion of the increased expense incurred (including, in the case of Section
3.1(iv), any reduction in the rate of return on capital to an amount below that
which it could have achieved but for the law, rule, regulation, policy,
guideline or directive, and after taking into account the Bank's policies as to
capital adequacy) or reduction in amounts received which the Bank determines is
attributable to making, funding and maintaining its Loans and its Commitment
(after taking into account the Bank's policies with respect to capital
adequacy). The Bank represents that it does not know of any amount that would be
payable under this Section 3.1 as of the date of this Agreement, although there
may be current laws or regulations that may cause an amount to be payable
hereunder after the date of this Agreement. The Bank will not assess amounts
under this Section 3.1 unless the Bank is generally charging such amounts to the
majority of its similarly situated customers.
3.2 AVAILABILITY OF RATE OPTIONS. If the Bank determines that maintenance of
its Eurodollar Rate Loans at a suitable Lending Installation would violate any
applicable law, rule, regulation or directive, whether or not having the force
of law, or if the Bank determines that (i) deposits of a type and maturity
appropriate to match fund Eurodollar Rate Loans are not available to it, or (ii)
a Rate Option does not accurately reflect the cost of making or maintaining a
Loan at that Rate Option, then the Bank may suspend the availability of the
affected Rate Option (other than the Floating Rate) and require any Eurodollar
Rate Loans outstanding under an affected Rate Option to be repaid or converted
to an unaffected Rate Option.
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3.3 FUNDING INDEMNIFICATION. If any payment of a Eurodollar Rate Loan occurs on
a date which is not the last day of the applicable Interest Period, whether
because of acceleration, prepayment or otherwise, or a Eurodollar Rate Loan is
not made on the date specified by the Borrower for any reason other than default
by the Bank, the Borrower indemnifies the Bank for any loss or cost incurred by
it resulting from these facts, including without limitation any loss or cost in
liquidating or employing deposits acquired to fund or maintain the Eurodollar
Rate Loan.
3.4 BANK STATEMENTS; SURVIVAL OF INDEMNITY. To the extent reasonably possible,
the Bank will designate an alternate Lending Installation with respect to
Eurodollar Rate Loans to reduce any liability of the Borrower to the Bank under
Section 3.1 or to avoid the unavailability of a Rate Option under Section 3.2,
so long as that designation is not disadvantageous to the Bank. The Bank will
deliver a written statement as to the amount due, if any, under Section 3.1 or
3.3. That written statement will set forth in reasonable detail the calculations
upon which the Bank determined the amount, and is final, conclusive and binding
on the Borrower in the absence of manifest error. Determination of amounts
payable under those Sections in connection with a Eurodollar Rate Loan will be
calculated as though the Bank funded its Eurodollar Rate Loan through the
purchase of a deposit of the type and maturity corresponding to the deposit used
as a reference in determining the Eurodollar Rate applicable to that Loan,
whether in fact that is the case or not. Unless otherwise provided in this
Agreement, the amount specified in the written statement is payable on demand
after receipt by the Borrower of the written statement. The obligations of the
Borrower under Sections 3.1 and 3.3 survive payment of the Obligations and
termination of this Agreement.
ARTICLE 4 - CONDITIONS PRECEDENT
4.1 INITIAL LOAN OR LETTER OF CREDIT. The Bank is not required to make the
initial Loan or issue the initial Letter of Credit under this Agreement unless
the Borrower has furnished to the Bank whatever opinions of counsel,
certificates of incumbency, resolutions, bylaws and articles of incorporation
which the Bank reasonably requests, and, if requested by the Bank, information
satisfactory to the Bank regarding the Borrower's plan for addressing Year 2000
Issues.
4.2 EACH LOAN. The Bank is not required to make any Loan or issue any Letter of
Credit, unless on the applicable borrowing date (i) there exists no Default or
Unmatured Default, (ii) the warranties contained in Article 5 are true and
correct as of such borrowing date, and (iii) all legal matters incident to
making the Loan or issuing the Letter of Credit, as the case may be, including
without limitation executed and delivered Letter of Credit Documents, are
reasonably satisfactory to the Bank and its counsel.
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ARTICLE 5 - WARRANTIES
The Borrower warrants to the Bank that:
5.1 CORPORATE EXISTENCE AND STANDING. Each of the Borrower and the Subsidiaries
is a corporation duly incorporated, validly existing and in good standing under
the laws of its jurisdiction of incorporation and has all requisite authority to
conduct its business in each jurisdiction in which its business is conducted
except where the failure to have that authority would not have a Material
Adverse Effect.
5.2 AUTHORIZATION AND VALIDITY. The Borrower has the corporate power and
authority and legal right to execute and deliver this Agreement and the Note and
to perform its obligations under them. The execution and delivery by the
Borrower of this Agreement and the Note and the performance of its obligations
under them have been duly authorized by proper corporate proceedings, and this
Agreement and the Note each constitute legal, valid and binding obligations of
the Borrower enforceable against the Borrower in accordance with their
respective terms.
5.3 NO CONFLICT; GOVERNMENT CONSENT. Neither the execution and delivery by the
Borrower of this Agreement and the Note, nor the consummation of the
transactions described in them, nor compliance with their provisions will
violate any law, rule, regulation, order, writ, judgment, injunction, decree or
award binding on the Borrower or any Subsidiary, or the Borrower's or any
Subsidiary's articles of incorporation or bylaws, or the provisions of any
indenture, instrument or agreement to which the Borrower or any Subsidiary is a
party or is subject, or by which it or its property is bound, or conflict with
or constitute a default under any indenture, instrument or agreement, or result
in the creation or imposition of any Lien in, of or on the property of the
Borrower or a Subsidiary pursuant to the terms of any indenture, instrument or
agreement. No order, consent, approval, license, authorization, or validation
of, or filing, recording or registration with, or exemption by, or other action
in respect of, any governmental or public body or authority, or any subdivision
of them, is required to authorize, or is required in connection with the
execution, delivery and performance of, or the legality, validity, binding
effect or enforceability of, this Agreement or the Note.
5.4 FINANCIAL STATEMENTS. The December 31, 1998 consolidated financial
statements of the Borrower and the Subsidiaries previously delivered to the Bank
were prepared in accordance with GAAP in effect on the date those statements
were prepared and fairly present the consolidated financial condition and
operations of the Borrower and the Subsidiaries at that date and the
consolidated results of their operations for the period then ended.
5.5 MATERIAL ADVERSE CHANGE. Since December 31, 1998, there has been no
material adverse change in the business, properties, condition (financial or
otherwise) or results of operations of the Borrower and its Subsidiaries, taken
as a whole.
5.6 LITIGATION AND CONTINGENT OBLIGATIONS. Except as disclosed on Schedule 5.6
attached to this Agreement, there is no litigation, arbitration, governmental
investigation, proceeding or inquiry pending or, to the knowledge of any of
their officers, threatened against or affecting the Borrower or any Subsidiary
which is reasonably likely to have a Material Adverse Effect. The
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Borrower has no material contingent obligations not provided for or disclosed
in the financial statements referred to in Section 5.4.
5.7 REGULATION U. Margin stock (as defined in Regulation U of the Board of
Governors of the Federal Reserve System) constitutes less than 25% of those
assets of the Borrower and its Subsidiaries which are subject to any limitation
on sale, pledge, or other restriction under this Agreement.
5.8 COMPLIANCE WITH LAWS. The Borrower and its Subsidiaries have complied in
all material respects with all applicable statutes, rules, regulations, orders
and restrictions of any domestic or foreign government or any instrumentality or
agency of them, having jurisdiction over the conduct of their respective
businesses or the ownership of their respective properties, except to the extent
that the failure to so qualify would not have a Material Adverse Effect.
ARTICLE 6 - COVENANTS
During the term of this Agreement, unless the Bank otherwise consents in
writing:
6.1 FINANCIAL REPORTING. The Borrower will maintain, for itself and each
Subsidiary, a system of accounting established and administered in accordance
with GAAP, and furnish to the Bank:
(I) Within 90 days after the close of each of its fiscal years, an
unqualified (except for qualifications relating to changes in accounting
principles or practices reflecting changes in GAAP and required or approved by
the Borrower's independent certified public accountants) audit report certified
by independent certified public accountants, reasonably acceptable to the Bank,
prepared in accordance with GAAP on a consolidated basis for itself and the
Subsidiaries, including a consolidated balance sheet as of the end of that
period, related consolidated statements of income and retained earnings, and a
consolidated statement of cash flows, together with the related consolidating
worksheets for the income statement and balance sheet certified by the chief
financial officer of the Borrower, and a certificate, in form and substance
reasonably satisfactory to the Bank, of the chief financial officer of the
Borrower to the effect that a computation (which computation shall accompany
such certificate and shall be in form and substance reasonably satisfactory to
the Bank) showing compliance with Sections 6.12, 6.13 and 6.14 is in conformity
with the requirements of this Agreement.
(II) Within 60 days after the close of the first three quarterly periods
of each of its fiscal years, for itself and the Subsidiaries, a consolidated
unaudited balance sheet as of the close of each such period and consolidated
statements of income and cash flows for the period from the beginning of that
fiscal year to the end of that quarter, all certified by the chief financial
officer of the Borrower, together with the related consolidating worksheets for
the income statement and balance sheet certified by the chief financial officer
of the Borrower, and a certificate, in form and substance satisfactory to the
Bank, of the chief financial officer of the Borrower to the effect that a
computation (which computation shall accompany such certificate and shall be in
form and substance reasonably satisfactory to the Bank) showing compliance with
Sections 6.12, 6.13 and 6.14 is in conformity with the requirements of this
Agreement.
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(III) Promptly upon furnishing it to its shareholders, copies of all
financial statements, reports and proxy statements so furnished.
(IV) Promptly upon filing them, copies of all registration statements and
annual, quarterly, monthly or other regular reports which the Borrower or any
Subsidiary files with the Securities and Exchange Commission.
(V) Any other information (including non-financial information) which the
Bank or any Lending Installation from time to time reasonably requests.
6.2 USE OF PROCEEDS. The Borrower will, and will cause each Subsidiary to, use
the Letters of Credit and proceeds of the Loans for general corporate purposes.
The Borrower may not, nor may it permit any Subsidiary to, use any of the
Letters of Credit or proceeds of the Loans to purchase or carry any "margin
stock" (as defined in Regulation U).
6.3 CONDUCT OF BUSINESS. The Borrower will, and will cause each Subsidiary to,
carry on and conduct its business in substantially the same manner and in
substantially the same fields of enterprise as it is presently conducted, and do
all things necessary to remain duly incorporated, validly existing and in good
standing as a domestic corporation in its jurisdiction of incorporation and
maintain all requisite authority to conduct its business in each jurisdiction in
which its business is conducted, except that, without limiting the requirements
of Section 6.15, the Borrower may dissolve or otherwise terminate the separate
existence of a Subsidiary if that dissolution or termination would not have a
Material Adverse Effect.
6.4 TAXES. The Borrower will, and will cause each Subsidiary to, timely file
complete and correct United States federal and applicable foreign, state and
local tax returns required by law, and pay when due all taxes, assessments and
governmental charges and levies on it or its income, profits or property, except
those which are being contested in good faith by appropriate proceedings and
with respect to which adequate reserves have been set aside.
6.5 COMPLIANCE WITH LAWS. The Borrower will, and will cause each Subsidiary to,
comply in all material respects with all laws, rules, regulations, orders,
writs, judgments, injunctions, decrees or awards to which it may be subject,
except to the extent such noncompliance would not have a Material Adverse
Effect.
6.6 MERGER. The Borrower will not merge or consolidate with or into any other
Person unless the Borrower is the legally surviving corporation and, after
giving effect to the merger or consolidation, no Default or Unmatured Default
exists.
6.7 LIENS. The Borrower will not, nor will it permit any Subsidiary to, create,
incur, or suffer to exist any Lien in, of or on the property of the Borrower or
any Subsidiary, except:
(I) Liens for taxes, assessments or governmental charges or levies on its
property if they are not at the time delinquent or if they can be paid later
without penalty, or are being contested in good faith and by appropriate
proceedings.
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(II) Liens imposed by law, such as carriers', warehousemen's and
mechanics' liens and other similar liens arising in the ordinary course of
business which secure payment of obligations not more than 60 days past due or
which are being contested in good faith by appropriate proceedings and for which
adequate reserves have been set aside on its books.
(III) Liens arising out of pledges or deposits under worker's compensation
laws, unemployment insurance, old age pensions, or other social security or
retirement benefits, or similar legislation.
(IV) Good faith deposits in connection with bids, tenders, contracts or
leases to which the Borrower or any of its Subsidiaries is a party for a purpose
other than borrowing money or obtaining credit, including rent security
deposits.
(V) Pledges or deposits to secure public or statutory obligations of the
Borrower or any of its Subsidiaries, or surety, customs or appeal bonds to which
the Borrower or any of its Subsidiaries is a party.
(VI) Liens affecting real property which constitute minor survey
exceptions or defects or irregularities in title, minor encumbrances, easements
or reservations of, or rights of others for, rights of way, sewers, electric
lines, telegraph and telephone lines and other similar purposes, or zoning or
other restrictions as to the use of such real property, provided that all of the
foregoing, in the aggregate, do not at any time materially detract from the
value of said properties or materially impair their use in the operation of the
businesses of the Borrower or any of its Subsidiaries.
(VII) Any Lien created to secure payment of a portion of the purchase
price of, or existing at the time of acquisition of, any tangible fixed asset
acquired by the Borrower or any of its Subsidiaries may be created or suffered
to exist upon such fixed asset if the outstanding principal amount of the
indebtedness secured by such Lien does not at any time exceed the purchase price
paid by the Borrower or such Subsidiary for such fixed asset and such
indebtedness secured by such Liens is permitted under Section 6.9; provided that
such Lien does not encumber any other asset at any time owned by the Borrower or
such Subsidiary, and provided, further, that not more than one such Lien shall
encumber any such fixed asset at any one time.
(VIII) Judgment and other similar liens, the existence of which judgment
does not constitute a Default under Section 7.8.
(IX) The interest or title of a lessor under any lease otherwise
permitted under this Agreement with respect to the property subject to such
lease to the extent performance of the monetary obligations of the Borrower or
any of its Subsidiaries thereunder are not delinquent in an amount in excess of
$100,000 in the aggregate.
(X) Liens existing on the date of this Agreement as described on
Schedule 6.7 attached hereto.
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6.8 NOTICE OF DEFAULT. The Borrower will, and will cause each Subsidiary to,
give prompt notice in writing to the Bank of the occurrence of any Default or
Unmatured Default and of any other development, financial or otherwise, which
might have a Material Adverse Effect or might materially adversely affect the
ability of the Borrower to repay the Obligations.
6.9 DEBT. The Borrower will not, nor will it permit any Subsidiary to, incur or
permit to remain outstanding, debt for borrowed money or installment obligations
in an aggregate principal amount which, together with undertakings of others
guaranteed by the Borrower or for which the Borrower otherwise is secondarily
liable, exceeds $200,000 at any time, except the following ("Permitted Debt"):
(i) indebtedness owing to the Bank or, with respect to the Subsidiaries, any of
the Bank's affiliates, (ii) indebtedness of any Subsidiary of the Borrower owing
to any other Subsidiary of the Borrower, and (iii) other indebtedness reflected
in the latest financial statement of the Borrower furnished to the Bank prior to
execution of this Agreement and not to be paid with proceeds of borrowings under
this Agreement. For purposes of this covenant, the sale of any accounts
receivable is deemed the incurring of debt for borrowed money. Nothing in this
Section shall prohibit trade accounts payable and receivable between the
Borrower and its Subsidiaries or between any Subsidiary of the Borrower and any
other Subsidiary of the Borrower arising in the ordinary course of business and
on terms not less favorable to the Borrower than those which could be obtained
if the related transaction were an arm's length transaction with a person other
than an affiliate.
6.10 GUARANTIES. The Borrower will not, nor will it permit any Subsidiary to,
guarantee or otherwise become or remain secondarily liable on the undertaking of
another in an aggregate amount which, together with the aggregate outstanding
principal amount of debt for borrowed money and other installment obligations of
the Borrower and its Subsidiaries, exceeds $200,000 at any time, except for (i)
endorsement of drafts for deposit and collection in the ordinary course of
business and (ii) guaranties by the Subsidiaries of the Borrower of any
Permitted Debt owing by the Borrower or by any other Subsidiary of the Borrower.
6.11 ADVANCES AND INVESTMENTS. The Borrower will not, nor will it permit any
Subsidiary to, purchase or acquire any securities of, or make any loans or
advances to, or investments in, any Person, except (i) obligations of the United
States Government, open market commercial paper rated one of the top two ratings
by a rating agency of recognized standing, or certificates of deposit in insured
financial institutions, and (ii) loans and advances by any Subsidiary of the
Borrower to any other Subsidiary of the Borrower and advances (without any
repayment obligation) by any Subsidiary of the Borrower to the Borrower. Nothing
in this Section shall prohibit trade accounts payable and receivable between the
Borrower and its Subsidiaries or between any Subsidiary of the Borrower and any
other Subsidiary of the Borrower arising in the ordinary course of business and
on terms not less favorable to the Borrower than those which could be obtained
if the related transaction were an arm's length transaction with a person other
than an affiliate.
6.12 FUNDED DEBT TO EBITDA RATIO. The Borrower will not permit or suffer the
ratio of (i) the Funded Debt of the Borrower as of the fiscal quarter end
corresponding to the determination date to (ii) the EBITDA of the Borrower for
the period of four consecutive quarters then ending
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to exceed (a) 4.50 to 1.00 at December 31, 1999 or (b) 3.00 to 1.00 at March 31,
2000 and thereafter, as of the end of each fiscal quarter.
6.13 EBITDA. The Borrower will not permit its EBITDA for the period commencing
with the first day of the then current fiscal year of the Borrower to the
determination date to be less than (i) ($4,300,000) at March 31, 1999, (ii)
($4,800,000) at June 30, 1999, (iii) ($2,600,000) at September 30, 1999, (iv)
$1,200,000 at December 31, 1999, (v) $500,000 at March 31, 2000, (vi) $2,000,000
at June 30, 2000, (vii) $4,000,000 at September 30, 2000, (viii) $6,000,000 at
December 31, 2000 and (ix) $500,000 at March 31, 2001.
6.14 FIXED CHARGE COVERAGE RATIO. The Borrower will not permit its Fixed Charge
Coverage Ratio for the period of four consecutive fiscal quarters immediately
preceding the determination date to be less than (i) 1.35 to 1.00 at March 31,
2000 or (ii) 1.50 to 1.00 at June 30, 2000 and thereafter, as of the end of each
fiscal quarter.
6.15 DISPOSITION OF ASSETS. The Borrower will not, nor will it permit any
Subsidiary to, sell, lease, license, transfer, assign or otherwise dispose of
all or a substantial portion of its business, assets, rights, revenues or
property, real, personal or mixed, tangible or intangible, whether in one or a
series of transactions, other than (i) inventory sold in the ordinary course of
business upon customary credit terms, (ii) sales of scrap or obsolete material
or equipment and (iii) transfers between Subsidiaries of the Borrower.
6.16 DIVIDENDS. The Borrower will not make, pay, declare or authorize any
dividend, payment or other distribution in respect of any class of its capital
stock or any dividend, payment or distribution in connection with the
redemption, purchase, retirement or other acquisition, directly or indirectly,
of any shares of its capital stock, other than such dividends, payments or other
distributions to the extent payable solely in shares of the capital stock of the
Borrower. For purposes of this Section 6.16, "capital stock" shall include
capital stock and any securities exchangeable for or convertible into capital
stock and any warrants, rights or other options to purchase or otherwise acquire
capital stock or such securities.
6.17 NEGATIVE PLEDGE LIMITATION. The Borrower will not enter into any agreement,
with any person other than the Bank pursuant hereto, which prohibits or limits
the ability of the Borrower or any Subsidiary to create, incur, assume or suffer
to exist any Lien upon any of its assets, rights, revenues or property, real,
personal or mixed, tangible or intangible, whether now owned or hereafter
acquired.
6.18 YEAR 2000 ISSUES. The Borrower will take all actions reasonably necessary
to assure that Year 2000 Issues will not have a Material Adverse Effect. Upon
the Bank's request, the Borrower will provide the Bank with a description of its
plan to address Year 2000 Issues, including updates and progress reports. The
Borrower will advise the Bank of any reasonably anticipated Material Adverse
Effect as a result of Year 2000 Issues.
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ARTICLE 7 - DEFAULTS
The occurrence of any one or more of the following events constitutes a Default:
7.1 Any warranty made or deemed made by or on behalf of the Borrower or any
Subsidiary to the Bank under or in connection with this Agreement, any Loan, any
Letter of Credit or any certificate or information delivered in connection with
this Agreement or the Note is materially false on the date as of which it is
made.
7.2 The principal of the Note is not paid when due, or any interest or any
facility fee or other obligations under this Agreement or the Note are not paid
within three days after they become due.
7.3 The Borrower breaches any of the terms of Article 6 and, with respect to
any breach under 6.1, 6.3, 6.4, 6.5, 6.7, 6.8, 6.9, 6.10, 6.11, 6.17 or 6.18,
such breach is not remedied within 10 days.
7.4 The Borrower breaches (other than a breach which constitutes a Default
under Section 7.1, 7.2 or 7.3) any of the terms of this Agreement and such
breach is not remedied within thirty days after written notice from the Bank.
7.5 The Borrower or any Subsidiary fails to pay any debt for borrowed money
when due, which individually or together with other such debt as to which any
such failure exists has an aggregate outstanding principal amount in excess of
$100,000; or the Borrower or any Subsidiary defaults in the performance of any
term contained in any agreement under which that debt was created or is
governed, the effect of which is to cause, or to permit the holder or holders of
that debt to cause, that debt to become due prior to its stated maturity; or any
debt of the Borrower or any Subsidiary is declared to be due and payable or
required to be prepaid or repurchased (other than by a regularly scheduled
payment) prior to its stated maturity, which individually or together with other
such debt as to which any such failure exists has an aggregate outstanding
principal amount in excess of $100,000; or the Borrower or any Subsidiary does
not pay, or admits in writing its inability to pay, its debts generally as they
become due.
7.6 The Borrower or any Subsidiary (i) has an order for relief entered with
respect to it under present or future Federal bankruptcy laws, (ii) makes an
assignment for the benefit of creditors, (iii) applies for, seeks, consents to,
or acquiesces in, the appointment of a receiver, custodian, trustee, examiner,
liquidator or similar official for it or any substantial part of its property,
(iv) institutes any proceeding seeking an order for relief under present or
future Federal bankruptcy laws, or seeking to adjudicate it a bankrupt or
insolvent, or seeking dissolution, winding up, liquidation, reorganization,
arrangement, adjustment or composition of it or its debts under any law relating
to bankruptcy, insolvency or reorganization or relief of debtors, or fails to
file an answer or other pleading denying the material allegations of any such
proceeding filed against it, (v) takes any corporate action to authorize or
effect any of the foregoing actions set forth in this Section 7.6 or (vi) fails
to contest in good faith any appointment or proceeding described in Section 7.7.
7.7 Without the application, approval or consent of the Borrower or any
Subsidiary, a receiver, trustee, examiner, liquidator or similar official is
appointed for the Borrower or any
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Subsidiary or any substantial part of its property, or a proceeding described in
Section 7.6(iv) is instituted against the Borrower or any Subsidiary and that
appointment continues undischarged or those proceedings continue undismissed or
unstayed for a period of 60 consecutive days.
7.8 The Borrower or any Subsidiary shall fail within 30 days to pay, bond or
otherwise discharge any judgment or order for the payment of money in excess of
$500,000, which is not stayed on appeal or otherwise being appropriately
contested in good faith or is not fully insured against, within the applicable
period of limitations for appealing such judgment or order and prior to the
denial of any such appeal.
7.9 Any reportable event (as defined in Section 4043 of ERISA) occurs in
connection with any plan (as defined in ERISA) which results in or could result
in a Material Adverse Effect and such reportable event is not corrected within
30 days after the occurrence thereof.
7.10 Any Person, or two or more Persons acting in concert, acquires beneficial
ownership (within the meaning of Rule 13d-3 of the Securities and Exchange
Commission under the Securities Exchange Act of 1934) of 30% or more of the
outstanding shares of the Borrower's voting stock.
ARTICLE 8 - ACCELERATION; REMEDIES; AND AMENDMENTS
8.1 ACCELERATION. If any Default described in Section 7.6 or 7.7 occurs with
respect to the Borrower, the obligation of the Bank to make Loans automatically
terminates and the Obligations are immediately due and payable without any
election or action on the part of the Bank. If any other Default occurs, the
Bank may terminate or suspend its obligation to make Loans, or declare the
Obligations due and payable, or both, whereupon the Obligations are immediately
due and payable, without presentment, demand, protest or notice of any kind, all
of which the Borrower expressly waives.
8.2 PRESERVATION OF RIGHTS. No delay or omission of the Bank to exercise any
right under this Agreement or the Note impairs that right nor can it be
construed to waive any Default or acquiesce in any Default, and the making of a
Loan notwithstanding the existence of a Default or the inability of the Borrower
to satisfy the conditions precedent to that Loan does not constitute a waiver or
acquiescence. Any single or partial exercise of any right does not preclude any
other or further exercise of it or the exercise of any other right, and no
waiver, amendment or other variation of the terms of this Agreement or the Note
is valid unless in writing signed by the Bank and the Borrower and then only to
the extent that writing specifies. All remedies contained in this Agreement and
the Note or by law afforded are cumulative and all are available to the Bank
until the Obligations have been paid in full.
8.3 AMENDMENTS. Subject to the provisions of this Article 8, the Bank and the
Borrower may enter into agreements supplementing this Agreement for the purpose
of adding or modifying this Agreement or the Note or changing in any manner the
rights of the Bank or the Borrower or waiving any Default.
17
<PAGE> 18
8.4 SETOFF. In addition to and without limiting any rights of the Bank under
applicable law, if the Borrower becomes insolvent, howsoever evidenced, or any
Default occurs, any and all deposits (including all account balances, whether
provisional or final and whether or not collected or available) and any other
debt at any time held or owing by the Bank to or for the credit or account of
the Borrower may be offset and applied toward the payment of the Obligations
owing to the Bank, whether or all or any part of the Obligations are then due.
ARTICLE 9 - GENERAL PROVISIONS
9.1 SURVIVAL OF WARRANTIES. All warranties of the Borrower contained in this
Agreement survive the delivery of the Note and the making of the Loans and the
issuance of Letters of Credit.
9.2 TAXES. Any taxes (excluding income taxes) or other similar assessments or
charges payable or ruled payable by any governmental authority in respect of
this Agreement and the Note must be paid by the Borrower, together with interest
and penalties, if any.
9.3 EXPENSES; INDEMNIFICATION. The Borrower must reimburse the Bank for any
costs, internal charges and out-of-pocket expenses (including reasonable
attorneys' fees and time charges of attorneys for the Bank, who may be employees
of the Bank) paid or incurred by the Bank in connection with the preparation,
review, execution, delivery, amendment, modification, administration, collection
and enforcement of this Agreement and the Note, provided that such attorneys'
fees in connection with the preparation, review, execution and delivery of this
Agreement and the Note for which the Borrower is responsible shall be only the
portion of the aggregate amount of such fees in excess of $5,000. The Borrower
further indemnifies the Bank, its directors, officers and employees against all
losses, claims, damages, penalties, judgments, liabilities and expenses
(including without limitation all expenses of litigation or preparation for
litigation whether or not the Bank is a party) which any of them pay or incur
arising out of or relating to this Agreement, the Note, the transactions
described in this Agreement or the direct or indirect application or proposed
application of the proceeds of any Loan, provided, however, that the Borrower
shall not be required to indemnify the Bank or any such other person, to the
extent, but only to the extent, that such losses, claims, damages, penalties,
judgments, liabilities or expenses are of a type generally borne by lenders in
the ordinary course of business and are not material in amount in the aggregate,
or which are attributable to the gross negligence or willful misconduct of the
Bank. The obligations of the Borrower under this Section survive the termination
of this Agreement.
9.4 SUCCESSORS AND ASSIGNS. The terms of this Agreement and the Note bind and
benefit the Borrower and the Bank and their respective successors and assigns,
except that the Borrower has no right to assign its rights or obligations under
this Agreement or the Note. The Bank may, in the ordinary course of its
commercial banking business and in accordance with applicable law, at any time
sell to one or more banks or other entities participating interests in any Loan,
the Note or the Commitment. The Bank may, with the consent of the Borrower,
which consent may not be unreasonably withheld, assign to one or more banks or
other entities all or any part of its rights and obligations under this
Agreement or the Note, and the Borrower releases the Bank for the amount so
assigned.
18
<PAGE> 19
9.5 GIVING NOTICE. Except as otherwise permitted by Section 2.7 with respect to
borrowing notices, all notices, requests and other communications to any party
must be in writing (including bank wire, telex, facsimile transmission or
similar writing) and must be given to a party: (y) in the case of the Borrower
or the Bank, at its address, facsimile number or telex number set forth on the
signature page below, or (z) in the case of any party, whatever other address,
facsimile number or telex number that party specifies for the purpose, by notice
to the other. Each notice, request or other communication is effective (i) if
given by telex, when it is transmitted to the telex number specified in this
Section and the appropriate answerback is received, (ii) if given by facsimile
transmission, when transmitted to the facsimile number specified in this Section
and confirmation of receipt is received, (iii) if given by mail, 72 hours after
that communication is deposited in the mails with first class postage prepaid,
addressed as required, or (iv) if given by any other means, when delivered at
the address specified in this Section. However, notices to the Bank under
Article 2 are not effective until received.
ARTICLE 10 - GOVERNING LAW; JURISDICTION; JURY TRIAL WAIVER
10.1 CHOICE OF LAW. This Agreement and the Note are to be construed in
accordance with the internal laws (but not the law of conflicts) of Michigan.
10.2 CONSENT TO JURISDICTION. The Borrower irrevocably submits to the
non-exclusive jurisdiction of any United States federal or Michigan state court
sitting in Michigan in any action or proceeding arising out of or relating to
any Loan, and the Borrower irrevocably agrees that all such claims may be heard
and determined in any such court and irrevocably waives any present and future
objection it may have as to the venue of any action or proceeding brought in
that court, or that court is an inconvenient forum. Any judicial proceeding
by the Borrower against the Bank or any affiliate of the Bank involving,
directly or indirectly, any matter in any way arising out of, related to, or
connected with any Loan must be brought only in a court in Michigan.
10.3 WAIVER OF JURY TRIAL. The Bank and the Borrower knowingly and voluntarily
waive any right either of them to have to a trial by jury in any proceeding
(whether sounding in contract or tort) which is in any way connected with this
or any related agreement, or the relationship established under them. This
provision may only be modified in a written instrument executed by the Bank and
the Borrower.
[The rest of this page intentionally left blank.]
19
<PAGE> 20
EXECUTED as of the date first written above.
BORROWER: BANK:
PERCEPTRON, INC. NBD BANK
By: John J. Garber By: Donna Boris
----------------------- -------------------------
Its: Vice President Its: Vice President
----------------------- ------------------------
ADDRESS FOR NOTICES: ADDRESS FOR NOTICES:
47827 Halyard 38601 Twelve Mile Road
Plymouth, Michigan 48170 Farmington Hills, Michigan 48331
Phone: (734) 414-4816 Phone: (248) 488-0652
Fax: (734) 414-4840 Fax: (248) 488-0634
Attention: John Garber Attention: Donna Boris
20
<PAGE> 21
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT, dated as of August 24, 1999 (this
"Amendment"), is by and between PERCEPTRON, INC., a Michigan corporation (the
"Borrower"), and BANK ONE, MICHIGAN, a Michigan banking corporation (the
"Bank").
RECITALS
A. The Borrower and the Bank have entered into the Credit Agreement,
dated May 28, 1999 (the "Credit Agreement"), pursuant to which the Bank provides
to the Borrower a revolving credit facility, including letters of credit, in the
aggregate principal amount not to exceed $15,000,000.
B. The Borrower now desires that the Credit Agreement be amended in order
to modify the financial covenants and the pricing terms applicable to the loans
under the Credit Agreement, and the Bank is willing to so amend the Credit
Agreement on the terms and conditions herein set forth.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein and in the Credit Agreement contained, the parties hereto
agree as follows:
ARTICLE 1. AMENDMENTS TO CREDIT AGREEMENT
Upon the date that the conditions precedent set forth in Article 2 of this
Amendment are satisfied, which date (the "Amendment Date") shall be determined
by the Bank in its sole discretion, the Credit Agreement hereby is amended as
follows, provided that such amendments pursuant to Sections 1.2, 1.3, 1.4 and
1.5 below shall be deemed retroactively effective as of June 30, 1999:
1.1 The definition of the term "Applicable Margin" in Article 1 is amended
and restated in full as follows:
"Applicable Margin" means the percent per annum added to the
Eurodollar Rate if that rate is chosen by the Borrower, and as
determined pursuant to Section 2.9 and by reference to the following
matrix:
<PAGE> 22
<TABLE>
<CAPTION>
Funded Debt/ Eurodollar
EBITDA Rate plus
------ ---------
<S> <C>
Greater than 1.625%
3.00 to 1.00
Equal to or
greater than 1.50%
1.00 to 1.00
but not greater
than 3.00 to 1.00
Less than
1.00 to 1.00 1.25%
</TABLE>
; provided that the "Applicable Margin" for each existing Loan that bears
interest at the Eurodollar Rate and with respect to which the current Eurodollar
Interest Period commenced prior to the Amendment Date shall continue as it was
at the time of the commencement of such current Eurodollar Interest Period,
through the end of such current Eurodollar Interest Period.
1.2 The following definitions of the terms "Tangible Net Worth" and "Total
Liabilities", respectively are added to Article 1 in alphabetical order:
"Tangible Net Worth" means, as of any date, (a) the amount of any
capital stock, paid in capital and similar equity accounts plus (or
minus in the case of a deficit) the capital surplus and retained
earnings and the amount of any foreign currency translation adjustment
account shown as a capital account, less (b) the net book value of all
items of the following character which are included in assets: (i)
goodwill, including, without limitation, the excess of cost over book
value of any asset, (ii) organization or experimental expenses, (iii)
unamortized debt discount and expense, (iv) patents, trademarks, trade
names and copyrights, (v) treasury stock, (vi) deferred taxes and
deferred charges, (vii) franchises, licenses and permits, and (viii)
other assets which are deemed intangible assets under GAAP; all as
determined for the Borrower and its Subsidiaries on a consolidated
basis in accordance with GAAP.
"Total Liabilities" means, as of any date, the following, as
determined for the Borrower and its Subsidiaries on a consolidated
basis in accordance with GAAP: all obligations which, in accordance
with GAAP, are or should be classified as liabilities on a balance
sheet and all contingent liabilities.
1.3 Each reference to "Sections 6.12, 6.13 and 6.14" in subparts (i) and
(ii) of Section 6.1 is deleted, and the following is substituted in place
thereof:
Sections 6.12, 6.13, 6.14 and 6.19.
-2-
<PAGE> 23
1.4 Sections 6.12, 6.13 and 6.14 are amended and restated in full as
follows:
6.12 FUNDED DEBT TO EBITDA RATIO. The Borrower will not permit or
suffer the ratio of (i) the Funded Debt of the Borrower as of the
fiscal quarter end corresponding to the determination date to (ii) the
EBITDA of the Borrower for the period of four consecutive quarters
then ending to exceed 3.00 to 1.00, such ratio to be determined as of
the end of each fiscal quarter, commencing with the fiscal quarter
ending on or about June 30, 2000.
6.13 EBITDA. The Borrower will not permit its EBITDA to be less than
(i) ($4,300,000) for the period from January 1, 1999 through the end
of its fiscal quarter ending on or about March 31, 1999, (ii)
($6,200,000) for the period from January 1, 1999 through the end of
its fiscal quarter ending on or about June 30, 1999, (iii) $1,500,000
for the period from July 1, 1999 through the end of its fiscal quarter
ending on or about September 30, 1999, (iv) $2,100,000 for the period
from July 1, 1999 through the end of its fiscal quarter ending on or
about December 31, 1999, (v) $3,000,000 for the period from July 1,
1999 through the end of its fiscal quarter ending on or about March
31, 2000, (vi) $4,500,000 for the period from July 1, 1999 through the
end of its fiscal quarter ending on or about June 30, 2000, (vii)
$1,800,000 for the period from July 1, 2000 through the end of its
fiscal quarter ending on or about September 30, 2000, (viii)
$3,600,000 from the period from July 1, 2000 through the end of its
fiscal quarter ending on or about December 31, 2000 and (ix)
$4,300,000 for the period from July 1, 2000 through the end of its
fiscal quarter ending on or about March 31, 2001.
6.14 FIXED CHARGE COVERAGE RATIO. The Borrower will not permit its
Fixed Charge Coverage Ratio for the period of four consecutive fiscal
quarters immediately preceding the fiscal quarter end corresponding to
the determination date to be less than (i) 1.20 to 1.00 at June 30,
2000, (ii) 1.35 to 1.00 at September 30, 2000 or (iii) 1.50 to 1.00 at
December 31, 2000 and thereafter, as of the end of each fiscal
quarter.
1.5 The following Section 6.19 is added to the end of Article 6:
6.19 TOTAL LIABILITIES TO TANGIBLE NET WORTH RATIO. The Borrower will
not permit the ratio of Total Liabilities to Tangible Net Worth to
exceed 1.00 to 1.00 at any time.
-3-
<PAGE> 24
ARTICLE 2. CONDITIONS PRECEDENT TO AMENDMENTS
As conditions precedent to the effectiveness of the amendments to the
Credit Agreement set forth in Article 1 of this Amendment, the Bank shall
receive this Amendment duly executed on behalf of the Borrower, and certified
copies of such documents evidencing necessary corporate action of the Borrower
with respect to this Amendment and the transactions contemplated hereby, as the
Bank may reasonably request and in form and substance satisfactory to the Bank.
ARTICLE 3. REPRESENTATIONS AND WARRANTIES
In order to induce the Bank to enter into this Amendment, the Borrower
represents and warrants that:
3.1 The execution, delivery and performance by the Borrower of this
Amendment are within its corporate powers, have been duly authorized by all
necessary corporate action and are not in contravention of any law, rule or
regulation, or any judgment, decree, writ, injunction, order or award of any
arbitrator, court or governmental authority, or of the terms of the Borrower's
charter or by-laws, or of any contract or undertaking to which the Borrower is a
party or by which the Borrower or its property is or may be bound or affected.
3.2 This Amendment is a legal, valid and binding obligation of the
Borrower, enforceable against the Borrower in accordance with its terms.
3.3 No consent, approval or authorization of or declaration, registration
or filing with any governmental authority or any nongovernmental person or
entity, including without limitation any creditor or stockholder of the
Borrower, is required on the part of the Borrower in connection with the
execution, delivery and performance of this Amendment or the transactions
contemplated hereby or as a condition to the legality, validity or
enforceability of this Amendment.
3.4 After giving effect to the amendments contained in Article 1 of this
Amendment, the representations and warranties contained in Article 5 of the
Credit Agreement are true on and as of the date hereof with the same force and
effect as if made on and as of the date hereof.
3.5 No Default or Unmatured Default has occurred and is continuing.
-4-
<PAGE> 25
ARTICLE 4. MISCELLANEOUS
4.1 If the Borrower shall fail to perform or observe any term, covenant or
agreement in this Amendment, or any representation or warranty made by the
Borrower in this Amendment shall prove to have been incorrect in any material
respect when made, such occurrence shall be deemed to constitute a Default.
4.2 All references to the Credit Agreement in any other document,
instrument or certificate referred to in the Credit Agreement or delivered in
connection therewith or pursuant thereto, hereafter shall be deemed references
to the Credit Agreement, as amended hereby.
4.3 Subject to the amendments herein provided, the Credit Agreement shall
in all respects continue in full force and effect.
4.4 Capitalized terms used but not defined herein shall have the
respective meanings ascribed thereto in the Credit Agreement.
4.5 This Amendment shall be governed by and construed in accordance with
the laws of the State of Michigan.
4.6 The Borrower agrees to pay the reasonable fees and expenses of
Dickinson Wright PLLC, counsel for the Bank, in connection with the negotiation
and preparation of this Amendment and the documents referred to herein and the
consummation of the transactions contemplated hereby, and in connection with
advising the Bank as to its rights and responsibilities with respect thereto.
4.7 This Amendment may be executed upon any number of counterparts with
the same effect as if the signatures thereto were upon the same instrument.
[The rest of this page intentionally left blank.]
-5-
<PAGE> 26
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered as of the day and year first-above written.
PERCEPTRON, INC.
By: /S/ JOHN J. GARBER
--------------------------
Its: Vice President
BANK ONE, MICHIGAN
(formerly known as NBD Bank)
By: /S/ DONNA BORIS
--------------------------
Its Vice President
-6-
<PAGE> 1
EXHIBIT 10.28
FIRST AMENDMENT TO THE
PERCEPTRON, INC. 1998 GLOBAL TEAM MEMBER
STOCK OPTION PLAN
Pursuant to the Amendment provisions in Section 9 of the Perceptron, Inc.
1998 Global Team Member Stock Option Plan ("Plan") and the approval of the
Board of Directors of Perceptron, Inc. ("Company"), the Plan is hereby amended
as set forth below:
1. Section 4.1 of the Plan (Shares Available for Options) shall be
amended and restated in its entirety to read as follows:
4.1 SHARES AVAILABLE FOR OPTIONS. The Board shall reserve a total of
500,000 shares of Common Stock for purposes of the Plan.
THIS FIRST AMENDMENT is hereby adopted as of June 24, 1999.
PERCEPTRON, INC.
By:/s/ Alfred A. Pease
-------------------------------
Alfred A. Pease, Chairman,
President and Chief
Executive Officer
<PAGE> 1
EXHIBIT 10.29
SECOND AMENDMENT TO THE
PERCEPTRON, INC. 1998 GLOBAL TEAM MEMBER
STOCK OPTION PLAN
Pursuant to the Amendment provisions in Section 9 of the Perceptron,
Inc. 1998 Global Team Member Stock Option Plan ("Plan") and the approval of the
Board of Directors of Perceptron, Inc. ("Company"), the Plan is hereby amended
as set forth below:
1. Section 4.1 of the Plan (Shares Available for Options) shall be
amended and restated in its entirety to read as follows:
4.1 SHARES AVAILABLE FOR OPTIONS. The Board shall reserve a total
of 700,000 shares of Common Stock for purposes of the Plan.
THIS SECOND AMENDMENT is hereby adopted as of September 3, 1999.
PERCEPTRON, INC.
By: /s/ Alfred A. Pease
---------------------------------------
Alfred A. Pease, Chairman, President and
Chief Executive Officer
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF PERCEPTRON, INC.
The following three corporations are subsidiaries of Perceptron, Inc.
1. Perceptron Europe B.V., a corporation organized under the laws of
the Netherlands.
2. Perceptron (Europe) GmbH, a corporation organized under the laws of
Germany, is a wholly owned subsidiary of Perceptron Europe B.V.
3. Trident Systems, Inc., a corporation organized under the laws of
Georgia.
51
<PAGE> 1
EXHIBIT 23
[PRICEWATERHOUSECOOPERS LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statements of Perceptron, Inc. and Subsidiaries on Form S-8 (File Nos. 33-63666,
33-63664, 33-85656, 33-93910, 333-00444, 333-00446, 333-65001 and 333-65007) and
on Form S-3 (File Nos. 33-78594, 333-24239 and 333-29263) of our report dated
August 11, 1999, on our audits of the consolidated financial statements and
financial statement schedule of Perceptron, Inc. and Subsidiaries as of June 30,
1999, December 31, 1998 and 1997, and for the six month period ended June 30,
1999 and the years ended December 31, 1998, 1997 and 1996, which report is
included in this Transition Report on Form 10-K for the six month period ended
June 30, 1999.
/s/ PricewaterhouseCoopers LLP
Detroit, Michigan
September 24, 1999
52
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,205,000
<SECURITIES> 0
<RECEIVABLES> 25,957,000
<ALLOWANCES> (218,000)
<INVENTORY> 12,323,000
<CURRENT-ASSETS> 43,574,000
<PP&E> 17,233,000
<DEPRECIATION> (6,121,000)
<TOTAL-ASSETS> 61,334,000
<CURRENT-LIABILITIES> 9,005,000
<BONDS> 4,265,000
0
0
<COMMON> 82,000
<OTHER-SE> 47,982,000
<TOTAL-LIABILITY-AND-EQUITY> 61,334,000
<SALES> 21,256,000
<TOTAL-REVENUES> 21,256,000
<CGS> 10,768,000
<TOTAL-COSTS> 10,768,000
<OTHER-EXPENSES> 17,148,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,349,000)
<INCOME-TAX> (2,489,000)
<INCOME-CONTINUING> (4,860,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,860,000)
<EPS-BASIC> (0.59)
<EPS-DILUTED> (0.59)
</TABLE>
