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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended March 31, 1999.
Commission file number: 0-20206
PERCEPTRON, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-2381442
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
47827 Halyard Drive, Plymouth, Michigan 48170-2461
(Address of principal executive offices)
(734) 414-6100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the proceeding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----------- -----------
The number of shares outstanding of each of the issuer's classes of common stock
as of May 7, 1999, was:
Common Stock, $0.01 par value 8,169,152
----------------------------- --------------------------
Class Number of shares
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PERCEPTRON, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
COVER 1
INDEX 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
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PART I. FINANCIAL INFORMATION
PERCEPTRON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
(In Thousands) 1999 1998
--------------------- ----------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 4,402 $ 5,753
Receivables:
Billed receivables, net of allowance for doubtful accounts 19,043 27,357
of $208,000 and $200,000, respectively
Unbilled and other receivables 5,423 4,242
Inventories, net of reserves of $528,000 and $519,000, respectively 11,949 11,365
Prepaid expenses and deferred tax asset 1,940 1,893
--------------------- ----------------------
Total current assets 42,757 50,610
--------------------- ----------------------
Property and Equipment
Building and land 5,990 5,990
Machinery and equipment 9,480 8,950
Furniture and fixtures 1,469 1,438
--------------------- ----------------------
16,939 16,378
Less - Accumulated depreciation and amortization (5,648) (5,131)
--------------------- ----------------------
Net property and equipment 11,291 11,247
--------------------- ----------------------
Other Assets
Intangible assets, net of accumulated amortization 1,777 1,829
of $182,000 and $94,000, respectively
Deferred tax asset 4,420 2,722
--------------------- ----------------------
Total other assets 6,197 4,551
--------------------- ----------------------
Total Assets $ 60,245 $ 66,408
===================== ======================
LIABILITIES AND COMMON SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 2,919 $ 3,666
Accrued liabilities and expenses 4,192 5,726
Income taxes payable 1,048 841
Accrued compensation and stock option expense 272 283
--------------------- ----------------------
Total current liabilities 8,431 10,516
--------------------- ----------------------
Long-Term Liabilities
Notes payable 1,040 1,040
--------------------- ----------------------
Total long-term liabilities 1,040 1,040
--------------------- ----------------------
Total liabilities 9,471 11,556
--------------------- ----------------------
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 and 8,219,000 at March 31, 1999 and
December 31, 1998, respectively 82 82
Accumulated other comprehensive income (loss) (2,860) (1,669)
Additonal paid-in capital 40,980 41,236
Retained earnings 12,572 15,203
--------------------- ----------------------
Total shareholders' equity 50,774 54,852
--------------------- ----------------------
Total Liabilities and Common Shareholders' Equity $ 60,245 $ 66,408
===================== ======================
</TABLE>
The notes to the consolidated financial statements are an integral part of these
statements.
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PERCEPTRON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
(In Thousands, Except Per Share Amounts) 1999 1998
------------------- -------------------
<S> <C> <C>
Net Sales $ 8,934 $ 8,755
Cost of Sales 4,697 4,316
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Gross Profit 4,237 4,439
------------------- -------------------
Operating Expenses
Selling, general and administrative 5,064 4,532
Engineering, research and development 3,233 2,743
------------------- -------------------
Total operating expenses 8,297 7,275
------------------- -------------------
Operating Income (Loss) (4,060) (2,836)
------------------- -------------------
Other Income and (Deductions)
Foreign currency gain 82 89
Interest Income (expense), net (8) 245
------------------- -------------------
Total other income 74 334
------------------- -------------------
Income (Loss) Before Income Taxes (3,986) (2,502)
Income Tax Benefit 1,355 838
------------------- -------------------
Net Income (Loss) $ (2,631) $ (1,664)
=================== ===================
Earnings (Loss) Per Share
Basic ($0.32) ($0.20)
Diluted ($0.32) ($0.20)
Weighted Average Common Shares Outstanding
Basic 8,200 8,235
Diluted 8,200 8,235
</TABLE>
The notes to the consolidated financial statements are an integral part of these
statements.
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PERCEPTRON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
(In Thousands) 1999 1998
------------------------ ----------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ (2,631) $ (1,664)
Adjustments to reconcile net income to net cash provided from
(used for) operating activities:
Depreciation and amortization 660 543
Deferred income taxes (1,698) -
Other (13)
Changes in assets and liabilities, exclusive of changes shown
separately 3,142 1,082
------------------------ ----------------------
Net cash used for operating activities (540) (39)
------------------------ ----------------------
Cash Flows from Financing Activities
Issuance of short-term debt 1,972 -
Repayment of short-term debt (1,573) -
Repurchase of company stock (257) (453)
Proceeds from the exercise of stock options - 627
------------------------ ----------------------
Net cash provided from financing activities 142 174
------------------------ ----------------------
Cash Flows from Investing Activities
Capital expenditures (631) (683)
Sales and maturities of marketable securities - 2,000
------------------------ ----------------------
Net cash provided from (used for) investing activities (631) 1,317
------------------------ ----------------------
Effect of Exchange Rate Changes on Cash and Cash Equivalents (322) (72)
------------------------ ----------------------
Net Increase (Decrease) in Cash and Cash Equivalents (1,351) 1,380
Cash and Cash Equivalents, January 1 5,753 14,448
------------------------ ----------------------
Cash and Cash Equivalents, March 31 $ 4,402 $ 15,828
======================== ======================
Changes in Assets and Liabilities, Exclusive of Changes Shown Separately
Billed, unbilled and other receivables, net $ 6,258 $ 5,587
Inventories (584) (2,056)
Accounts payable (748) (844)
Other current assets and liabilities (1,784) (1,605)
------------------------ ----------------------
$ 3,142 $ 1,082
======================== ======================
</TABLE>
The notes to the consolidated financial statements are an integral part of these
statements.
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PERCEPTRON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements should be read in
conjunction with Perceptron's 1998 Annual Report on Form 10-K. Certain
reclassifications have been made to the prior year's financial statements to
conform with the 1999 presentation. In the opinion of management, the unaudited
information furnished herein reflects all adjustments necessary, consisting of
normal recurring adjustments, for a fair presentation of the financial
statements for the periods presented. The results of operations for any interim
period are not necessarily indicative of the results of operations for a full
year.
2. INVENTORY
Inventory is stated at the lower of cost or market. The cost of inventory is
determined by the first in, first out (FIFO) method. Inventory, net of reserves,
is comprised of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------------- ----------------
<S> <C> <C>
Component Parts $ 6,206 $ 5,794
Work In Process 2,073 2,235
Finished Goods 3,670 3,336
---------------- ----------------
Total $ 11,949 $ 11,365
================ ================
</TABLE>
3. CREDIT FACILITIES
At March 31, 1999, the Company had unsecured bank credit facilities of $5.0
million US and 1.0 million DM. 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 (7.75% as of April 30, 1999). These
credit facilities expire on May 31, 1999, unless canceled earlier by the Company
or the bank. The Company expects to complete a $15.0 million US two-year
unsecured revolving credit facility and renew the 1.0 million DM facility prior
to May 31, 1999.
4. FOREIGN EXCHANGE CONTRACTS
The Company may use, from time to time, a limited hedging program to minimize
the impact of foreign currency fluctuations. As the Company exports products, it
may enter into limited hedging transactions relating to the accounts receivable
arising as a result of such shipments. These transactions involve the use of
forward contracts. At March 31, 1999 and 1998, the Company had no forward
contracts outstanding.
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5. COMPREHENSIVE INCOME
Comprehensive income is defined as the change in common shareholder's equity
during a period from transactions and events from non-owner sources, including
net income. Other items of comprehensive income include revenues, expenses,
gains and losses that are excluded from net income. Total comprehensive income
for the applicable periods is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999 1998
--------------- ----------------
<S> <C> <C>
Net Income (Loss) $ (2,631) $ (1,664)
Other Comprehensive Income (Loss)
foreign currency translation adjustments (1,191) (359)
--------------- ----------------
Total Comprehensive Income (Loss) $ (3,822) $ (2,023)
=============== ================
</TABLE>
6. 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. A reconciliation of both calculations is
shown below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
WEIGHTED AVG. EARNINGS (LOSS)
NET INCOME (LOSS) COMMON SHARES PER SHARE
THREE MONTHS ENDED MARCH 31, 1999 1998 1999 1998 1999 1998
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $ (2,631) $ (1,664) 8,200 8,235 $ (0.32) $ (0.20)
Effect of Dilutive Securities:
Stock options and warrants - - - -
------------ ------------ ------------ ------------
Diluted EPS $ (2,631) $ (1,664) 8,200 8,235 $ (0.32) $ (0.20)
============ ============ ============ ============
</TABLE>
Options to purchase 4,369 shares of common stock were outstanding in 1999 and
were not included in the computation of diluted EPS because the effect would
have been antidilutive.
7. COMMITMENTS AND CONTINGENCIES
The Company may, from time to time, be subject to legal proceedings and claims.
Litigation involves many uncertainties. Management is currently unaware of any
significant pending litigation affecting the Company, other than the matters
discussed below.
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.
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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. The arbitration is presently scheduled to begin
in May 1999. 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.
8. SEGMENT INFORMATION
The Company has two reportable segments: Automotive and Forest Products. The
Automotive segment designs, manufactures, and markets information based process
measurement and guidance systems within the automotive industry. The Forest
Products segment employs the same technology, providing products and services to
the forest and wood products industry. The Company evaluates performance based
on operating income. Segment detail is summarized as follows (in thousands):
<TABLE>
<CAPTION>
FIRST QUARTER AUTOMOTIVE FOREST PRODUCTS CONSOLIDATED
- ----------------------- -------------------- ---------------------- ----------------------
<S> <C> <C> <C>
1999
Revenues $ 8,136 $ 798 $ 8,934
Operating (loss) (1,899) (2,161) (4,060)
Total Assets 52,739 7,506 60,245
1998
Revenues $ 7,246 $ 1,509 $ 8,755
Operating (loss) (2,089) (747) (2,836)
Total Assets 60,541 3,582 64,123
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview - The Company reported a net loss of $2.6 million ($0.32 per share) for
the 1999 first quarter, compared to a loss of $1.7 million ($0.20 per share) in
the 1998 first quarter. Net sales of $8.9 million for the three months ended
March 31, 1999, were up slightly over the prior year's sales of $8.8 million.
Automotive sales accounted for 91% of total sales during the first quarter of
1999, compared to 83% in 1998. Forest Product sales represented 9% of total
sales for 1999, compared to 17% in the first quarter of 1998. Gross profit for
the 1999 period was 47.4%, compared to 50.7 % in 1998 reflecting competitive
pricing on certain product lines. Operating expenses were up $1.0 million in the
first quarter of 1999 compared to 1998 primarily related to the additional
personnel required to support the Company's expanding global market
opportunities and research and development work on new products.
Automotive - Sales in the first quarter of 1999 increased $900,000 to $8.1
million, compared to $7.2 million in 1998. P-1000 sales accounted for
approximately 66% of net automotive sales in the first quarter of 1999, compared
to approximately 53% in the same period of 1998. RGS and NCA systems sales
accounted for 17% of net sales in 1999 compared to 36% in 1998. The timing of
RGS and NCA system sales are contingent on new model retooling programs and, as
a result, can fluctuate greatly from quarter to quarter. During the first
quarter of 1999, the Company also sold its first Wet Film Thickness Measurement
System.
Forest Products - Sales in the first quarter of 1999 were $800,000, down from
last year's sales of $1.5 million. The low sales level in the first quarter
continued to reflect the postponement of capital purchases by mills affected by
the soft dimension lumber market. During the 1999 first quarter, the Company had
its first Lumber Analyzer sale at an in-field beta testing site. The Lumber
Analyzer is an ultrasound technology product that the Company acquired from
Sonic Technologies and Sonic Industries in the fourth quarter of 1998.
Bookings & Backlog - New order bookings for the three months ended March 31,
1999, were a strong $16.4 million, compared to only $5.4 million in 1998.
Automotive bookings totaled $15.2 million in the 1999 quarter, compared to $4.7
million a year ago. Forest Products bookings were $1.2 million in 1999, compared
to $700,000 a year ago. The increase in Forest Products bookings, quarter over
quarter, reflects improvement in the market for dimension lumber. The 1999
quarter included a significant $1.1 million two-year blanket order for the
Lumber Analyzer product. Backlog at March 31, 1999 was $30.9 million, compared
to $20.8 million at March 31, 1998. The Company expects to be able to fill
substantially all of the orders in backlog by the end of 1999. The amount of new
order bookings and the level of backlog during any particular period are not
necessarily indicative of the future operating performance of the Company.
Selling, General and Administrative Expenses (SG&A) - SG&A expenses increased
from $4.5 million in the 1998 first quarter to $5.1 million in 1999. The
increase was primarily due to increased personnel and related expenses in 1999
as compared to the same period last year to support broadening international
sales and marketing activities and in the forest products industry.
Engineering, Research and Development Expenses (R&D) - Engineering and R&D
expenses increased from $2.7 million in the first quarter of 1998 to $3.3 in the
1999 quarter. The increase in expenses continued to reflect investments the
Company is making in new product development including increases in labor,
contract design services and engineering supplies. As discussed in the "Outlook"
section below,
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the Company expects to begin realizing returns on these investments beginning in
the second half of 1999 as several new products are launched. The foregoing
statement is a "forward looking statement" within the meaning of the Securities
Exchange Act of 1934, as amended. See Item 2 "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Safe Harbor
Statement" for a discussion of a number of uncertainties which could cause
actual results to differ materially from those set forth in the forward looking
statement. During the first quarter of 1999, the first Wet Film Thickness
Measurement System was sold and is in the process of being installed at an alpha
site. Also during the first quarter, orders were taken for the IPNetTM, with
installation expected to begin toward the end of June or the beginning of July
1999. The Company completed the first installation of its revised PaintScanTM
product during the first quarter of 1999 and the system is currently undergoing
customer evaluation. PaintScanTM is a paint defect inspection system that was
formerly known as Industrial Dirt Counter.
Interest Income (Expense), net - The decrease in interest income (expense), net
reflected the reduction in interest income related to lower cash balances and
higher interest expense from the assumption of long-term debt related to the
Sonic acquisition.
Outlook - Based on customer shipment schedules, the Company expects second
quarter 1999 sales to improve, but may remain below the level required to
achieve break-even operating income. If new product launches go as planned, the
Company would expect sales during the second half of 1999 to continue to improve
and, as a result, expects to achieve positive operating results in the second
half of 1999. The foregoing statement is a "forward looking statement" within
the meaning of the Securities Exchange Act of 1934, as amended. See Item 2
"Management's Discussion and Analysis of financial Condition and Results of
Operations - Safe Harbor Statement" for a discussion of a number of
uncertainties which could cause actual results to differ materially from those
set forth in the forward looking statement.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $4.4 million at March 31, 1999,
compared to $5.8 million at December 31, 1998. The decrease of $1.4 million in
cash for the quarter resulted from $540,000 used in operations; $631,000 used
for capital spending; an unfavorable exchange rate on cash of $322,000; and
$142,000 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, net of foreign currency effects, decreased $6.3 million primarily
as a result of collections. The increase of $584,000 in inventory primarily
reflected the purchase of component parts needed to fulfill second quarter 1999
orders. The decrease in accounts payable and other current assets and
liabilities totaling $2.5 million primarily reflected the payment of liabilities
recorded as of December 31, 1998, and lower expenses in the first quarter of
1999, compared to the fourth quarter of 1998.
Financing activities during the quarter reflected working capital borrowings of
$2.0 million, offset by repayments of $1.6 million. Also during the quarter, the
Company repurchased 50,000 shares of stock for $257,000.
At March 31, 1999, the Company had unsecured credit facilities totaling $5.0
million US and 1.0 million DM. 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 (7.75% as of April 30, 1999). At March
31, 1999, the Company had $399,000 outstanding under these credit facilities.
There were no
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borrowings outstanding under these credit facilities as of March 31, 1998. These
credit facilities expire on May 31, 1999, unless canceled earlier by the Company
or the bank. The Company expects to complete a $15.0 million US two-year
unsecured revolving credit facility and renew the 1.0 million DM facility prior
to May 31, 1999. The Company believes that available cash on hand plus existing
and expected credit facilities will be sufficient to fund anticipated 1999 cash
flow requirements.
The Company does not believe that inflation has had any significant impact on
historical operations and does not expect any significant near-term inflationary
impact.
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.
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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 does not plan to monitor 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 determining whether its principal vendors and
suppliers (all of which are referred to as "Third Party Suppliers") are Year
2000 capable and expects to complete this process in the third quarter of 1999.
The plan includes the identification of principal Third Party Suppliers, formal
communications with the Third Party Suppliers regarding their Year 2000 efforts
and, with respect to its critical Third Party Suppliers, some form of additional
verification of readiness, which could include site visits. The failure of one
or more critical Third Party Suppliers 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. This
third-party vendor offers an upgraded version which is represented to be Year
2000 compliant. Alternatively, the Company believes that the current version of
the operations system can be remediated by a third party to be Year 2000
capable. Completion of this remediation is expected in the first half of 1999.
The Company also has a number of engineering systems, used primarily for
testing, developed by the Company's internal staff. The Company forward-date
tested these systems during the first quarter of 1999 and is in the process of
completing the remediation necessary to make them Year 2000 compliant. The
Company has begun to assess the IT systems of its subsidiaries which should be
completed by the third quarter of 1999.
The Company maintains networks of personal computers. Using internal personnel,
the Company plans to assess the Company's personal computer networks for Year
2000 compliance and to make necessary modifications. The assessment began in the
first quarter of 1999. Completion of this project is expected in the first half
of 1999. The Company's personal computer systems generally operate using
"shrinkwrapped" software (such as Microsoft Windows 95, Microsoft Word and
Excel). To the extent any of the programs used by the personal computer systems
are not Year 2000 compliant, the Company believes that Year 2000 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 began its initial
assessment of these systems in the first quarter of 1999. Most of the Company's
operations are conducted from its headquarters in Plymouth, Michigan, which was
built in 1996, and included new non-IT systems. If the Company's non-IT systems
cannot be
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remediated to become compliant, and if it is necessary for the Company's
operations, the Company will replace those systems before the end of 1999.
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 plans to evaluate business disruption
scenarios, coordinate the establishment of Year 2000 contingency plans, and
identify and implement preemptive strategies. The Company plans to develop
contingency plans for critical business processes during 1999 as the Company
identifies areas of greater risk for Year 2000 non-compliance internally or by
its customers and Third Party Suppliers. Estimates of time, costs and risks
associated with the Year 2000 issue are based on currently available
information. Developments that could affect estimates include, but are not
limited to, the availability and cost of trained personnel; the ability to
locate and correct all relevant computer code and systems; cooperation and
remediation success of the Company's suppliers and customers (and their
suppliers and customers); 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.
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 has historically not had direct exposures to interest rate
risks. The Company assumed fixed rate debt due in 2003 in connection with a
recent acquisition. To the
13
<PAGE> 14
extent the Company needs to borrow funds in the future it could be exposed to
interest rate risks. At March 31, 1999 and 1998, 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 percentage of sales commitments in U.S. Dollars at
March 31, 1999 was 74%. 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 March 31, 1999 and 1998, the Company had no forward
contracts outstanding.
NEW ACCOUNTING PRONOUNCEMENTS
In the first quarter of 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 the first quarter of 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 issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", effective for
fiscal years beginning after June 15, 1999. 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 Operations may be "forward looking statements" within
the meaning of the Securities Exchange Act of 1934, including the Company's
expectation as to 1999 and future revenue and earnings levels, the
14
<PAGE> 15
timing of new product releases and the expansion of the 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required pursuant to this item is incorporated by reference herein
from Item 2 "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Market Risk Information".
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. 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. The arbitration is presently scheduled to begin
in May 1999. The Company intends to vigorously pursue its claims and defend
Speroni's claims.
ITEM 5. OTHER INFORMATION
John J. Garber joined the Company as Vice President, Finance and Chief Financial
Officer in February 1999. Mr. Garber comes to the Company from Newcor, Inc.,
where he served as Chief Financial Officer since 1991.
Louis R. Ross, a valued member of Perceptron's Board of Directors, passed
away in early May 1999. Mr. Ross was a retired Vice-Chairman of Ford Motor
Company and made a significant contribution to the Company through his vast
experience, energy and talent.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
10.26 Second Amendment to Amended and Restated 1992 Stock Option
Plan
10.27 First Amendment to Amended and Restated Directors Stock
Option Plan
27. Financial Data Schedule
(B) Reports on Form 8-K
None
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PERCEPTRON, INC.
(Registrant)
Date: May 13, 1999 By: /S/ Alfred A. Pease
-----------------------------------
Alfred A. Pease, President
and Chief Executive Officer
Date: May 13, 1999 By: /S/ John J. Garber
--------------------------
John J. Garber
Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: May 13, 1999 By: /S/ Sylvia M. Smith
-----------------------------------
Sylvia M. Smith, Controller
and Chief Accounting Officer
(Principal Accounting Officer)
17
<PAGE> 18
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.26 Second Amendment to Amended and Restated 1992 Stock Option Plan
10.27 First Amendment to Amended and Restated Directors Stock Option Plan
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.26
SECOND AMENDMENT TO THE
PERCEPTRON, INC. 1992 STOCK OPTION PLAN
(AMENDED AND RESTATED OCTOBER 31, 1996)
Pursuant to the Amendment provisions in Section 9.2 of the Perceptron, Inc.
1992 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. Subject to shareholder approval, 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 of Directors shall reserve
for purposes of this Plan, out of the authorized but unissued Stock or out
of shares of Stock held in the Company's Treasury, or partly out of each, a
total of 2,414,286 shares of Stock, after taking into account the Company's
reverse stock split effected on May 5, 1992 and stock split effected
November 30, 1995, (or the number and kind of shares of Stock or other
securities which, in accordance with Section 8 of this Plan, shall be
substituted for such shares or to which such shares shall be adjusted).
2. Section 6.1 of the Plan (Termination of Employment - General) shall be
amended and restated in its entirety to read as follows:
6.1 GENERAL. If the employment by the Company of any optionee who is
an Employee shall terminate for any reason, other than by death or total
and permanent disability, any option which such optionee is entitled to
exercise on the date of such termination shall be exercisable by the
optionee at any time on or before the earlier of the expiration date of the
option or three months after the date of such termination, but only to the
extent of the accrued right to purchase at the date of such termination.
Notwithstanding the foregoing, the Committee, in its discretion, may extend
an exercise period, not to exceed the tenth anniversary of the date of the
grant, and may permit the option to continue to accrue rights to purchase
additional shares of Stock following any termination of employment of any
option; it being understood, that the extension of the exercise term or
accrual right as set forth above for an Incentive Stock Option may cause
such Option to lose its preferential tax treatment.
THIS SECOND AMENDMENT is hereby adopted as of April 14, 1999.
PERCEPTRON, INC.
By: /S/ Alfred A. Pease
------------------------------------------
Alfred A. Pease, Chairman, President
and Chief Executive Officer
<PAGE> 1
EXHIBIT 10.27
FIRST AMENDMENT TO THE
PERCEPTRON, INC. DIRECTORS STOCK OPTION PLAN
(AMENDED AND RESTATED OCTOBER 31, 1996)
Pursuant to the Amendment provisions in Section 5.6 of the Perceptron, Inc.
Directors Stock Option Plan, as amended and restated October 31, 1996, (the
"Plan"), the approval of the Board of Directors of Perceptron, Inc. (the
"Company") and, to the extent set forth below, the approval of the shareholders
at the Company's next Annual Meeting, the Plan is hereby amended as set forth
below.
1. Subject to shareholder approval, section 1.4 of the Plan (Stock) shall
be amended and restated in its entirety to read as follows:
1.4 STOCK. The total number of shares of Common Stock available for
grants under the Plan shall not, in the aggregate, exceed 325,500 shares of
Common Stock, after taking into account the Company's stock split effected
November 30, 1995, as adjusted from time to time in accordance with Article
IV. Shares subject to any unexercised portion of a terminated, forfeited,
canceled or expired Option granted hereunder shall be available for
subsequent grants under the Plan. In the event that an option granted under
the Plan is exercised by the delivery of shares of Common Stock previously
acquired upon the exercise of Options issued under the Plan or through the
retention of options procedure as described in Section 2.6 below, the
shares of Common Stock so delivered to the Company or underlying such
retained options shall be available for subsequent grants under the Plan.
2. Subject to shareholder approval, section 2.1 (Automatic Grants of
Options) shall be amended and restated in its entirety to read as follows:
(A) INITIAL GRANT. Each Eligible Director who is serving on the
Board on the Effective Date of the Plan shall be granted an Option to
purchase 15,000 shares of the Company's Common Stock on the Effective Date.
Any Eligible Director who is first elected or appointed to such position
after the Effective Date shall receive an Option to purchase 15,000 shares
of the Company's Common Stock on the date of his or her election or
appointment. A person who receives an Initial Grant of an option under this
Section 2.1(a) which becomes fully exercisable as provided in Section 2.5
or Article III may not receive a subsequent Initial Grant under this
Section 2.1(a). For instance, an Eligible Director who receives an Initial
Grant and leaves the Board two years after such Initial Grant, may not
receive an additional Initial Grant if he or she is subsequently re-elected
or reappointed to the Board. [Notwithstanding the foregoing, each Eligible
Director who is serving on the Board immediately prior to the date of the
1999 Annual Meeting and who is reelected to the Board at the 1999 Annual
Meeting shall be granted an Option to purchase 10,000 shares of the
Company's Common Stock on the date of the 1999 Annual Meeting.] [Such
additional grant shall be in lieu of the Option that each Eligible Director
otherwise would have received on the date of the 1999 Annual Meeting
pursuant to Section 2.1(b).] A person who first becomes an Eligible
Director following service as an
<PAGE> 2
Employee or Chairman of the Board of the Company shall not be entitled to
receive an Initial Grant upon becoming an Eligible Director.
(B) SUBSEQUENT GRANTS. During the term of the Plan, an Eligible
Director who has been a Director for at least six months before the date of
an Annual Meeting of Stockholders, automatically shall be granted, as of
the date of the 2000 Annual Meeting and the date of each subsequent Annual
Meeting thereafter, an additional Option to purchase 3,000 shares of the
Company's Common Stock. A Participant may hold more than one Option under
the Plan.
3. Subject to shareholder approval, section 2.5(a) (Exercise of Shares
Subject to Option) shall be amended and restated in its entirety to read as
follows:
(A) Options granted under Section 2.1(a) shall become exercisable in
full on the first anniversary of the Grant Date. [Notwithstanding the
foregoing, an Option granted to an Eligible Director on the date of the
1999 Annual Meeting pursuant to Section 2.1(a) shall be exercisable in
three (3) equal annual installments so that the Option shall be fully
exercisable on the third anniversary of the date of the 1999 Annual
Meeting.]
4. Subject to shareholder approval, section 5.6(a) (Termination and
Amendment) shall be amended and restated in its entirety to read as follows:
(A) The Board may terminate the Plan, or the granting of Options
under the Plan, at any time. No new grants shall be made under the Plan
after February 9, 2005.
5. Section 1.2(o) of the Plan ("Fair Market Value") shall be amended and
restated in its entirety to read as follows:
(o) "FAIR MARKET VALUE" means, for purposes of determining the value
of Common Stock,:
(i) the average of the closing sales prices of the Common
Stock on the principal securities exchange on which the Common Stock
may at the time be listed (or, if there have been no sales on such
exchange on any day, the average of the closing high bid and low
asked prices on such exchange at the end of such day), for the last
five (5) consecutive trading days on such exchange of the month in
which the date of grant of the option occurs; or
(ii) if the Common Stock is not listed on a securities
exchange, the average of the closing sales prices of the Common Stock
on The Nasdaq Stock Market (or, if there have been no sales on The
Nasdaq Stock Market on any such day, the average of the closing high
bid and low asked prices on The Nasdaq Stock Market at the end of
such day) for the last five (5) consecutive trading days on The
Nasdaq Stock Market of the month in which the date of grant of the
option occurs; or
(iii) if the Common Stock is not listed on any domestic stock
exchange or The Nasdaq Stock Market, the average of the mean between
the closing high bid and low asked price as
<PAGE> 3
reported by the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") (or, if not so reported, by the system
then regarded as the most reliable source of such quotations) for the
last five (5) consecutive trading days on NASDAQ or such other system
of the month in which the date of grant of the option occurs; or
(iv) if none of the foregoing clauses apply, the fair value as
determined in good faith by the Committee.
THIS FIRST AMENDMENT is hereby adopted as of April 14, 1999.
PERCEPTRON, INC.
By: /S/ Alfred A. Pease
----------------------------------
Alfred A. Pease, Chairman, President
and Chief Executive Officer
BOARD APPROVAL: February 9, 1995, June 5, 1996, October 31, 1996, April 14, 1999
SHAREHOLDER APPROVAL: June 23, 1995, July 12, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,402,000
<SECURITIES> 0
<RECEIVABLES> 24,674,000
<ALLOWANCES> (208,000)
<INVENTORY> 11,949,000
<CURRENT-ASSETS> 42,757,000
<PP&E> 16,939,000
<DEPRECIATION> (5,648,000)
<TOTAL-ASSETS> 60,245,000
<CURRENT-LIABILITIES> 8,431,000
<BONDS> 1,040,000
0
0
<COMMON> 82,000
<OTHER-SE> 50,692,000
<TOTAL-LIABILITY-AND-EQUITY> 60,245,000
<SALES> 8,934,000
<TOTAL-REVENUES> 8,934,000
<CGS> 4,697,000
<TOTAL-COSTS> 8,297,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,000
<INCOME-PRETAX> (3,986,000)
<INCOME-TAX> (1,355,000)
<INCOME-CONTINUING> (2,631,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,631,000)
<EPS-PRIMARY> (.32)
<EPS-DILUTED> (.32)
</TABLE>
