-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M4E9y512piaXX/25NaWWKo9bmpb+0b93l9NhtWp1Vt2xiaIJJA2UK+jK10Ai7hXU 1Mx+SPSOox34KzhWmSOP7Q== 0000704460-98-000002.txt : 19980130 0000704460-98-000002.hdr.sgml : 19980130 ACCESSION NUMBER: 0000704460-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971031 FILED AS OF DATE: 19980129 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PPT VISION INC CENTRAL INDEX KEY: 0000704460 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INSTRUMENTS FOR MEASUREMENT, DISPLAY, AND CONTROL [3823] IRS NUMBER: 411413345 STATE OF INCORPORATION: MN FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-11518 FILM NUMBER: 98516595 BUSINESS ADDRESS: STREET 1: 10321 W 70TH ST CITY: EDEN PRAIRIE STATE: MN ZIP: 55344 BUSINESS PHONE: 6129425747 MAIL ADDRESS: STREET 1: 10321 W 70TH ST CITY: EDEN PRAIRIE STATE: MN ZIP: 55344 FORMER COMPANY: FORMER CONFORMED NAME: PATTERN PROCESSING TECHNOLOGIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: PATTERN PROCESSING CORP DATE OF NAME CHANGE: 19840318 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K --------- (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended October 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from to Commission File Number: 0-11518 PPT VISION, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) MINNESOTA 41-1413345 --------------------------- -------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 10321 West 70th Street Eden Prairie, MN 55344 ----------------------------------------------------- (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (612) 995-9500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock ($.10 par value) 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. ( ) As of January 5, 1998, assuming as market value the closing sale price of $8.125 as reported by the Nasdaq System on that date, the aggregate market value of shares of Common Stock held by non-affiliates was $33.8 million. As of January 5, 1998, 5,387,805 shares of common stock, $.10 par value were outstanding. Documents Incorporated by Reference: The Company's Proxy Statement for its Annual Meeting of Shareholders to be held March 12, 1998 is incorporated by reference into Part III of this Form 10-K. Page 2 TABLE OF CONTENTS ----------------- PART I Page ---- Item 1. Business.............................................. 3 Important Factors Regarding Forward-Looking Statements...................... 13 Executive Officers of the Company.................. 17 Item 2. Properties............................................ 17 Item 3. Legal Proceedings..................................... 18 Item 4. Submission of Matters for a Vote of Security Holders........................... 18 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............. 19 Item 6. Selected Financial Data............................... 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 22 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................ 25 Item 8. Financial Statements and Supplementary Data........... 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................ 25 PART III Item 10. Directors and Executive Officers of the Registrant.... 26 Item 11. Executive Compensation................................ 26 Item 12. Security Ownership of Certain Beneficial Owners and Management................... 26 Item 13. Certain Relationships and Related Transactions........ 26 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................ 27 Signatures...................................................... 29 Page 3 BUSINESS -------- OVERVIEW PPT Vision, Inc. ("PPT Vision" or the "Company") is a leading designer, manufacturer, marketer and integrator of a complete family of machine vision systems for end user manufacturers, system integrators and machine builders. The Company's machine vision systems consist of a combination of proprietary computer software and hardware, cameras and lighting, working together to capture and analyze images of moving parts to determine the quality of manufactured parts and control manufacturing processes. PPT Vision's systems enable manufacturers to achieve 100% on-line inspection, thus achieving zero defect production, in situations where previously only random sampling or less precise human inspection was used as a means of monitoring quality. In addition to functioning as a quality control tool, PPT Vision systems provide manufacturers a window on their manufacturing processes by producing real-time statistical process control feedback. This allows manufacturers to take earlier corrective action to improve their manufacturing process. The Company's machine vision systems are used for a broad range of manufacturing applications, including electronic and mechanical assembly verification, verification of printed characters, packaging integrity, surface flaw detection and gauging and measurement tasks. The Company's systems are sold principally throughout North America, Europe and the Far East to various industries, including electronics, pharmaceutical, medical products, automotive, consumer products and plastics. Major manufacturing end users of PPT Vision systems include AMP, Abbott Labs, Berg Electronics, Chrysler, the Delphi Electronic Division of General Motors, Imation, Johnson & Johnson, Kemet, Micron Technology, Molex, Siemens, 3M and United Technologies. PPT Vision believes that it has a leadership position as the most vertically integrated developer of machine vision systems and solutions for a wide range of manufacturing applications. Through this approach, PPT Vision can rapidly and cost-effectively provide machine vision system solutions to a wide variety of manufacturing end users while enabling them to concentrate their engineering and manufacturing expertise on the products they manufacture. PPT Vision's library of machine vision software tools enables end users to implement machine vision solutions to a growing number of manufacturing applications quickly and cost effectively. BACKGROUND A machine vision system consists of computer software and hardware, working together with cameras and lighting, to perform image analysis and image processing for automated inspection, measurement and identification functions in the manufacturing process. Commercial use of machine vision technology for manufacturing quality control began to emerge in the early 1980s. However, machine vision systems at that time were complex to program and maintain, difficult to install, limited in performance and not cost effective. Through advances in microprocessor and software technologies, these barriers have been Page 4 removed, enabling machine vision to emerge as a powerful process control technology that allows manufacturers to improve quality and increase productivity. The machine vision market is large and highly fragmented. The Automated Imaging Association ("AIA") estimates that the North American market for machine vision systems in 1996 was approximately $1.0 billion, with worldwide levels estimated at approximately $2.8 billion. The AIA expects this market to grow at approximately 13% - 15% per year through the year 2001. According to the AIA, over 70% of the estimated 200 companies in the North American machine vision market have less than $5 million in annual revenues. Demand for machine vision systems comes from end user manufacturers who apply these systems as an integral part of their manufacturing process, original equipment manufacturers ("OEMs") who incorporate machine vision systems into their products, systems integrators and machine builders. The AIA estimates that a substantial majority of the North American market for machine vision systems consists of sales to end user manufacturers. A key factor in the expansion of the machine vision market is the growth in the demand for machine vision systems in the semiconductor and electronics industries. The growth in demand for personal computers, cellular communications and other electronic devices, as well as the increase in electronic components inside other products such as consumer appliances and automobiles, is stimulating demand for electronic and semiconductor components. In an effort to rapidly ramp up manufacturing capability while at the same time introducing innovative new designs and improving quality, manufacturers of these components are increasingly turning to machine vision as a vital part of their manufacturing process. The growth of the end user machine vision market is also being driven by global competitive trends, which have led manufacturers worldwide to dramatically redesign manufacturing processes in order to reduce cost and increase productivity and quality. In order to meet today's manufacturing quality requirements, statistical sampling methods are insufficient and 100% on-line inspection is required. To accomplish these objectives, manufacturers are increasingly adopting machine vision solutions. Manufacturers are demanding expanded capabilities from machine vision systems, including faster processing capabilities and greater ease of use. Manufacturers are also demanding more comprehensive services from machine vision providers, including application engineering, technical support and training. Furthermore, manufacturers are seeking the ability to monitor trends, to better comprehend the manufacturing process and to identify problems. In addition, manufacturers are being challenged to maintain high production levels which require rapid set up times, flexibility and seamless networking with the host manufacturing control system to provide comprehensive diagnostic and process control feedback. THE PPT VISION SOLUTION The Company's machine vision systems are primarily targeted at providing manufacturers with 100% on-line inspection in high speed discrete part manufacturing applications. This typically replaces older off-line random Page 5 sampling techniques or human vision inspection techniques as a means of monitoring quality, thus enabling manufacturers to achieve zero defect production. PPT Vision's family of machine vision systems, which include its proprietary Vision Program Manager ("VPM") graphical programming software, provide significant performance advantages that meet manufacturers' critical requirements. These requirements include high speed, flexibility, ease-of-use, networkability and statistical feedback, all without sacrificing performance. All PPT Vision systems are supported by the Company's focus on providing its customers with complete solutions, not just components, and a major commitment to providing its customers with value-added application engineering services. PPT Vision has developed products that have specific advantages in terms of speed and ease-of-use. The Company's machine vision systems are capable of operating speeds of over 12,000 parts per minute performing 100% on-line inspection. This speed is critical to successfully employing machine vision in many applications. PPT Vision also pioneered the use of an icon-based visual programming system (i.e. VPM) operating in the Microsoft(R) Windows(TM) environment. Users are able to program the Company's systems by creating a flowchart of icons linked together rather than having to write a computer program in a programming language such as C or using a complex, pull-down menu- based system. This results in lower cost and time for implementation. The Company is pursuing what it believes is the most fully vertically integrated business model in the machine vision industry. PPT Vision develops its own image acquisition and processing hardware, image analysis software, application specific software tools and general purpose graphical user interface. The Company also provides lighting solutions and value-added application engineering services on a direct basis to manufacturers. These capabilities enable PPT Vision to provide its customers with (i) application specific software tools such as the Connector Tool used for inspection of fully assembled electronic connectors, (ii) complete application specific products such as the Stampede providing high speed inspection for precision metal stamping applications, and (iii) complete custom solutions. This strategy enables PPT Vision to leverage its investment in core software and hardware architectures while providing improved service for the end user manufacturing customers. In addition, PPT Vision markets its vision systems to manufacturing system integrators and machine builders who address the end user market with unique expertise in specific vertical markets. Many system integrators and machine builders prefer to use the Company's complete vision systems, which enable them to reduce programming development time, save money and concentrate their expertise on material handling and integration issues. The Company believes that this business model gives it a decisive competitive advantage in providing cost effective, complete solutions to the end user machine vision market. Page 6 PPT VISION STRATEGY The Company's objective is to be a worldwide leader in the design, manufacture, marketing and integration of machine vision systems for automated manufacturing applications in the end user machine vision market. Through the successful integration of the Company's five core competencies, including image acquisition, image processing, application development software, optics and illumination and vision system integration, the Company believes it will be able to meet its objective and successfully implement its strategy. Key elements of the Company's strategy include: * Provide Complete Solutions to End Users: The Company focuses on providing complete machine vision solutions to end user manufacturers, system integrators and machine builders. PPT Vision is pursuing what it believes to be the most fully vertically integrated business model in the industry, including the design, manufacturing, marketing and integration of complete machine vision solutions. The Company believes this provides it with a competitive advantage in delivering cost effective complete vision solutions. * Extend Technology Leadership in Speed and Ease-of-Use: The Company is continuing to aggressively invest in next generation software and hardware architectures that will expand its lead in speed, ease-of-use and the ability to deliver cost effective complete solutions to its customers. * Target Expanding Markets Through Continued Development of Application Specific Software Tools and Hardware Products: The Company's application specific software tools are a proven solution for a wide variety of electronic component inspection applications. In response to the worldwide expansion of the semiconductor and electronics industries, the Company is developing additional software tools and hardware products for electronic component, electronics and semiconductor applications. * Provide a Superior Level of Value-Added Application Engineering Support: The Company delivers a high level of value-added application engineering support to its end user customers through its own in-house applications engineering resources. Manufacturing end users increasingly want to concentrate their engineering expertise on the products they manufacture, not on engineering machine vision systems. They are seeking complete machine vision solutions with the associated application engineering support on an on-going basis. * Increase International Market Presence: The Company is aggressively focusing on increasing its market share in the worldwide machine vision market. The Company believes international markets represent a significant opportunity and intends to capture a significant share of this market through investment and expansion in its international sales distribution and support infrastructure. Page 7 PRODUCTS PPT Vision's systems consist of proprietary software and hardware working together with cameras and lighting to capture and analyze images of parts on- line. The four key process steps in the PPT Vision solution are lighting and optics, image acquisition, image processing and outputs. In the lighting and optics step, cameras, lenses and lighting options are configured to capture a high-definition image of each part as it passes the camera. Image acquisition involves capturing an image at an extremely high rate of speed and preparing the image for further processing. In image processing, the machine vision system measures critical part features and compares algorithmically the digital image to a preset standard that has been programmed into the system. The output function typically involves sending the results of the inspection process to the production line controller or the host manufacturing control system, as well as providing real-time process control data which can be used to improve the production process over time. Software Operating System and Tools. All PPT Vision systems run on proprietary software in a Microsoft(R) Windows(TM) environment using the Company's VPM user interface. VPM is an icon-based, graphical language which is extremely flexible and easy to use. It allows the Company's customers to create complete inspection solutions without the need for knowledge of computer programming languages. Instead of writing a computer program in a programming language such as C or using a complex, pull-down menu-based system, the vision system is set up by creating visual flowcharts. Clicking a trackball, the user graphically grabs icons (representing machine vision functions) out of system toolboxes and arranges them in the workspace on the system monitor. The icons are then connected with different colored lines to indicate execution and data flow throughout the inspection routine. Machine vision functions are performed by the Company's extensive set of software tools. PPT Vision has developed a library of over 40 vision tools contained in four toolboxes covering imaging, input/output ("I/O"), utility and control functions. The Company's imaging toolbox contains all system tools directly associated with image acquisition, processing and analysis. These tools provide access to all of the Company's vision algorithms, which are the vital core of all inspections performed by its vision systems. The I/O toolbox holds all the tools which permit an inspection developer to control vision system input and output options. These tools allow for system networking, data collection and application control. The tools in the utility and control toolboxes access functions such as counters, reset and display functions, math and logical operations, data collection and screen controls. These toolboxes also provide control of data flow to a variety of peripherals such as disk drives, serial ports and Microsoft(R) Visual Basic(TM) programs. Hardware Architecture. PPT Vision's machine vision processor includes the Company's proprietary high performance board set with a Texas Instruments DSP (digital signal processor) and high speed pipeline architecture along with an integrated PC for inspection set-up and networking and fully integrated I/O capability. All PPT Vision systems are capable of capturing full framed video images at a rate of up to 3,600 images per minute, in both strobed and shuttered modes. Most competitors are limited to capturing full frame images at 1,800 images per minute, which is the industry standard. Much higher inspection rates Page 8 are achieved through the use of the Company's exclusive partial scanning technology and split-screen imaging, which enables speeds of over 12,000 parts per minute. PPT Vision Product Family. The Company's newest machine vision systems are the Passport(R) DSL(TM) and Scout(R) DSL(TM) (Digital Serial Link). The DSL systems are the world's first completely digital machine vision systems and network. DSL-based systems are an integrated network of cameras, lighting, image processors and hubs, which together form a complete machine vision system. The Passport DSL and Scout DSL systems are completely digital, which results in much greater accuracy and repeatability than traditional analog systems. A key strength of the DSL network is that it enables the user to put processing power where it is most needed, out on the network, reducing bottlenecks at the central machine vision processor. The Passport DSL is housed in an industrially rugged enclosure while the Scout DSL is packaged in a non-industrial style enclosure. To complement the new DSL family, the Company has also developed the DSL6000 digital camera. The Company also offers the Passport 440, Passport 240, and Scout machine vision systems. The Passport 440 is designed to operate with up to four asynchronously functioning cameras for multiple inspection views and complex imaging tasks. The Passport 240 has all of the basic capabilities of the Passport 440 in a two-camera model. Both systems are housed in industrially rugged enclosures and are capable of operating at speeds of over 12,000 inspections per minute. The Scout is a cost-effective machine vision system designed for industrial applications that do not require rugged enclosures. It is packaged in a non-industrial style enclosure and is capable of running two cameras with similar speed and power to the Passport 240. In addition, the Company sells a broad range of peripheral services and components, including applications engineering, installation and training services, custom lighting solutions, fixturing, cameras, cabling and various software options. MARKETS AND CUSTOMERS The Company sells its products to a broad range of industries, including manufacturers of electronic and semiconductor components, pharmaceuticals, medical devices, automotive components, consumer products and plastics. As of October 31, 1997, the Company had sold 2,054 machine vision systems to over 200 customers since inception. The following is a representative list of end users of the Company's products. AMP Imation Reynolds Metals Abbott Labs Johnson & Johnson Siemens Akzo Kemet Sumitomo Allied Signal Molex Suzuki Berg Electronics Motorola Thomas & Betts Chrysler Novo Nordisk 3M Ford Philip Morris Toshiba GM-Delphi Division Philips United Technologies Page 9 In each of the past several years, the Company has had one or more customers that have accounted for ten percent or more of the Company's net revenues. During the fiscal year ended October 31, 1997, sales to one customer, Simac Masic B.V., a European distributor for the Company, represented 14% of net revenues. Sales to another customer, Advantek, Inc., represented 14% of net revenues during fiscal 1997. The loss of, or significant curtailment of purchases by, any of the Company's principal customers could have a material adverse effect on the Company's results of operations. SALES, MARKETING AND CUSTOMER SUPPORT The Company sells its products primarily on a direct basis in the United States to end users, system integrators, machine builders and OEMs. Outside the United States, the Company sells primarily through a network of distributors covering Europe, Asia and South America. The Company markets its products through appearances at industry trade shows, advertising in industry journals, articles published in industry and technical journals and through direct-selling in specific vertical markets. In addition, the Company's strong customer relationships serve as valuable references. The Company focuses on delivering a high level of value-added applications engineering support to its end user customers through its own in-house applications engineering resources. The Company also provides extensive training opportunities for its customers, either at the Company's facilities or on-site at the customer's facilities. The Company's sales and applications engineering departments are structured along a team concept, with each team having dedicated sales and applications engineering resources. The Company believes this team approach provides it with increased flexibility in responding to customers' needs. In September of 1997 the Company created a new corporate group, the Microelectronics Product Group ("MPG"), to develop and market high-speed inspection equipment for the electronics and semiconductor industries. The first two product offerings from the group will be a turnkey inspection system for bumped wafers and a turnkey, total-package inspection system for ball-grid array ("BGA") components, including semiconductor packages and electronic connectors. The following table sets forth the percentage of the Company's net revenues (including sales delivered through international distributors) by geographic location during the past three years: YEAR ENDED OCTOBER 31, -------------- 1997 1996 1995 ---- ---- ---- North America.............................. 78% 73% 67% Europe..................................... 14% 14% 21% Far East................................... 8% 13% 12% Substantially all of the Company's export sales are negotiated, invoiced and paid in United States dollars. Page 10 BACKLOG The Company does not believe backlog is a key indicator of future revenues in the end user machine vision market. PPT Vision products are typically shipped within 30 days after receipt of an order. The Company believes that maintaining as short a time as practical for delivery is a competitive advantage in the end user machine vision market. The nature of the end user machine vision market is that customers do not normally place orders for large multiples of units with scheduled deliveries over many months. Rather, end user machine vision addresses a specific application or problem at a specific manufacturing site. RESEARCH AND PRODUCT DEVELOPMENT PPT Vision's products are distinguished by the Company's proprietary technology and its significant commitment to research and product development efforts. The Company's research and product development efforts are focused on its five core competencies, including image acquisition, imaging processing, application development software, optics and illumination and vision system integration. The Company believes that the integration of these core competencies is essential to achieving long term success in the machine vision market. The Company's five core competencies can be described as follows: Image Acquisition. This refers to the means and methods by which an image is captured, stored, and then made available for subsequent processing and display. Image acquisition combines the disciplines of photo-optics and electrical engineering. Imaging Processing. This refers to the means and methods whereby an image is analyzed or enhanced to produce some desired information, measurements or results. Image processing combines the disciplines of software engineering, mathematics, algorithm development and electrical engineering to implement efficient solutions to computationally complex problems. Typical image processing tasks include real-time inspection, guidance, gauging and recognition. Application Development Software. This refers to the means and methods whereby a machine vision system is configured and controlled. The development and support of applications development software requires expertise in the disciplines of object-oriented programming, graphical programming environments, man-machine interfaces, device drivers and general software engineering. Optics and Illumination. This refers to the means and methods by which a scene is illuminated and optically presented to an input device such as a video camera. Special optics and illumination techniques are often used to reveal features in an image which would otherwise go undetected or to optimize an image for subsequent processing. Strobed illumination is often used to "freeze" the motion of continuously moving parts. Optics and illumination draw on skills from the disciplines of physics, mechanical engineering and electrical engineering. Page 11 Vision System Integration. This refers to the means and methods whereby a machine vision system is interfaced to and combined with other factory automation equipment for purposes of creating a complete solution for the customer. This may include the development of application specific solutions for certain vertical market applications along with mechanical fixturing for mounting camera and lighting components, networking and programmable controllers for process control, and reject mechanisms for ejection of defective parts. Various configurations of the Company's products include proprietary design work performed by the Company's employees in each of these five areas. PPT Vision believes that continued and timely development of new products and enhancements to existing product characteristics is essential to maintaining its competitive position. The Company has committed and expects to continue to commit substantial resources to its research and development effort, which plays a significant role in maintaining and advancing its position as a leading provider of complete machine vision systems. The Company's current research and development efforts are directed to increasing performance in image acquisition, image processing and application development software, which could produce systems with greater speed and accuracy while also providing customers with more expanded software tools. These efforts include the Company's traditional two- dimensional ("2D") machine vision systems as well as three- and one-dimensional ("3D" and "1D") sensor products. Key software products under development will enable support for different hardware and user interfaces, as well as increasing the development speed of application specific software tools. The Company also intends to expand its offerings of application specific software and hardware products for the industries it identifies as being poised to exhibit significant growth in demand for machine vision solutions, which includes electronics and semiconductors. Research and development expenditures were $2.3 million, $1.8 million, and $1.3 million in the fiscal years ended October 31, 1997, 1996, and 1995, respectively. MANUFACTURING The Company assembles, configures and tests its products at its suburban Minneapolis facility. The Company's printed circuit boards are custom built by several manufacturers. Most of the components used in the Company's machine vision systems are available off-the-shelf. However, some components are available from only a single supplier or from a limited number of suppliers. The Company typically purchases inventory and builds products in response to quarterly sales forecasts, enabling it to ship products within 30 days after receipt of an order. Much of the Company's product manufacturing, consisting primarily of circuit board manufacturing and assembly and machined parts production, is contracted with outside vendors. Company personnel inspect incoming parts and perform final assembly and testing of finished products. The Company believes that its outsourcing strategy enables it to employ its resources on the key core competency areas from which it derives its competitive advantages. Page 12 COMPETITION The machine vision industry is highly fragmented. Recent data provided by the AIA show that there were approximately 200 machine vision companies in North America in 1996, of which over 70% had revenues of less than $5 million. Currently, no competitor holds a significant aggregate market share percentage, although some dominate individual niches within the overall machine vision industry. The Company believes that over the next several years, the industry will experience a continuing trend toward consolidation. However, given the application specific nature of the industry, the Company also believes that the machine vision industry will continue to have a relatively large number of competitors. The Company believes the major competitive factors in the industry are performance, quality, support and price. Although the Company believes that its products are unique, competitors offer technologies and systems that are capable of certain of the functions performed by the Company's products. The Company faces competition from a number of companies in the machine vision market, some of which have greater manufacturing and marketing capabilities and greater financial, technological and personnel resources. Certain competitors in this market include the machine vision group of Allen Bradley, the Acuity Imaging division of Robotic Vision Systems, Inc. and Cognex Corporation. Although the Company believes that its current products offer several advantages in terms of speed and ease-of-use and although the Company has attempted to protect the proprietary nature of such products, it is possible that any of the Company's products could be duplicated by other companies in the same general market. There can be no assurances that the Company would be able to compete with similar products produced by a competitor. PATENTS AND PROPRIETARY RIGHTS The Company relies on a combination of patent, copyright, trademark and trade secret laws to establish its proprietary rights in its products. The Company has applied for foreign and domestic patents which are now pending with respect to several key technologies. United States patent No. 5,530,813, "Field- programmable electronic crossbar system and method for using same," was issued on June 25, 1996 and expires in August of 2014. In September of 1997 the Company entered into a license agreement with Medar, Inc. ("Medar") under which it acquired the exclusive worldwide rights for use of Medar's patented (5,646,733, "Scanning Phase Measurement Method and System for an Object at a Vision Station") 3D scanning technology for applications in the electronics and semiconductor industries. This patent was issued on July 8, 1997 and expires in January of 2016. The Company believes that the patents it owns and licenses may have been useful in protecting the Company's proprietary products and may be useful in protecting potential future products. The Company also believes its ability to efficiently develop and sell high performance, cost-effective vision systems on a timely basis, whether patented or not, is crucial to the Company's future success. The Company requires each of its employees to enter into standard agreements pursuant to which the employee agrees to keep confidential all proprietary information of the Company and to assign to the Company all Page 13 rights in any proprietary information or technology made or contributed by the employee during his or her employment or made thereafter as a result of any inventions conceived or work done during such employment. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use the Company's products or technology without authorization or to develop similar technology independently. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable or limited in certain foreign countries. The Company has obtained United States federal registration for its "PPT", "PPT Vision", "Passport" and "Scout" trademarks. The Company intends to file for federal registration of additional trademarks in the future. Although no assurance can be given as to the strength or scope of the Company's trademarks, the Company believes that its trademarks have been and will be useful in developing and protecting market recognition for its products. EMPLOYEES As of January 22, 1998, the Company had 88 employees, including 32 employees in research and development, 33 in sales and marketing, 16 in manufacturing and 7 in finance and administration. To date, the Company has been successful in attracting and retaining qualified technical personnel, although there can be no assurance that this success will continue. None of the Company's employees are covered by collective bargaining agreements or are members of a union. The Company has never experienced a work stoppage and believes that its relations with its employees are excellent. IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS Various forward-looking statements have been made in this Annual Report on Form 10-K. Forward-looking statements may also be made in the Company's other reports filed under the Securities Exchange Act of 1934, in its press releases and in other documents. In addition, from time to time, the Company through its management may make oral forward-looking statements. Forward-looking statements are subject to risks and uncertainties, including those identified below, which could cause actual results to differ materially from such statements. The words "anticipate", "believe", "expect", "intend", "optimistic", "will" or similar expressions are intended to identify forward- looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. The Company undertakes no obligation to update publicly or revise any forward-looking statements. Important factors that could cause actual results to differ materially from the Company's forward-looking statements, as well as affect the Company's ability to achieve its financial and other goals, include, but are not limited to, the following: Technological Change and New Product Development. The market for the Company's products is characterized by rapidly changing technology. The Company's future success will continue to depend upon its ability to enhance its current products and to develop and introduce new products that keep pace with technological Page 14 developments and evolving industry standards, respond to changes in customer requirements and achieve market acceptance. Any failure by the Company to anticipate or respond adequately to technological developments and customer requirements, or any significant delays in product development or introduction, could have a material adverse effect on the Company's business, results of operations, financial condition and liquidity. In addition, there can be no assurance the new products and services or product and service enhancements, if any, developed by the Company will achieve market acceptance. Dependence Upon Principal Customers. In each of the past several years, the Company has had one or more customers that have accounted for ten percent or more of the Company's net revenues. During the fiscal year ended October 31, 1997, sales to one customer, Simac Masic B.V., a European distributor for the Company, represented 14% of net revenues. Sales to another customer, Advantek, Inc., represented 14% of net revenues during fiscal 1997. The loss of, or significant curtailment of purchases by, any of the Company's principal customers could have a material adverse effect on the Company's results of operations. Cyclicality of Capital Spending by Customers. A significant portion of the Company's revenues are derived from sales to various segments of the electronic component industry, such as metal stamping, electronic connectors and passive components. The markets for these segments, and for the electronic component industry in general, can be cyclical, resulting in varying amounts of capital spending. Any significant downturn in capital spending in these markets, or in any other markets served by the Company's products, could have a material adverse effect on the Company's business and results of operations. Management of Growth. The Company's revenues have increased at an average annual rate of 23% over the past five years. The Company's future success will depend on the ability of its officers and key employees to manage growth successfully through maintenance of appropriate operational, financial and management information systems and to attract, retain, motivate and effectively manage its employees. If the Company's management is unable to manage growth effectively, the Company's business, results of operations, financial condition and liquidity could be materially and adversely affected. Proprietary Technology. The Company relies heavily on its image acquisition and image processing hardware designs, along with proprietary software technology. Although the Company has been issued patents, or obtained licenses to patents, in the past on certain technology and has patents pending on new technologies, it currently relies most heavily on protecting its proprietary information as trade secrets. There can be no assurance that the steps taken by the Company will be adequate to prevent misappropriation of its technology by third parties or will be adequate under the laws of some foreign countries, which may not protect the Company's proprietary rights to the same extent as do laws of the United States. In addition, the possibility exists that others may "reverse engineer" the Company's products in order to determine their method of operation and then introduce competing products. Further, many high technology markets, including segments of the machine vision industry, are characterized by the existence of a large number of patents and frequent litigation for financial gain that is based on patents with broad, and often questionable, application. As the number of the Company's products increases, the markets in which its Page 15 products are sold expands and the functionality of those products grows and overlaps with products offered by competitors. As a result, the Company believes that it may become increasingly subject to infringement claims in the future. Although the Company does not believe any of its products or proprietary rights infringe upon the rights of third parties, there can be no assurance that infringement claims will not be asserted against the Company in the future or that any such claims will not require the Company to enter into royalty arrangements or result in costly litigation. Quarterly Fluctuations. The Company has experienced quarterly fluctuations in operating results and anticipates that these fluctuations will continue. These fluctuations have been caused by various factors, including the order flow of its principal customers, the timing and acceptance of new product introductions and enhancements and the timing of product shipments and marketing. Future operating results may fluctuate as a result of these and other factors, including the Company's ability to continue to develop innovative products, the announcement or introduction of new products by the Company's competitors, the Company's product and customer mix, the level of competition and overall trends in the economy. Dependence on Outside Contractors and Suppliers. The Company currently contracts with third party assembly houses for a substantial portion of its components and assembly needs. Although the Company endeavors to inspect and internally test most components prior to final assembly, reliance on outside contractors reduces its control over quality and delivery schedules. The failure by one or more of these subcontractors to deliver quality components in a timely manner could have a material adverse effect on the Company's results of operations. In addition, a number of the components integral to the functioning of the Company's products are available from only a single supplier or from a limited number of suppliers. Any interruption in or termination of supply of these components, or a material change in the purchase terms, including pricing, of any of these components, or a reduction in their quality or reliability, could have a material adverse effect on the Company's business or results of operations. International Revenue. In the years ended October 31, 1997, 1996 and 1995, sales of the Company's products to customers outside North America accounted for approximately 22%, 27% and 33%, respectively, of the Company's net revenues. The Company anticipates that international revenue will continue to account for a significant portion of its net revenues. The Company's operating results are subject to the risks inherent in international sales, including various regulatory requirements, political and economic changes and disruptions, transportation delays and difficulties in staffing and managing foreign sales operations and distributor relationships. In addition, fluctuations in exchange rates may render the Company's products less price competitive relative to local product offerings. There can be no assurance that these factors will not have a material adverse effect on the Company's future international sales and, consequently, on the Company's operating results. Competition. The Company competes with other vendors of machine vision systems, some of which may have greater financial and other resources than the Company. There can be no assurance that the Company will be able to compete Page 16 successfully in the future or that the Company will not be required to incur significant costs in connection with its engineering research, development, marketing and customer service efforts to remain competitive. Competitive pressures may result in price erosion or other factors which will adversely affect the Company's financial performance. Dependence on Key Personnel. The Company's success depends in large part upon the continued services of many of its highly skilled personnel involved in management, research and product development and sales, and upon its ability to attract and retain additional highly qualified employees. The loss of services of these key personnel could have a material adverse effect on the Company. The Company does not have key-person life insurance on any of its employees. Page 17 EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the Company are as follows: NAME AGE POSITION - ----- --- -------- Joseph C. Christenson.......... 39 President, Director Thomas R. Northenscold......... 39 Chief Financial Officer, Assistant Secretary Larry G. Paulson............... 46 Vice President of Research and Development, Director Arye Malek..................... 41 Vice President of Marketing Joseph C. Christenson has been President of the Company since January 1989 and a director since December 1987. Prior to being elected President of the Company, he had been its Chief Operating Officer and Chief Financial Officer from December 1987 to December 1988, General Manager and Chief Financial Officer from August 1986 to November 1987, and financial analyst and marketing manager since joining the Company in May 1985. Mr. Christenson has a Masters in Business Administration from the University of Michigan and a Bachelor of Arts degree from St. Olaf College. Thomas R. Northenscold has been Chief Financial Officer of the Company since February 1995. Prior to that, he had been the Senior Vice President of Operations in the City Directory Division of R.L. Polk and Company, a directory publishing company, from April 1992 to April 1994. Mr. Northenscold was previously employed at Cardiac Pacemakers, Inc., a medical device company, in several finance and operations positions from June 1985 to April 1992. He has a Masters in Business Administration in finance from the University of Michigan and a Bachelor of Science degree from Mankato State University. Larry G. Paulson was a co-founder of the Company and has been Vice President of Research and Development and a director of the Company since December 1981. Mr. Paulson is also a Registered Professional Engineer and holds Bachelors and Masters Degrees in Science from the University of Minnesota. Arye Malek has been the Vice President of Marketing of the Company since May 1996. He joined the Company in May 1990 as a Senior Account Manager and became Director of International Operations in November 1992. Mr. Malek holds a Bachelor of Science Degree from the University of Minnesota. Item 2. PROPERTIES - ------------------- The Company leases approximately 28,400 square feet of office and manufacturing space in suburban Minneapolis pursuant to a seven year lease beginning in March 1994. Rent payments for its facilities commenced at $7,093 per month during the first year of the lease and increase over the term of the lease to $16,551 during the final twelve months of the lease. The Company also leases space for its regional sales and support offices in Massachusetts, Michigan and North Carolina. Page 18 Item 3. LEGAL PROCEEDINGS - ------------------------- None. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ----------------------------------------------------------- None. Page 19 PART II ------- Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ------------------------------------------------------------------------------ PRICE RANGE OF COMMON STOCK Since December 28, 1995, the Company's Common Stock has traded on the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol "PPTV." Prior to that time, the Common Stock was traded on the Nasdaq SmallCap Market. The following table sets forth the high and low sales prices of the Company's Common Stock on the Nasdaq National Market for the period beginning December 28, 1995, and the high and low closing bid prices for the Company's Common Stock on the Nasdaq SmallCap Market for the periods prior to December 28, 1995, each as reported by Nasdaq. HIGH LOW ------ ----- FISCAL YEAR ENDED OCTOBER 31, 1996 First Quarter............................................. $13.17 $8.50 Second Quarter............................................ 16.00 8.83 Third Quarter............................................. 19.25 6.88 Fourth Quarter............................................ 10.62 7.12 FISCAL YEAR ENDING OCTOBER 31, 1997 First Quarter............................................. $ 9.75 $6.50 Second Quarter............................................ 9.00 5.56 Third Quarter............................................. 8.62 6.25 Fourth Quarter............................................ 10.38 7.62 The Company estimates that there were approximately 3,100 beneficial holders of the Company's Common Stock at January 20, 1998. DIVIDEND POLICY The Company has never declared or paid any dividends on its Common Stock. The Company currently intends to retain any earnings for use in its operations and expansion of its business and therefore does not anticipate paying any cash dividends in the foreseeable future. RECENT ISSUANCES OF UNREGISTERED SECURITIES On September 30, 1997, in connection with the execution of a license agreement between the Company and Medar, Inc. ("Medar"), the Company granted a warrant to Medar, to purchase Twenty-Five Thousand (25,000) shares of the Company's Common Stock at a price of $12.00 per share. The Warrant expires on September 30, 2004. At the time the warrant was issued, Medar had assets of $50.9 million and was an accredited investor as defined in Rule 501(a)(3) under the Securities Act of 1933. The Company believes the transaction was exempt under Section 4(2) under the Securities Act of 1933. Page 20 Item 6. SELECTED FINANCIAL DATA - -------------------------------- YEAR ENDED OCTOBER 31, ------------------------------------------------------------ 1997 1996 1995 1994 1993 ----------- ----------- ---------- ---------- ----------- INCOME STATEMENT DATA: Net revenues.................. $12,055,000 $12,693,000 $9,750,000 $6,587,000 $5,935,000 Cost of sales................. 4,894,000 5,044,000 4,442,000 3,026,000 2,539,000 ----------- ----------- ---------- ---------- ---------- Gross profit................. 7,161,000 7,649,000 5,308,000 3,561,000 3,396,000 Selling expenses.............. 3,727,000 2,897,000 2,279,000 1,970,000 1,576,000 General and administrative expenses..................... 1,177,000 976,000 851,000 711,000 550,000 Research and development expenses..................... 2,339,000 1,827,000 1,299,000 1,133,000 831,000 ----------- ----------- ---------- ---------- ---------- Income (loss) from operations.................. (82,000) 879,000 (253,000) 439,000 296,000 Other income (expense), net.............. 1,147,000 453,000 61,000 40,000 (4,000) ----------- ----------- ---------- ---------- ---------- Net income (loss) before taxes....................... 1,065,000 2,402,000 940,000 (213,000) 435,000 Income tax (expense) benefit.. (405,000) 1,309,000 407,000 ---- ----------- ----------- ---------- ---------- ---------- Net income (loss)............ $ 660,000 $ 3,711,000 $1,347,000 $ (213,000) $ 435,000 =========== =========== ========== ========== ========== Net income (loss) per share........................ $ 0.12 $ 0.84 $ 0.37 $ (0.06) $ 0.13 =========== =========== ========== ========== ========== Weighted average common shares outstanding........... 5,495,000 4,410,000 3,650,000 3,455,000 3,236,000 =========== =========== ========== ========== ==========
Page 21 OCTOBER 31, ------------------------------------------------------------ 1997 1996 1995 1994 1993 ----------- ----------- ---------- ---------- ---------- BALANCE SHEET DATA: Working capital................... $22,887,000 $24,083,000 $4,131,000 $3,253,000 $3,071,000 Total assets...................... 29,986,000 28,056,000 6,098,000 4,449,000 4,005,000 Shareholders' equity.............. 27,535,000 26,809,000 5,145,000 3,719,000 3,384,000
Page 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Comparison of Year Ended October 31, 1997 to Year Ended October 31, 1996 - ------------------------------------------------------------------------ Net Revenues: Net revenues decreased 5% to $12,055,000 in fiscal 1997, compared to net revenues of $12,693,000 in fiscal 1996, although unit sales of the Company's machine vision systems increased to 481 in fiscal 1997 versus 465 in fiscal 1996. Net revenues decreased primarily because of lower average selling prices per system due to changes in product mix. Net revenues in fiscal 1997 were also affected by slowdowns in deliveries to customers in the electronics segment, which mainly occurred during the first half of fiscal 1997. Much of this slowdown was experienced in markets outside of North America. Gross revenues in fiscal 1997 increased 1% in North America and decreased 24% outside North America. Sales to customers outside North America represented 22% of gross revenues in fiscal 1997, compared to 27% for in fiscal 1996. Gross Profit: Gross profit decreased 6 percent to $7,161,000 in fiscal 1997, compared to $7,649,000 in fiscal 1996. Gross profit as a percentage of net revenues for fiscal 1997 decreased to 59%, compared with 60% in fiscal 1996. The decrease in gross profit in 1997 is primarily due to the decline in sales. The Company anticipates that the gross profit as a percentage of net revenues may fluctuate and may decline temporarily at certain times in fiscal 1998 due to normal start-up costs associated with new product introductions. Selling Expenses: Selling expenses increased 29% to $3,727,000 in fiscal 1997, compared to $2,897,000 in fiscal 1996. As a percentage of net revenues, fiscal 1997 selling expenses increased to 31%, compared with 23% in fiscal 1996. The increase in expenditures is primarily the result of the addition of several application engineers and sales people in the latter part of fiscal 1996. Although the Company anticipates selling expenses to increase in fiscal 1998 as the Company maintains its investments in sales and applications engineering, the Company believes that these expenditures will not increase substantially, and may be reduced somewhat, as a percentage of net revenues in fiscal 1998, depending on the level of sales growth. General and Administrative Expenses: General and administrative expenses increased 21% to $1,177,000 in fiscal 1997, compared to $976,000 in fiscal 1996. As a percentage of net revenues, general and administrative expenses increased to 10% for fiscal 1997, compared to 8% for fiscal 1996. The increase in expenditures is primarily attributable to increased expenses associated with operating the Company as it prepares for continued growth. In addition, the Company incurred a one-time charge during the third quarter of fiscal 1997 due to the write-off of a receivable involving a bankruptcy. The increase as a percentage of net revenues is mainly related to the decline in sales. The Company believes that during fiscal 1998, general and administrative expenses will not increase substantially, and may be reduced somewhat, as a percentage of net revenues compared to fiscal 1997, depending on the level of sales growth. Page 23 Research and Development Expenses: Research and development expenses increased 28% to $2,339,000 in fiscal 1997, compared to $1,827,000 in fiscal 1996. Research and development expenses as a percentage of net revenues for fiscal 1997 increased to 19%, compared to 14% for fiscal 1996. The increase in expenditures is mainly due to new product development programs and increased permanent staffing and contract personnel to support these efforts. While research and development expenses may increase somewhat as the Company continues to invest in next generation software and hardware development, the Company expects that during fiscal 1998, such expenses will not increase substantially, and may decline somewhat, as a percentage of net revenues compared to fiscal 1997, depending on the level of sales growth. Interest income increased 154% to $1,124,000 in fiscal 1997, compared to $442,000 in fiscal 1996. The increase in interest income is primarily due to a full year of interest on the proceeds of a public stock offering completed in June of 1996. Income Tax Benefit: Income tax expense was $405,000 in fiscal 1998. In fiscal 1997, an income tax benefit of $1,309,000 was recorded to fully recognize the potential future tax benefits of loss carry forwards and net deductible temporary differences available to offset taxable income in future periods. As a result of this full recognition, in fiscal 1997 the Company began reporting earnings on a fully-taxed basis. Comparison of Year Ended October 31, 1996 to Year Ended October 31, 1995 - ------------------------------------------------------------------------ Net Revenues: Net revenues increased 30% to $12,693,000 in fiscal 1996, compared to net revenues of $9,750,000 in fiscal 1995. The increase in net revenues in fiscal 1996 was due to a 40% growth in unit sales, with sales of the Company's machine vision systems increasing to 465 in fiscal 1996 versus 333 in fiscal 1995. The Company attributes its sales growth to increased demand in all markets. Net revenues in fiscal 1996 increased 42% in North America and 7% outside North America. Sales to customers outside North America represented 27% of total revenues in fiscal 1996, compared to 33% in fiscal 1995. The increase in North America is primarily the result of increased sales to electronic component and automobile manufacturers. Gross Profit: Gross profit increased 44% to $7,649,000 in fiscal 1996, compared to $5,308,000 in fiscal 1995. Gross profit as a percentage of net revenues for fiscal 1996 increased to 60%, compared with 54% in fiscal 1995. The increase in gross profit as a percentage of net revenues in 1996 is primarily due to economies of scale related to increasing volume, model mix shift, and decreased material costs. Selling Expenses: Selling expenses increased 27% to $2,897,000 in fiscal 1996, compared to $2,279,000 in fiscal 1995. As a percentage of net revenues, fiscal 1996 selling expenses remained relatively constant at 23%. General and Administrative Expenses: General and administrative expenses increased 15% to $976,000 in fiscal 1996, compared to $851,000 in fiscal 1995. As a percentage of net revenues, general and administrative expenses decreased to 8% for fiscal 1996, compared to 9% for fiscal 1995. The increase in Page 24 expenditures in fiscal 1996 is primarily attributable to increased expenses associated with operating the Company as it continues to grow and to investments in management infrastructure. The decrease as a percentage of net revenues is mainly related to operating leverage provided by the Company's growing revenue base. Research and Development Expenses: Research and development expenses increased 41% to $1,827,000 in fiscal 1996, compared to $1,299,000 in fiscal 1995. Research and development expenses as a percentage of net revenues for fiscal 1996 increased to 14%, compared to 13% for fiscal 1995. The increase in expenses in fiscal 1996 is mainly due to new product development programs and increased staffing to support these efforts. Interest income increased 625% to $442,000 in fiscal 1996, compared to $61,000 in fiscal 1995. The increase in interest income is primarily due to interest on the proceeds of a public stock offering completed in June of 1996. Income Tax Benefit: The income tax benefit of $1,309,000 recorded in fiscal 1996 reflects full recognition of the potential future tax benefits of loss carry forwards and net deductible temporary differences available to offset taxable income in future periods. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Working capital decreased to $22,887,000 at October 31, 1997 from $24,083,000 at October 31, 1996. This decline was primarily due to the recording of a short term liability of $1,000,000 related to future payments under the September 1997 license agreement with Medar, Inc. ("Medar"), as described below. The Company financed its operations in fiscal 1997 through internally generated cash flow and existing cash and cash equivalents. Net cash provided from operating activities in fiscal 1997 was $1,692,000. Accounts receivable decreased $758,000 due to improvement in collections. Inventories increased $513,000 in fiscal 1997 primarily due to raw material purchases to support new product introductions as well as a higher level of sales at year-end. In September of 1997 the Company entered into a license agreement with Medar under which it acquired the exclusive worldwide rights to use of Medar's patented 3D scanning technology for applications in the electronics and semiconductor industries. Under the terms of the agreement, the Company agreed to pay Medar an initial license fee of $1,500,000 based on the achievement of certain developmental milestones plus a royalty based on sales. The first $500,000 due under this license agreement was paid upon execution of the agreement. The remaining two $500,000 payments comprise the $1,000,000 short- term liability. The Company used $1,959,000 of cash for investing activities, primarily for the purchase of fixed assets and investment in other long-term assets. The Company used $1,095,000 of cash for the purchase of fixed assets, mainly consisting of computer, lab and manufacturing equipment. The Company used $759,000 of cash for investment in other long-term assets, mainly consisting of a $500,000 payment made under the Medar license agreement as well as capitalized software development costs. Investments consist of short-term investment grade Page 25 securities. In addition, the Company generated $115,000 in cash flow from its financing activities as a result of issuances of its Common Stock upon exercise of stock options. Current assets increased slightly to $25,202,000 at October 31, 1997 from $25,164,000 at October 31, 1996. Investments increased to $15,515,000 at October 31, 1997 from 15,135,000 at October 31, 1996. Cash and cash equivalents decreased to $4,027,000 at October 31, 1997 from $4,179,000 at October 31, 1996. The Company's current liabilities increased to $2,315,000 at October 31, 1997 from $1,081,000 at October 31, 1996. This was mainly due to the previously mentioned $1,000,000 short-term liability as well as increased trade accounts payable associated with a higher level of sales at year-end. The Company expects that its capital expenditures for fiscal 1998 will increase from the $1.1 million in fiscal 1997, primarily for computer, lab and manufacturing equipment. At October 31, 1997, the Company had commitments for approximately $200,000 for capital equipment. The Company is also obligated to pay an additional $1 million under the terms of the Medar, Inc. license agreement, subject to the achievement by Medar of certain developmental milestones.The Company believes that its cash flow from operations, existing cash and cash equivalents, and investments at October 31, 1997 will be adequate for its working capital and capital resource needs, including payments due under the Medar license agreement, during fiscal 1998. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------- Not applicable. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- See Item 14 for a list of the financial statements included in this Form 10-K. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - ------------------------------------------------------------------------ Not applicable. Page 26 PART III -------- Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------ Information required under this item with respect to directors is contained in the section "Election of Directors" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held in March 1998 (the "1998 Proxy Statement"), a definitive copy of which will be filed with the Commission within 120 days of the close of the past fiscal year, and is incorporated herein by reference. Information concerning executive officers is set forth in the Section entitled "Executive Officers of the Company" in Part I of this Form 10-K pursuant to Instruction 3 to paragraph (b) of Item 401 of Regulation S-K. Item 11. EXECUTIVE COMPENSATION - -------------------------------- Information required under this item is contained in the sections entitled "Executive Compensation," "Employment Agreements" and "Stock Option Plan" in the Company's 1998 Proxy Statement and is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------ Information required under this item is contained in the section entitled "Shareholdings of Principal Shareholders, Directors and Officers" in the Company's 1998 Proxy Statement and is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------- Information required under this item is contained in the section entitled "Certain Transactions" in the Company's 1998 Proxy Statement which is incorporated herein by reference. Page 27 PART IV ------- Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - -------------------------------------------------------------------------- (a) Documents filed as Part of this Report (1) FINANCIAL STATEMENTS. The following financial statements of the Company are hereby included in this Form 10-K. Page ---- Report of Independent Accountants..................... 31 Income Statements for the three years ended October 31, 1997, 1996 and 1995.................. 32 Balance Sheets as of October 31, 1997 and 1996........ 33 Statements of Cash Flows for the Years ended October 31, 1997, 1996 and 1995............ 34 Statements of Shareholders' Equity for the Years ended October 31, 1997, 1996 and 1995............ 35 Notes to Financial Statements......................... 36 (2) FINANCIAL STATEMENT SCHEDULES FOR THE THREE YEARS ENDED OCTOBER 31, 1997 VIII. Valuation and Qualifying Accounts.............. 45 All other schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or the notes thereto. (b) Reports on Form 8-K ------------------- No reports on Form 8-K were filed during the quarter ended October 31, 1997. Page 28 (c) Listing of Exhibits ------------------- Exhibit No. Description Page - ------- ---------------------------------------------------------- ---- 3.1..... Restated Articles of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of 1996 Form 10-K) 3.2..... By-Laws of Registrant (incorporated by reference to Exhibit 3.2 of 1996 Form 10-K) 10.1.... Lease Agreement dated February 11, 1993 for facilities at 10321 West 70th Street, Eden Prairie, Minnesota (incorporated by reference to Exhibit 10.3 of 1993 Form 10-K) 10.2.... Employment Agreement with Joseph C. Christenson dated as of May 7, 1984 (incorporated by reference from Exhibit 10.4 to May 15, 1996 Form S-2) 10.3.... Employment Agreement with Larry G. Paulson dated as of February 1, 1984 (incorporated by reference from Exhibit 10.5 to May 15, 1996 Form S-2) 10.4.... Employment Agreement with Tom Northenscold dated as of February 27, 1995 (incorporated by reference from Exhibit 10.6 to May 15, 1996 Form S-2) 10.5.... Employment Agreement with Arye Malek dated as of May 1, 1990 (incorporated by reference from Exhibit 10.7 to May 15, 1996 Form S-2) 10.6*... PPT Vision, Inc. 1988 Stock Option Plan, as amended........ 46 10.7*... PPT Vision, Inc. 1997 Stock Option Plan.................... 61 21...... The Company has no subsidiaries 23...... Consent of Price Waterhouse LLP............................ 76 27...... Financial Data Schedule.................................... 77 *Indicates compensatory plan Page 29 SIGNATURES ---------- Pursuant to the requirements of Section 13 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. PPT VISION, INC. Date: January 26, 1998 By:/s/Joseph C. Christenson ---------------------------- Joseph C. Christenson (Principal Executive Officer) Date: January 26, 1998 By:/s/Thomas R. Northenscold ---------------------------- Thomas R. Northenscold (Principal Accounting Officer) Chief Financial Officer Signatures and Power of Attorney Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant, in the capacities, and on the dates, indicated. Each person whose signature appears below constitutes and appoints Joseph C. Christenson and Thomas R. Northenscold as his true and lawful attorneys-in-fact and agents, each acting alone, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K and to file the same, with the exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission. Date Signature and Title ---- ------------------- January 26, 1998 /s/Joseph C. Christenson ---------------------------- Joseph C. Christenson President, Director (Principal Executive Officer) January 26, 1998 /s/Thomas R. Northenscold ---------------------------- Thomas R. Northenscold (Principal Accounting Officer) Chief Financial Officer January 26, 1998 /s/Larry G. Paulson ---------------------------- Larry G. Paulson, Secretary, Vice President of Research and Development, Director Page 30 January 26, 1998 /s/Bruce C. Huber ---------------------------- Bruce C. Huber, Director January 26, 1998 /s/David C. Malmberg ---------------------------- David C. Malmberg, Director January 26, 1998 /s/Peter R. Peterson ---------------------------- Peter R. Peterson, Director Page 31 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of PPT Vision, Inc. In our opinion, the financial statements listed in the index appearing under Item 14(a)(1) and (2) present fairly, in all material respects, the financial position of PPT Vision, Inc. at October 31, 1997 and 1996, and the results of its operations and cash flows for each of the three fiscal years in the period ended October 31, 1997 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits 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. /s/Price Waterhouse LLP - ------------------------ Price Waterhouse LLP Minneapolis, MN November 21, 1997 Page 32 PPT VISION, INC. INCOME STATEMENTS YEAR ENDED OCTOBER 31, ----------------------------------- 1997 1996 1995 ----------- ----------- ---------- Net revenues............................ $12,055,000 $12,693,000 $9,750,000 Cost of sales........................... 4,894,000 5,044,000 4,442,000 ----------- ----------- ---------- Gross profit........................ 7,161,000 7,649,000 5,308,000 ----------- ----------- ---------- Expenses: Selling............................... 3,727,000 2,897,000 2,279,000 General and administrative............ 1,177,000 976,000 851,000 Research and development.............. 2,339,000 1,827,000 1,299,000 ----------- ----------- ---------- Total expenses...................... 7,243,000 5,700,000 4,429,000 ----------- ----------- ---------- Income (loss) from operations........... (82,000) 1,949,000 879,000 Interest income......................... 1,124,000 442,000 61,000 Other income............................ 23,000 11,000 -- ----------- ----------- ---------- Net income before taxes................. 1,065,000 2,402,000 940,000 Income tax (expense) benefit............ (405,000) 1,309,000 407,000 ----------- ----------- ---------- Net income.......................... $ 660,000 $ 3,711,000 $1,347,000 =========== =========== ========== Net income per share.................. $ 0.12 $ 0.84 $ 0.37 =========== =========== ========== Weighted average common shares outstanding................... 5,495,000 4,410,000 3,650,000 =========== =========== ==========
The accompanying notes are an integral part of the financial statements Page 33 PPT VISION, INC. BALANCE SHEETS OCTOBER 31, ------------------------- 1997 1996 ----------- ----------- ASSETS Current assets Cash and cash equivalents........................ $ 4,027,000 $ 4,179,000 Investments...................................... 15,515,000 15,135,000 Accounts receivable, net......................... 3,693,000 4,451,000 Inventories...................................... 1,741,000 1,228,000 Other current assets............................. 226,000 171,000 ----------- ----------- Total current assets........................... 25,202,000 25,164,000 Restricted cash.................................... -- 135,000 Fixed assets, net.................................. 1,546,000 863,000 Other assets, net.................................. 1,828,000 79,000 Deferred income taxes.............................. 1,410,000 1,815,000 ----------- ----------- Total assets................................... $29,986,000 $28,056,000 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable................................. $ 1,010,000 $ 754,000 Commissions payable.............................. 60,000 62,000 Accrued expenses................................. 245,000 265,000 Other short-term liabilities..................... 1,000,000 -- ----------- ----------- Total current liabilities...................... 2,315,000 1,081,000 Deferred rent...................................... 136,000 166,000 Commitments and contingencies (Note 8) Shareholders' equity Common Stock $.10 par value; authorized 10,000,000 shares; issued and outstanding 5,387,355 and 5,358,422.. 539,000 536,000 Capital in excess of par value................... 29,555,000 29,443,000 Accumulated (deficit)............................ (2,510,000) (3,170,000) Unrealized loss, investments..................... (49,000) -- ----------- ----------- Total shareholders' equity..................... 27,535,000 26,809,000 ----------- ----------- Total liabilities and shareholders' equity..... $29,986,000 $28,056,000 =========== ===========
The accompanying notes are an integral part of the financial statements Page 34 PPT VISION, INC. STATEMENT OF CASH FLOWS YEAR ENDED OCTOBER 31, ------------------------------------- 1997 1996 1995 ------------ ------------ ---------- Net income................................$ 660,000 $ 3,711,000 $1,347,000 Adjustment to reconcile net income to net cash provided by operating activities: Depreciation and amortization........... 422,000 286,000 164,000 Deferred rent........................... (30,000) (6,000) 44,000 Deferred income tax benefit............. 405,000 (1,408,000) (407,000) Accrued interest income................. (322,000) (149,000) -- Realized gain on sales of investments... (2,000) (4,000) -- Change in assets and liabilities: Accounts receivable..................... 758,000 (1,764,000) (749,000) Inventories............................. (513,000) (285,000) (158,000) Other assets............................ (55,000) (104,000) (7,000) Restricted cash......................... 135,000 78,000 -- Accounts payable........................ 256,000 190,000 102,000 Commissions payable..................... (2,000) 7,000 12,000 Accrued expenses........................ (20,000) 103,000 65,000 ------------ ------------ ---------- Total adjustments..................... 1,032,000 (3,056,000) (934,000) ------------ ------------ ---------- Net cash provided by operating activities. 1,692,000 655,000 413,000 Cash flows from investing activities: Purchase of fixed assets................ (1,095,000) (662,000) (349,000) Purchase of investments................. (21,353,000) (17,007,000) -- Sales and maturities of investments..... 21,248,000 2,025,000 -- Net investment in other long-term assets...................... (759,000) (20,000) -- ------------ ------------ ---------- Net cash used by investing activities..... (1,959,000) (15,664,000) (349,000) Cash flows from financing activities: Proceeds from issuance of common stock.. 115,000 17,953,000 79,000 ------------ ------------ ---------- Net cash provided by financing activities. 115,000 17,953,000 79,000 ------------ ------------ ---------- Net increase in cash and cash equivalents. (152,000) 2,944,000 143,000 Cash and cash equivalents at beginning of year................................. 4,179,000 1,235,000 1,092,000 ------------ ------------ ---------- Cash and cash equivalents at end of year..$ 4,027,000 $ 4,179,000 $1,235,000 ============ ============ ========== Supplemental disclosure of cash flow information: Cash paid during the year for: Income tax.............................. $ 3,000 $ 89,000 $ 42,000 Interest................................ -- 1,000 --
The accompanying notes are an integral part of the financial statements Page 35 PPT VISION, INC. STATEMENT OF SHAREHOLDERS' EQUITY CAPITAL IN COMMON COMMON EXCESS OF PREFERRED PREFERRED ACCUMULATED SHARES STOCK PAR VALUE SHARES STOCK (DEFICIT) --------- --------- ----------- --------- ---------- ----------- October 31, 1994.................. 3,440,486 $344,000 $11,347,000 87,499 $256,000 $(8,228,000) Stock issued through the exercise of stock options...... 65,370 6,000 37,000 Stock issued through the employee stock purchase plan... 16,599 2,000 35,000 Stock issued through conversion of preferred shares. 56,250 6,000 249,000 (87,499) (256,000) Net income...................... 1,347,000 --------- --------- ----------- --------- ---------- ----------- October 31, 1995.................. 3,578,705 358,000 11,668,000 0 0 (6,881,000) Stock issued through public offering (net of issue costs)........... 1,600,000 160,000 17,459,000 Stock issued through the exercise of stock options....... 94,526 9,000 123,000 Stock issued through the employee stock purchase plan.... 35,691 4,000 74,000 Stock issued through the exercise of warrants............ 49,500 5,000 119,000 Net income....................... 3,711,000 --------- --------- ----------- --------- ---------- ----------- October 31, 1996................. 5,358,422 $536,000 $29,443,000 0 0 (3,170,000) Stock issued through the exercise of stock options....... 23,705 2,000 77,000 Stock issued through the employee stock purchase plan.... 5,228 1,000 35,000 Net income...................... 660,000 --------- --------- ----------- --------- ---------- ----------- October 31, 1997................ 5,387,355 $539,000 $29,555,000 0 0 $(2,510,000) ========= ========= =========== ========= ========== ============
The accompanying notes are an integral part of the financial statements Page 36 PPT VISION, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1: ORGANIZATION AND OPERATIONS The Company designs, manufactures, markets and integrates machine vision based automated inspection systems. The systems are used to improve productivity and quality by automating inspection tasks in manufacturing applications such as assembly verification, flaw detection, character verification or measurement tasks. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ACCOUNTS RECEIVABLE Accounts receivable are shown net of allowance for doubtful accounts of $30,026 at October 31, 1997, and $35,110 at October 31, 1996. INVENTORIES Inventories are stated at the lower of cost or market, with costs determined on a first-in, first-out ("FIFO") basis. As of October 31, 1997 and 1996 inventories consist of the following: OCTOBER 31, --------------------- 1997 1996 ---------- -------- Manufactured and purchased parts............ $1,223,000 $1,015,000 Work-in-process............................. 448,000 144,000 Finished goods.............................. 70,000 69,000 ---------- --------- Totals.................................. $1,741,000 $1,228,000 ========== ========== FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash and cash equivalents, investments, short-term trade receivables and payables for which current carrying amounts approximate fair market value. Page 37 OTHER ASSETS Other assets at October 31, 1997 and 1996 consist of the following: OCTOBER 31, ------------------- 1997 1996 ---------- -------- Patent and trademark............................... $1,654,000 $ 91,000 Security deposits.................................. -- -- Investment in related party........................ 53,000 53,000 Software development costs, net.................... 196,000 -- ---------- -------- 1,903,000 144,000 Less accumulated amortization...................... (75,000) (65,000) ---------- -------- Total other assets............................. $1,828,000 $ 79,000 ========== ======== The patent and trademark balance of $1,654,000 as of October 31, 1997 includes $1,500,000 which represents the value of a license agreement that the Company entered into with Medar, Inc. Patent and trademark costs are amortized over five to ten years. The investment in a related party represents common stock the Company intends to hold as an investment and is recorded at cost. During 1994, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities" SFAS. No. 115 requires certain investments in debt and equity securities to be recorded at fair market value. No adjustment to market value was recorded as of October 31, 1997 and 1996 as the difference was not material. Software development costs are treated in accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed." Certain software development costs totaling $196,000 were capitalized during the fiscal year ended October 31, 1997. No amortization expense has yet been recorded related to these software development costs. OTHER SHORT-TERM LIABILITIES In September of 1997 the Company entered into a license agreement with Medar, Inc. ("Medar") under which it acquired the exclusive worldwide rights to use of Medar's patented 3D scanning technology for applications in the electronics and semiconductor industries. Under the terms of the agreement, the Company will pay Medar an initial license fee of $1,500,000 based on the achievement of certain developmental milestones plus a royalty based on sales. The first $500,000 due under this license agreement was paid upon execution of the agreement. The remaining two $500,000 payments comprise the $1,000,000 short- term liability. Page 38 FIXED ASSETS Fixed assets consist of furniture, fixtures and equipment and are stated at cost net of accumulated depreciation. Depreciation is computed for book purposes on a straight-line basis over the estimated useful life of the asset and for tax purposes over five and ten years using accelerated and straight-line methods. At October 31, 1997 and 1996 furniture, fixtures and equipment consisted of the following: OCTOBER 31, ----------------------- 1997 1996 ---------- ---------- Equipment....................................... $3,271,000 $2,215,000 Furniture and fixtures.......................... 438,000 407,000 ---------- ---------- 3,709,000 2,622,000 Less accumulated depreciation................... (2,163,000) (1,759,000) ---------- ---------- Total fixed assets.......................... $1,546,000 $ 863,000 ========== ========== REVENUE RECOGNITION The Company records sales revenue upon shipment to the customer. RESEARCH AND DEVELOPMENT Expenditures for research and development are expensed as incurred. INCOME TAXES Income taxes are provided on the liability method. Under the liability method, deferred income taxes are provided on the difference in basis of assets and liabilities between financial reporting and tax returns using expected tax rates. INCOME PER SHARE Income per share computations are based on the weighted average number of common shares and common share equivalents outstanding during the year. Common share equivalents consist of stock options and warrants outstanding during the year. CASH FLOWS For purposes of reporting cash flows, cash and cash equivalents include cash on hand and investments with original maturities of three months or less. Non-cash transactions in 1997 consist of $6,228 related to the transfer of long-term assets to inventory. Non-cash transactions in 1996 consist of $10,568 related to the transfer of long-term assets to inventory. In 1995 non-cash Page 39 transactions consist of $255,952 related to the conversion of 87,499 preferred shares into 56,250 shares of common stock and $37,514 related to the transfer of long-term assets to inventory. ESTIMATES BY MANAGEMENT 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. STOCK SPLIT On March 14, 1996, the Board of Directors approved a three-for-two stock split in the form of a fifty percent (50%) stock dividend. The distribution of shares was made on April 5, 1996 to shareholders of record as of March 25, 1996. All historical share and per share data included in the financial statements have been restated to reflect the stock split. NOTE 3: CUSTOMER INFORMATION SIGNIFICANT CUSTOMER INFORMATION During 1997, 1996 and 1995, revenue from one customer accounted for 14%, 14% and 17% of net revenues respectively. During 1997 and 1996, revenue from another customer accounted for 14% and 12% of net revenues respectively. CUSTOMER GEOGRAPHIC DATA North American and export sales as a percentage of net revenues in 1997, 1996 and 1995 are as follows: YEAR ENDED OCTOBER 31, ---------------- 1997 1996 1995 ---- ---- ---- North America......... 78% 73% 67% Europe................ 14% 14% 21% Far East.............. 8% 13% 12% Page 40 NOTE 4: ACCRUED EXPENSES Accrued expenses at October 31, 1997 and 1996 include: OCTOBER 31, ---------------- 1997 1996 -------- -------- Vacation............................................... $ 25,000 $ 30,000 Employee Stock Purchase Plan payroll deductions........ 78,000 42,000 Compensation........................................... 64,000 67,000 Other.................................................. 78,000 126,000 -------- -------- Total.............................................. $245,000 $265,000 ======== ======== NOTE 5: COMMON STOCK OPTIONS AND WARRANTS Under the Company's 1988 Stock Option Plan and 1997 Stock Option Plan the Company may issue options to purchase up to 1,100,000 shares of common stock to employees and directors. Options are granted at prices equal to the average of the bid and ask prices on the date of the grant. The granting of options and their vesting is within the discretion of the Company's Board of Directors. A summary of stock options issued and outstanding under these plans is as follows: NUMBER OF SHARES ------------------------- EMPLOYEE WEIGHTED AVG OPTIONS OPTION PRICE ----------- ------------ Balance at October 31, 1994........................... 323,718 $ 2.14 Granted............................................. 22,125 $ 2.95 Exercised........................................... (65,370) $ 0.66 Forfeited........................................... (4,687) $ 3.07 ----------- ------------ Balance at October 31, 1995........................... 275,786 $ 2.55 Granted............................................. 126,850 $11.81 Exercised........................................... (94,526) $ 1.41 Forfeited........................................... (350) $ 9.86 ----------- ------------ Balance at October 31, 1996........................... 307,760 $ 6.70 Granted............................................. 364,200 $ 6.91 Exercised........................................... (23,705) $ 3.34 Forfeited........................................... (126,375) $11.68 ----------- ------------ Balance at October 31, 1997........................... 521,880 $ 5.79 =========== ============ Page 41 As of October 31, 1997: Price Range of Outstanding Options Options...........................................$2.33-$12.00 Expiration Dates.................................. 1997-2004 Options Exercisable............................... 146,680 In May of 1997, 122,150 options granted in fiscal years 1996 and 1997 with exercise prices ranging from $7.19 to $18.13 were repriced to $6.875 per share, the market price at the time of the repricing. The repricing is reflected in the table above as a grant cancellation and a new grant issuance. The estimated weighted average grant-date fair value of stock options granted is as follows: 1997--$4.23 and 1996--$5.64. The Company accounts for stock options and other equity instruments in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees." Statement of Financial Accounting Standards ("SFAS")No. 123, "Accounting for Stock-Based Compensation," was issued in October 1995. SFAS No. 123 establishes a fair value based method of accounting for employee stock based compensation plans and encourages companies to adopt that method. However, it also allows companies to continue to apply the intrinsic value based method currently prescribed under APB Opinion No. 25, provided certain pro forma disclosures are made. Had the Company's stock option plans and its stock purchase plans compensation costs been determined based on the fair value at the option grant dates for awards consistent with the accounting provision of SFAS No. 123 the Company's net income and earnings per share for fiscal years 1997 and 1996 would have been adjusted to the pro forma amount indicated below: Fiscal Year Ended October 31, 1997 1996 ------------------------------------ ---------- ---------- Net income............ As reported... $ 660,000 $3,711,000 Pro forma..... $ 197,000 $3,594,000 Net income per share.. As reported... $ 0.12 $ 0.84 Pro forma..... $ 0.04 $ 0.81 The following table summarizes stock options outstanding and exercisable at October 31, 1997. Outstanding Exercisable - -------------------------------------------------------- ---------------------- Weighted Average Weighted Weighted Exercise Contractual Average Average Price Range Options Life Remaining Exercise Price Options Exercise Price - --------------- ------- -------------- -------------- ------- -------------- $ 2.33 - $ 3.50 148,630 1.30 $ 3.03 135,880 $ 3.02 $ 3.67 - $ 4.17 6,375 1.69 $ 3.88 6,375 $ 3.88 $ 5.67 - $ 8.19 361,625 6.43 $ 6.88 2,175 $ 5.90 $ 9.62 - $12.00 5,250 5.82 $11.66 2,250 $12.00 ------- -------------- -------------- ------- -------------- 521,880 4.90 $ 5.79 146,680 $ 3.24 Page 42 The fair value of options granted under the Company's fixed stock option plans during fiscal 1997 and 1996 was estimated on the dates of grant using the Black- Scholes options-pricing model. The assumptions for fiscal 1997 and 1996 were as follows: Fiscal Year Ended October 31 1997 1996 --------------------------------- ----------- ----------- Risk free interest rates......... 5.6% - 5.9% 5.6% - 5.9% Expected life.................... 6.9 4.0 Expected volatility.............. 54% 54% Expected dividends............... 0% 0% Pro forma compensation cost related to shares purchased under the Company's Employee Stock Purchase Plan is measured based on the discount from market value. The effects of applying SFAS No. 123 does not apply to awards prior to fiscal 1996, and additional awards in future years are anticipated. In September of 1997, the Company issued a warrant to purchase 25,000 shares of common stock with an exercise price of $12.00 and an expiration date of September of 2004. The warrant becomes exercisable upon completion of certain technical milestones which have not yet been achieved. NOTE 6: STOCK OFFERINGS In June of 1996, the Company completed a public stock offering, issuing 1,600,000 shares of common stock at $12.00 per share, that raised $17,618,522 net of offering costs of $1,581,478. NOTE 7: EMPLOYEE STOCK PURCHASE PLAN In March 1995 shareholders approved the adoption of the 1995 Employee Stock Purchase Plan to replace the 1990 Employee Stock Purchase Plan which expired in 1995. Under the terms of the 1995 Plan, 225,000 shares have been reserved for issuance under the Plan. The third phase of the 1995 Plan began on June 1, 1997 and employees were granted the right to purchase 28,055 shares at $6.69 per share under the Plan. The second phase of the 1995 Plan ended on May 31, 1997 and employees purchased 5,228 shares at $6.69 per share under the Plan. The first phase of the 1995 Plan ended on May 31, 1996 and employees purchased 35,691 shares at $2.19 per share under the Plan. Page 43 NOTE 8: COMMITMENTS & CONTINGENCIES Rental expense under operating leases was $188,000, $170,987, and $163,100 in 1997, 1996, and 1995 respectively. Minimum future rental payments due under noncancelable operating lease agreements are as follows: 1998............................ 185,000 1999............................ 189,000 2000............................ 196,000 2001............................ 66,000 -------- Total....................... $636,000 ======== NOTE 9: EMPLOYEE SAVING PLAN The Company provides a supplementary retirement savings plan which is structured in accordance with Section 401(k) of the Internal Revenue Code. Employees eligible for the Plan may contribute from one to fifteen percent of their monthly earnings on a pre-tax basis subject to annual contribution limitations. The Company makes matching contributions of fifty cents for each dollar contributed by each Plan participant up to a maximum of $1,000 annually. The Company's contributions under this program were approximately $66,000, $52,250, and $30,876 for the years ended October 31, 1997, 1996 and 1995 respectively. NOTE 10: INCOME TAXES The provision for income taxes differs from the statutory U.S. federal tax rate of 34% applied to earnings before income taxes as follows: 1997 1996 ----------- ----------- Expected tax provision at statutory rate..........................$ 362,000 $ 783,000 State income tax provision, net of federal tax effect.................. 42,000 138,000 Permanent differences...................... 11,000 (11,000) (Reduction) of valuation allowance......... (2,219,000) Other...................................... (10,000) ----------- ----------- Total...................................$ 405,000 $(1,309,000) =========== =========== Page 44 Deferred tax assets (liabilities) are comprised of the following at October 31: 1997 1996 ---------- ---------- Depreciation.............................$ 93,000 $ 147,000 Deferred rent............................ 52,000 66,000 Other.................................... (199,000) (129,000) Net operating loss carry forwards........ 959,000 1,281,000 Credit carry forwards.................... 505,000 450,000 ---------- ---------- Net deferred tax asset................$1,410,000 $1,815,000 ========== ========== At October 31, 1997, the Company has available net operating loss and tax credit carry forwards for income tax purposes of $2.8 million and $505,000, respectively. These carry forwards expire in the years ending October 31, 2001 through 2009. No current tax provisions were recorded in the fiscal years ended October 31, 1997 and 1996 due to the utilization of net operating loss (NOL) carry forwards. The entire tax provisions consist of deferred taxes. The utilization of the net operating loss and tax credit carry forwards is dependent upon the Company's ability to generate sufficient taxable income during the carry forward period. A valuation allowance was established in 1994 and subsequent taxable earnings and an analysis of likely taxable income resulted in the elimination of the allowance for the year ended October 31, 1996. Page 45 SCHEDULE VIII Valuation and Qualifying Accounts Allowance for Doubtful Accounts: Balance at Additions Deductions Balance at Beginning Charged to and Write- End of of Period Earnings offs Period ---------- ---------- ---------- ---------- Year Ended October 31, 1995 $55,000 $ 69,000 ($ 89,000) $35,000 Year Ended October 31, 1996 $35,000 $ 2,000 ($ 2,000) $35,000 Year Ended October 31, 1997 $35,000 $ 95,000 ($100,000) $30,000 EX-10.6 2 1988 STOCK OPTION PLAN Page 46 PPT VISION, INC. 1988 STOCK OPTION PLAN 1. Purpose. The purpose of the PPT Vision, Inc. 1988 Stock Option Plan is to provide a continuing, long-term incentive to selected eligible officers, directors and key employees of PPT Vision, Inc. (the "Corporation") and of any subsidiary corporation of the Corporation (the "Subsidiary"), as herein defined; to provide a means of rewarding outstanding performance; and to enable the Corporation to maintain a competitive position to attract and retain key personnel necessary for continued growth and profitability. 2. Definitions. The following words and phrases as used herein shall have the meanings set forth below: 2.1. "Board" shall mean the Board of Directors of the Corporation. 2.2. "Change in Control" shall mean the time at which any entity, person or group (other than the Corporation, any subsidiary of the Corporation or any savings, pension or other benefit plan for the benefit of any employees of the Corporation or its subsidiaries) which prior to such time beneficially owned less than twenty percent (20%) of the then outstanding Common Stock acquires such additional shares of Common Stock in one or more transactions, or a series of transactions, such that following such transaction or transactions such entity, person or group beneficially owns, directly or indirectly, twenty percent (20%), or more, of the outstanding Common Stock. 2.3. "Code" shall mean the Internal Revenue Code of 1986, as amended. 2.4. "Committee" shall mean a committee of the Board as may be designated by the Board, from time to time, for the purpose of administering this plan as contemplated by Article 4 hereof. 2.5. "Common Stock" shall mean the common stock, no par value, of the Corporation. Page 47 2.6. "Corporation" shall mean PPT Vision, Inc., a Minnesota corporation. 2.7. "Non-Employee Directors" shall mean a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3) under the Securities Exchange Act, as amended, or any successor rule. 2.8. "Fair Market Value" of any security on any given date shall be determined by the Committee as follows: (a) if the security is listed for trading on one or more national securities exchanges, or is traded on the Nasdaq National Market System, the last reported sales price on the principal such exchange or Nasdaq System on the date in question, or if such security shall not have been traded on such principal exchange on such date, the last reported sales price on such principal exchange or the Nasdaq System on the first day prior thereto on which such security was so traded; or (b) if the security is not listed for trading on a national securities exchange or the Nasdaq National Market System, but is traded in the over-the-counter market, including the NASDAQ System, closing bid price for such security on the date in question, or if there is no such bid price for such security on such date, the closing bid price on the first day prior thereto on which such price existed; or (c) if neither (a) nor (b) is applicable, by any means deemed fair and reasonable by the Committee, which determination shall be final and binding on all parties. 2.9. "ISO" shall mean any stock option granted pursuant to this Plan as an "incentive stock option" within the meaning of Section 422 of the Code. 2.10. "NQO" shall mean any stock option granted pursuant to this Plan which is not an ISO. 2.11. "Option" shall mean any stock option granted pursuant to this Plan, whether an ISO or an NQO. 2.12. "Optionee" shall mean any person who is the holder of an Option granted pursuant to this Plan. Page 48 2.13. "Outside Director" shall mean a director who (a) is not a current employee of the Corporation or any member of an affiliated group which includes the Corporation; (b) is not a former employee of the Corporation who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year; (c) has not been an officer of the Corporation; (d) does not receive remuneration from the Corporation, either directly or indirectly, in any capacity other than as a director, except as otherwise permitted under Code Section 162(m) and regulations thereunder. For this purpose, remuneration includes any payment in exchange for goods or services. This definition shall be further governed by the provisions of Code Section 162(m) and regulations promulgated thereunder. 2.14. "Plan" shall mean this 1988 Stock Option Plan of the Corporation. 2.15. "Subsidiary" shall mean any corporation which at the time qualifies as a subsidiary of the Corporation under Section 425(f) of the Code. 2.16. "Tax Date" shall mean the date on which the amount of tax to be withheld is determined under the Code. 3. Shares Available Under Plan. The number of shares which may be issued pursuant to Options granted under this Plan shall not exceed 600,000 shares of the Common Stock of the Corporation; provided, however, that shares which become available as a result of cancelled, unexercised, lapsed or terminated Options granted under this Plan shall be available for issuance pursuant to Options subsequently granted under this Plan. The shares issued upon exercise of Options granted under this Plan may be authorized and unissued shares or shares previously acquired or to be acquired by the Corporation. 4. Administration. 4.1. The Plan will be administered by the Board or a Committee of at least two directors, all of whom shall be Outside Directors and Page 49 Non-Employee Directors. The Committee may be a subcommittee of the Compensation Committee of the Board. 4.2. The Committee will have plenary authority, subject to provisions of the Plan, to determine when and to whom Options will be granted, the term of each Option, the number of shares covered by it, the participation by the Optionee in other plans, and any other terms or conditions of each Option. The Committee shall determine with respect to each grant of an Option whether a participant shall receive an ISO or an NQO. The number of shares, the term and the other terms and conditions of a particular kind of Option need not be the same, even as to Options granted at the same time. The Committee's recommendations regarding Option grants and terms and conditions thereof will be conclusive. 4.3. The Committee will have the sole responsibility for construing and interpreting the Plan, for establishing and amending any rules and regulations as it deems necessary or desirable for the proper administration of the Plan, and for resolving all questions arising under the Plan. Any decision or action taken by the Committee arising out of or about the construction, administration, interpretation and effect of the Plan and of its rules and regulations will, to the extent permitted by law, be within its absolute discretion, except as otherwise specifically provided herein, and will be conclusive and binding on all Optionees, all successors, and any other person, whether that person is claiming under or through any Optionee or otherwise. 4.4. The Committee will designate one of its members as chairman. It will hold its meetings at the times and places as it may determine. A majority of its members will constitute a quorum, and all determinations of the Committee will be made by a majority of its members. Any determination reduced to writing and signed by all members will be fully as effective as if it had been made by a majority vote at a meeting duly called and held. The Committee may appoint a secretary, who need not be a member of the Page 50 Committee, and may make such rules and regulations for the conduct of its business as it may deem advisable. 4.5. No member of the Committee will be liable, in the absence of bad faith, for any act or omission with respect to his services on the Committee. Service on the Committee will constitute service as a member of the Board, so that the members of the Committee will be entitled to indemnification and reimbursement as Board members pursuant to its Bylaws. 4.6. The Committee will regularly inform the Board as to its actions with respect to all Options granted under the Plan and the terms and conditions and any such Options in a manner, at any times, and in any form as the Board may reasonably request. 4.7. Any other provision of the Plan to the contrary notwithstanding, the Committee is authorized to take such action as it, in its discretion, may deem necessary or advisable and fair and equitable to Optionees in the event of: a Change in Control of the Corporation; a tender, exchange or similar offer for all or any part of the Common Stock made by any entity, person or group (other than the Corporation, any Subsidiary of the Corporation or any savings, pension or other benefit plan for the benefit of employees of the Corporation or its Subsidiaries); a merger of the Corporation into, a consolidation of the Corporation with, or an acquisition of the Corporation by another corporation; or a sale or transfer of all or substantially all of the Corporation's assets. Such action, in the Committee's discretion, may include (but shall not be deemed limited to): establishing, amending or waiving the forms, terms, conditions or duration of Options so as to provide for earlier, later, extended or additional terms for exercise of the whole, or any installment, thereof; alternate forms of payment; or other modifications. The Committee may take any such actions pursuant to this Section 4.7 by adopting rules or regulations of general applicability to all Optionees, or to certain categories of Optionees: by amending or waiving terms and conditions in Page 51 stock option agreements; or by taking action with respect to individual Optionees. The Committee may take any such actions before or after the public announcement of any such Change in Control, tender offer, exchange offer, merger, consolidation, acquisition or sale or transfer of assets. 5. Participants. 5.1. Participation in this Plan shall be limited to officers and regular full-time executive, administrative, professional, production and technical employees of the Corporation or of a Subsidiary, who are salaried employees of the Corporation or of a Subsidiary and to all Directors of the Company. 5.2. Subject to other provisions of this Plan, Options may be granted to the same participants on more than one occasion. 5.3. The Committee's determination under the Plan including, without limitation, determination of the persons to receive Options, the form, amount and type of such Options, and the terms and provisions of Options need not be uniform and may be made selectively among otherwise eligible participants, whether or not the participants are similarly situated. 5.4 No person shall receive Options under this Plan which exceed 50,000 shares during any fiscal year of the Corporation. 6. Terms and Conditions. 6.1. Each Option granted under the Plan shall be evidenced by a written agreement, which shall be subject to the provisions of this Plan and to such other terms and conditions as the Corporation may deem appropriate. 6.2. Each Option agreement shall specify the period for which the Option thereunder is granted (which in no event shall exceed ten years from the date of the grant for any Option granted pursuant to Section 6.3(a) hereof, five years from the date of grant for any Option granted pursuant to 6.3(b) hereof and ten years and one day from the date of grant for any Option designated by the Committee as an NQO and shall provide that the Page 52 Option shall expire at the end of such period; provided, however, the term of each Option shall be subject to the power of the Committee, among other things, to accelerate or otherwise adjust the terms for exercise of Options pursuant to Section 4.7 hereof in the event of the occurrence of any of the events set forth therein. 6.3. The exercise price per share shall be determined by the Committee at the time any Option is granted; provided, however, that in no event shall the exercise price per share purchasable under a NQO be less than 85% of the Fair Market Value of the Common Stock of the Corporation on the date the Option is granted, and, if the Option is an ISO, shall be determined as follows: (a) For employees who do not own stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation or of any Subsidiary, the ISO exercise price per share shall not be less than one hundred percent (100%) of Fair Market Value of the Common Stock of the Corporation on the date the Option is granted, as determined by the Committee. (b) For employees who own stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation or of any Subsidiary, the ISO exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value of the Common Stock of the Corporation on the date the Option is granted, as determined by the Committee. 6.4. The aggregate Fair Market Value (determined as of the time the Option is granted) of the Common Stock with respect to which an ISO under this Plan or any other plan of the Corporation or its Subsidiaries is exercisable for the first time by an Optionee during any calendar year shall not exceed $100,000. 6.5. An Option shall be exercisable at such time or times, and with respect to such minimum number of shares, as may be determined by the Page 53 Corporation at the time of the grant. The Option agreement may require, if so determined by the Corporation, that no part of the Option may be exercised until the Optionee shall have remained in the employ of the Corporation or of a Subsidiary for such period after the date of the Option as the Corporation may specify. Notwithstanding the foregoing and subject to the discretionary acceleration rights of the Committee, an Option granted to a director, officer or 10% shareholders of the Corporation shall not be exercisable for a period of six (6) months unless the Option has been approved by the Board, the Committee or the shareholders of the Corporation. 6.6. The Corporation may prescribe the form of legend which shall be affixed to the stock certificate representing shares to be issued and the shares shall be subject to the provisions of any repurchase agreement or other agreement restricting the sale or transfer thereof. Such agreements or restrictions shall be noted on the certificate representing the shares to be issued. 7. Exercise of Option. 7.1. Each exercise of an Option granted hereunder, whether in whole or in part, shall be by written notice thereof, delivered to the Secretary of the Corporation (or such other person as he may designate). The notice shall state the number of shares with respect to which the Options are being exercised and shall be accompanied by payment in full for the number of shares so designated. Shares shall be registered in the name of the Optionee unless the Optionee otherwise directs in his or her notice of election. 7.2. Payment shall be made to the Corporation either (i) in cash, including certified check, bank draft or money order, (ii) at the discretion of the Corporation, by delivering Common Stock of the Corporation already owned by the participant, (iii) at the discretion of the Corporation, by delivering a promissory note, containing such terms and Page 54 conditions acceptable to the Corporation, for all or a portion of the purchase price of the shares so purchased, or a combination of (i), (ii) and (iii). With respect to (ii) the Fair Market Value of stock so delivered shall be determined as of the date immediately preceding the date of exercise. 7.3. Upon notification of the amount due and prior to, or concurrently with, the delivery to the Optionee of a certificate representing any shares purchased pursuant to the exercise of an Option, the Optionee shall promptly pay to the Corporation any amount necessary to satisfy applicable federal, state or local withholding tax requirements. 7.4. If the terms of an Option so permit, an Optionee, other than a member of the Committee, may elect by written notice to the Secretary of the Corporation (or such other person as he may designate), to satisfy the withholding tax requirements associated with the exercise of an Option by authorizing the Corporation to retain from the number of shares of Common Stock that would otherwise be deliverable to the Optionee that number of shares having an aggregate Fair Market Value on the Tax Date equal to the tax payable by the Optionee under Section 7.3. Where shares are transferred to an Optionee prior to the Tax Date, the Optionee shall agree in any such election to surrender that number of shares having an aggregate Fair Market Value on the Tax Date equal to the tax payable by the Optionee under Section 7.3. Where the Optionee is an officer, Director or beneficial owner of more than 10% of the Corporation's Common Stock, any such election shall be made (a) at least six (6) months following the grant of the Option, and (b) (i) at least six (6) months prior to the Tax Date, or (ii) within a ten-day "window period" following release of the Corporation's annual or quarterly financial results, all as required by Rule 16b-3 under the Securities Exchange Act of 1934. In addition, any Page 55 election to have shares withheld pursuant to this Section 7.4 will be irrevocable by the Optionee and will in any event be subject to the disapproval of the Committee. 8. Adjustments of Option Stock. In case the shares issuable upon exercise of any Option granted under the Plan at any time outstanding shall be subdivided into a greater or combined into a lesser number of shares (whether with or without par value), the number of shares purchasable upon exercise of such Option immediately prior thereto shall be adjusted so that the Optionee shall be entitled to receive a number of shares which he or she would have owned or have been entitled to receive after the happening of such event had such Option been exercised immediately prior to the happening of such subdivision or combination or any record date with respect thereto. An adjustment made pursuant to this paragraph shall become effective immediately after the effective date of such subdivision or combination retroactive to the record date, if any, for such subdivision or combination. The Option price (as such amount may have theretofore been adjusted pursuant to the provisions hereof) shall be adjusted by multiplying the Option price immediately prior to the adjustment of the number of shares purchasable under the Option by a fraction, of which the numerator shall be the number of shares purchasable upon the exercise of the Option immediately prior to such adjustment, and of which the denominator shall be the number of shares so purchasable immediately thereafter. Substituted shares of stock shall be deemed shares under Section 3 of the Plan. 9. Assignments. Any Option granted under this Plan shall be exercisable only by the Optionee to whom granted during his or her lifetime and shall not be assignable or transferable otherwise than by will or by the laws of descent and distribution. Notwithstanding the foregoing, the Board or the Committee may, in its discretion, determine that an Option may be exercised by a person other than the Optionee and that an Option may be transferable based on he tax and federal securities law considerations then in effect for such Options. Page 56 10. Severance; Death; Disability. An Option shall terminate, and no rights thereunder may be exercised, if the person to whom it is granted ceases to be employed by the Corporation or by a Subsidiary except that: 10.1. If the employment of the Optionee is terminated by any reason other than his or her death or disability, the Optionee may at any time within not more than three months after termination of his or her employment, exercise his or her Option rights but only to the extent they were exercisable by the Optionee on the date of termination of his or her employment; provided, however, that if the employment is terminated by deliberate, willful or gross misconduct as determined by the Committee, all rights under the Option shall terminate and expire upon such termination. 10.2. If the Optionee dies while in the employ of the Corporation or a Subsidiary, or within not more than three months after termination of his or her employment, the Optionee's rights under the Option may be exercised at any time within one year following such death by his or her personal representative or by the person or persons to whom such rights under the Option shall pass by will or by the laws of descent and distribution, but only to the extent they were exercisable by the Optionee on the date of death. 10.3. If the employment of the Optionee is terminated because of permanent disability, the Optionee, or his or her legal representative, may at any time within not more than one year after termination of his or her employment, exercise his or her Option rights but only to the extent they were exercisable by the Optionee on the date of termination of his or her employment. 10.4. Notwithstanding anything contained in Sections 10.1, 10.2 and 10.3 to the contrary, no Option rights shall be exercisable by anyone after the expiration of the term of the Option. 10.5. Transfers of employment between the Corporation and a Subsidiary, or between Subsidiaries, will not constitute termination of Page 57 employment for purposes of any Option granted under this Plan. The Committee may specify in the terms and conditions of an Option whether any authorized leave of absence or absence for military or government service or for any other reasons will constitute a termination of employment for purposes of the Option and the Plan. 11. Rights of Participants. Neither the participant nor the personal representatives, heirs, or legatees of such participant shall be or have any of the rights or privileges of a shareholder of the Corporation in respect of any of the shares issuable upon the exercise of an Option granted under this Plan unless and until certificates representing such shares shall have been issued and delivered to the participant or to such personal representatives, heirs or legatees. 12. Securities Registration. If any law or regulation of the Securities and Exchange Commission or of any other body having jurisdiction shall require the Corporation or the participant to take any action in connection with the exercise of an Option, then notwithstanding any contrary provision of an Option agreement or this Plan, the date for exercise of such Option and the delivery of the shares purchased thereunder shall be deferred until the completion of the necessary action. In the event that the Corporation shall deem it necessary, the Corporation may condition the grant or exercise of an Option granted under this Plan upon the receipt of a satisfactory certificate that the Optionee is acquiring the Option or the shares obtained by exercise of the Option for investment purposes and not with the view or intent to resell or otherwise distribute such Option or shares. In such event, the stock certificate evidencing such shares shall bear a legend referring to applicable laws restricting transfer of such shares. In the event that the Corporation shall deem it necessary to register under the Securities Act of 1933, as amended, or any other applicable statute, any Options or any shares with respect to which an Option shall have been granted or exercised, then the participant shall Page 58 cooperate with the Corporation and take such action as is necessary to permit registration or qualification of such Options or shares. 13. Duration and Amendment. 13.1. There is no express limitation upon the duration of the Plan, except for the requirement of the Code that all ISOs must be granted within ten years from the date the Plan is approved by the shareholders. 13.2. The Board may terminate or may amend the Plan at any time, provided, however, that the Board may not, without approval of the shareholders of the Corporation, (i) increase the maximum number of shares as to which options may be granted under the Plan, (ii) permit the granting of ISO's at less than 100% of Fair Market Value at time of grant, or (iii) change the class of employees eligible to receive Options under the Plan. 14. Granting of Options to Directors Who Are Not Employees. Each person who is not an employee of the Corporation or its Subsidiaries who on and after the date this Plan is approved by shareholders of the Corporation (i) is elected or reelected or (ii) is elected as a Director of the Corporation at any special meeting of holders of Common Stock of the Corporation, shall as of the date of such election, reelection, or annual or special meeting automatically be granted an Option to purchase 1,500 shares of the Corporation's Common Stock at an option price per share equal to 100% of the Fair Market Value of a share on such date. In the case of a special meeting, the action of the holders of shares in electing a Director who is not an employee of the Corporation or its Subsidiaries shall constitute the granting of the Option to such Director, and, in the case of an annual meeting, the action of the holders of shares in electing or reelecting such Director shall constitute the granting of an Option to such Director; and the date when the holders of shares shall take such action shall be the date of grant of the Option. In addition, each Director who was not an employee on June 18, 1996 shall receive an option to purchase 1,500 shares of the Company's Common Stock at a price of $12.00 per share, Page 59 the price at which the Company issued 1,600,000 shares of Common Stock in its public offering. All such Options shall be designated as NQOs and shall be subject to the same terms and provisions as are then in effect with respect to granting of NQOs to salaried officers and key employees of the Corporation, except that the Option shall be exercisable as to all or any part of the shares subject to the Option from the date the Option is granted, and shall expire on the earliest of (i) twelve months after the Optionee ceases to be a director (except by death) (ii) one year after the death of the optionee, or (iii) five years after the date of grant, unless the Board, in its discretion, shall waive or modify the term of the grant. Directors shall always have the right to deliver stock in exercise of Options as provided in Section 8.2. In the event discretionary Options are granted to members of the Committee, such Options shall be granted by the Board. 15. Approval of Shareholders. This Plan expressly is subject to approval of holders of a majority of the outstanding shares of Common Stock of the Corporation, and if it is not so approved on or before one year after the date of adoption of this Plan by the Board, the Plan shall not come into effect, and any Options granted pursuant to this Plan shall be deemed cancelled. 16. Conditions of Employment. The granting of an Option to a participant under this Plan who is an employee shall impose no obligation on the Corporation to continue the employment of any participant and shall not lessen or affect the right of the Corporation to terminate the employment of the participant. 17. Other Options. Nothing in the Plan will be construed to limit the authority of the Corporation to exercise its corporate rights and powers, including, by way of illustration and not by way of limitation, the right to grant options for proper corporate purposes otherwise than under the Plan to any employee or any other person, firm, corporation, Page 60 association, or other entity, or to grant Options to, or assume Options of, any person for the acquisition by purchase, lease, merger, consolidation, or otherwise, of all or any part of the business and assets of any person, firm, corporation, association, or other entity. As amended March 5, 1997. Reflects the Company's April 5, 1996 2 for 1 stock split in the form of a 50% stock dividend. EX-10.7 3 1997 STOCK OPTION PLAN Page 61 PPT VISION, INC. 1997 STOCK OPTION PLAN 1. Purpose. The purpose of the PPT Vision, Inc. 1997 Stock Option Plan is to provide a continuing, long-term incentive to selected eligible officers and key employees of PPT Vision, Inc. (the "Corporation") and of any subsidiary corporation of the Corporation (the "Subsidiary"), as herein defined to provide a means of rewarding outstanding performance; and to enable the Corporation to maintain a competitive position to attract and retain key personnel necessary for continued growth and profitability. 2. Definitions. The following words and phrases as used herein shall have the meanings set forth below: 2.1. "Board" shall mean the Board of Directors of the Corporation. 2.2. "Change in Control" shall mean the time at which any entity, person or group (other than the Corporation, any subsidiary of the Corporation or any savings, pension or other benefit plan for the benefit of any employees of the Corporation or its subsidiaries) which prior to such time beneficially owned less than twenty percent (20%) of the then outstanding Common Stock acquires such additional shares of Common Stock in one or more transactions, or a series of transactions, such that following such transaction or transactions such entity, person or group beneficially owns, directly or indirectly, twenty percent (20%), or more, of the outstanding Common Stock. 2.3. "Code" shall mean the Internal Revenue Code of 1986, as amended. 2.4. "Committee" shall mean a committee of the Board as may be designated by the Board, from time to time, for the purpose of administering this plan as contemplated by Article 4 hereof. Page 62 2.5. "Common Stock" shall mean the common stock, no par value, of the Corporation. 2.6. "Corporation" shall mean PPT Vision, Inc., a Minnesota corporation. 2.7. "Non-Employee Directors" shall mean a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3) under the Securities Exchange Act, as amended, or any successor rule. 2.8. "Fair Market Value" of any security on any given date shall be determined by the Committee as follows: (a) if the security is listed for trading on one or more national securities exchanges, or is traded on the Nasdaq National Market System, the last reported sales price on the principal such exchange or Nasdaq System on the date in question, or if such security shall not have been traded on such principal exchange on such date, the last reported sales price on such principal exchange or the Nasdaq System on the first day prior thereto on which such security was so traded; or (b) if the security is not listed for trading on a national securities exchange or the Nasdaq National Market System, but is traded in the over-the-counter market, including the Nasdaq System, closing bid price for such security on the date in question, or if there is no such bid price for such security on such date, the closing bid price on the first day prior thereto on which such price existed; or (c) if neither (a) nor (b) is applicable, by any means deemed fair and reasonable by the Committee, which determination shall be final and binding on all parties. 2.9. "ISO" shall mean any stock option granted pursuant to this Plan as an "incentive stock option" within the meaning of Section 422 of the Code. 2.10. "NQO" shall mean any stock option granted pursuant to this Plan which is not an ISO. Page 63 2.11. "Option" shall mean any stock option granted pursuant to this Plan, whether an ISO or an NQO. 2.12. "Optionee" shall mean any person who is the holder of an Option granted pursuant to this Plan. 2.13. "Outside Director" shall mean a director who (a) is not a current employee of the Corporation or any member of an affiliated group which includes the Corporation; (b) is not a former employee of the Corporation who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year; (c) has not been an officer of the Corporation; (d) does not receive remuneration from the Corporation, either directly or indirectly, in any capacity other than as a director, except as otherwise permitted under Code Section 162(m) and regulations thereunder. For this purpose, remuneration includes any payment in exchange for goods or services. This definition shall be further governed by the provisions of Code Section 162(m) and regulations promulgated thereunder. 2.14. "Plan" shall mean this 1997 Stock Option Plan of the Corporation. 2.15. "Subsidiary" shall mean any corporation which at the time qualifies as a subsidiary of the Corporation under Section 425(f) of the Code. 2.16. "Tax Date" shall mean the date on which the amount of tax to be withheld is determined under the Code. 3. Shares Available Under Plan. The number of shares which may be issued pursuant to Options granted under this Plan shall not exceed 500,000 shares of the Common Stock of the Corporation; provided, however, that shares which become available as a result of cancelled, unexercised, lapsed or terminated Options granted under this Plan shall be available for issuance pursuant to Options subsequently granted under this Plan. The shares issued upon exercise of Page 64 Options granted under this Plan may be authorized and unissued shares or shares previously acquired or to be acquired by the Corporation. 4. Administration. 4.1. The Plan will be administered by the Board or a Committee of at least two directors, all of whom shall be Outside Directors and Non-Employee Directors. The Committee may be a subcommittee of the Compensation Committee of the Board. 4.2. The Committee will have plenary authority, subject to provisions of the Plan, to determine when and to whom Options will be granted, the term of each Option, the number of shares covered by it, the participation by the Optionee in other plans, and any other terms or conditions of each Option. The Committee shall determine with respect to each grant of an Option whether a participant shall receive an ISO or an NQO. The number of shares, the term and the other terms and conditions of a particular kind of Option need not be the same, even as to Options granted at the same time. The Committee's recommendations regarding Option grants and terms and conditions thereof will be conclusive. 4.3. The Committee will have the sole responsibility for construing and interpreting the Plan, for establishing and amending any rules and regulations as it deems necessary or desirable for the proper administration of the Plan, and for resolving all questions arising under the Plan. Any decision or action taken by the Committee arising out of or about the construction, administration, interpretation and effect of the Plan and of its rules and regulations will, to the extent permitted by law, be within its absolute discretion, except as otherwise specifically provided herein, and will be conclusive and binding on all Optionees, all successors, and any other person, whether that person is claiming under or through any Optionee or otherwise. Page 65 4.4. The Committee will designate one of its members as chairman. It will hold its meetings at the times and places as it may determine. A majority of its members will constitute a quorum, and all determinations of the Committee will be made by a majority of its members. Any determination reduced to writing and signed by all members will be fully as effective as if it had been made by a majority vote at a meeting duly called and held. The Committee may appoint a secretary, who need not be a member of the Committee, and may make such rules and regulations for the conduct of its business as it may deem advisable. 4.5. No member of the Committee will be liable, in the absence of bad faith, for any act or omission with respect to his services on the Committee. Service on the Committee will constitute service as a member of the Board, so that the members of the Committee will be entitled to indemnification and reimbursement as Board members pursuant to its Bylaws. 4.6. The Committee will regularly inform the Board as to its actions with respect to all Options granted under the Plan and the terms and conditions and any such Options in a manner, at any times, and in any form as the Board may reasonably request. 4.7. Any other provision of the Plan to the contrary notwithstanding, the Committee is authorized to take such action as it, in its discretion, may deem necessary or advisable and fair and equitable to Optionees in the event of: a Change in Control of the Corporation; a tender, exchange or similar offer for all or any part of the Common Stock made by any entity, person or group (other than the Corporation, any Subsidiary of the Corporation or any savings, pension or other benefit plan for the benefit of employees of the Corporation or its Subsidiaries); a merger of the Corporation into, a consolidation of the Corporation with, or an acquisition of the Corporation by Page 66 another corporation; or a sale or transfer of all or substantially all of the Corporation's assets. Such action, in the Committee's discretion, may include (but shall not be deemed limited to): establishing, amending or waiving the forms, terms, conditions or duration of Options so as to provide for earlier, later, extended or additional terms for exercise of the whole, or any installment, thereof; alternate forms of payment; or other modifications. The Committee may take any such actions pursuant to this Section 4.7 by adopting rules or regulations of general applicability to all Optionees, or to certain categories of Optionees: by amending or waiving terms and conditions in stock option agreements; or by taking action with respect to individual Optionees. The Committee may take any such actions before or after the public announcement of any such Change in Control, tender offer, exchange offer, merger, consolidation, acquisition or sale or transfer of assets. 5. Participants. 5.1. Participation in this Plan shall be limited to officers and regular full-time executive, administrative, professional, production and technical employees of the Corporation or of a Subsidiary, who are salaried employees of the Corporation or of a Subsidiary and to all Directors of the Company. 5.2. Subject to other provisions of this Plan, Options may be granted to the same participants on more than one occasion. 5.3. The Committee's determination under the Plan including, without limitation, determination of the persons to receive Options, the form, amount and type of such Options, and the terms and provisions of Options need not be uniform and may be made selectively among otherwise eligible participants, whether or not the participants are similarly situated. Page 67 5.4 No person shall receive Options under this Plan which exceed 50,000 shares during any fiscal year of the Corporation. 6. Terms and Conditions. 6.1. Each Option granted under the Plan shall be evidenced by a written agreement, which shall be subject to the provisions of this Plan and to such other terms and conditions as the Corporation may deem appropriate. 6.2. Each Option agreement shall specify the period for which the Option thereunder is granted (which in no event shall exceed ten years from the date of the grant for any Option granted pursuant to Section 6.3(a) hereof, five years from the date of grant for any Option granted pursuant to 6.3(b) hereof and ten years and one day from the date of grant for any Option designated by the Committee as an NQO and shall provide that the Option shall expire at the end of such period; provided, however, the term of each Option shall be subject to the power of the Committee, among other things, to accelerate or otherwise adjust the terms for exercise of Options pursuant to Section 4.7 hereof in the event of the occurrence of any of the events set forth therein. 6.3. The exercise price per share shall be determined by the Committee at the time any Option is granted; provided, however, that in no event shall the exercise price per share purchasable under a NQO be less than 85% of the Fair Market Value of the Common Stock of the Corporation on the date the Option is granted, and, if the Option is an ISO, shall be determined as follows: (a) For employees who do not own stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation or of any Subsidiary, the ISO exercise price per share shall not be less than one hundred percent (100%) of Fair Market Value of the Common Stock of the Page 68 Corporation on the date the Option is granted, as determined by the Committee. (b) For employees who own stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation or of any Subsidiary, the ISO exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value of the Common Stock of the Corporation on the date the Option is granted, as determined by the Committee. 6.4. The aggregate Fair Market Value (determined as of the time the Option is granted) of the Common Stock with respect to which an ISO under this Plan or any other plan of the Corporation or its Subsidiaries is exercisable for the first time by an Optionee during any calendar year shall not exceed $100,000. 6.5. An Option shall be exercisable at such time or times, and with respect to such minimum number of shares, as may be determined by the Corporation at the time of the grant. The Option agreement may require, if so determined by the Corporation, that no part of the Option may be exercised until the Optionee shall have remained in the employ of the Corporation or of a Subsidiary for such period after the date of the Option as the Corporation may specify. Notwithstanding the foregoing and subject to the discretionary acceleration rights of the Committee, an Option granted to a director, officer or 10% shareholder of the Corporation shall not be exercisable for a period of six (6) months unless the Option has been approved by the Board, the Committee or the shareholders of the Corporation. 6.6. The Corporation may prescribe the form of legend which shall be affixed to the stock certificate representing shares to be issued and the shares shall be subject to the provisions of any repurchase agreement or other agreement restricting the sale or Page 69 transfer thereof. Such agreements or restrictions shall be noted on the certificate representing the shares to be issued. 7. Exercise of Option. 7.1. Each exercise of an Option granted hereunder, whether in whole or in part, shall be by written notice thereof, delivered to the Secretary of the Corporation (or such other person as he may designate). The notice shall state the number of shares with respect to which the Options are being exercised and shall be accompanied by payment in full for the number of shares so designated. Shares shall be registered in the name of the Optionee unless the Optionee otherwise directs in his or her notice of election. 7.2. Payment shall be made to the Corporation either (i) in cash, including certified check, bank draft or money order, (ii) at the discretion of the Corporation, by delivering Common Stock of the Corporation already owned by the participant, (iii) at the discretion of the Corporation, by delivering a promissory note, containing such terms and conditions acceptable to the Corporation, for all or a portion of the purchase price of the shares so purchased, or a combination of (i), (ii) and (iii). With respect to (ii) the Fair Market Value of stock so delivered shall be determined as of the date immediately preceding the date of exercise. 7.3. Upon notification of the amount due and prior to, or concurrently with, the delivery to the Optionee of a certificate representing any shares purchased pursuant to the exercise of an Option, the Optionee shall promptly pay to the Corporation any amount necessary to satisfy applicable federal, state or local withholding tax requirements. 7.4. If the terms of an Option so permit, an Optionee, other than a member of the Committee, may elect by written notice to the Secretary of the Corporation (or such other person as he may Page 70 designate), to satisfy the withholding tax requirements associated with the exercise of an Option by authorizing the Corporation to retain from the number of shares of Common Stock that would otherwise be deliverable to the Optionee that number of shares having an aggregate Fair Market Value on the Tax Date equal to the tax payable by the Optionee under Section 7.3. Where shares are transferred to an Optionee prior to the Tax Date, the Optionee shall agree in any such election to surrender that number of shares having an aggregate Fair Market Value on the Tax Date equal to the tax payable by the Optionee under Section 7.3. Where the Optionee is an officer, Director or beneficial owner of more than 10% of the Corporation's Common Stock, any such election shall be made (a) at least six (6) months following the grant of the Option, and (b) (i) at least six (6) months prior to the Tax Date, or (ii) within a ten-day "window period" following release of the Corporation's annual or quarterly financial results, all as required by Rule 16b-3 under the Securities Exchange Act of 1934. In addition, any election to have shares withheld pursuant to this Section 7.4 will be irrevocable by the Optionee and will in any event be subject to the disapproval of the Committee. 8. Adjustments of Option Stock. In case the shares issuable upon exercise of any Option granted under the Plan at any time outstanding shall be subdivided into a greater or combined into a lesser number of shares (whether with or without par value), the number of shares purchasable upon exercise of such Option immediately prior thereto shall be adjusted so that the Optionee shall be entitled to receive a number of shares which he or she would have owned or have been entitled to receive after the happening of such event had such Option been exercised immediately prior to the happening of such subdivision or combination or any record date with respect thereto. An adjustment made pursuant to this paragraph shall become effective immediately after the effective date of such subdivision or combination retroactive to the record date, if any, for such Page 71 subdivision or combination. The Option price (as such amount may have theretofore been adjusted pursuant to the provisions hereof) shall be adjusted by multiplying the Option price immediately prior to the adjustment of the number of shares purchasable under the Option by a fraction, of which the numerator shall be the number of shares purchasable upon the exercise of the Option immediately prior to such adjustment, and of which the denominator shall be the number of shares so purchasable immediately thereafter. Substituted shares of stock shall be deemed shares under Section 3 of the Plan. 9. Assignments. Any Option granted under this Plan shall be exercisable only by the Optionee to whom granted during his or her lifetime and shall not be assignable or transferable otherwise than by will or by the laws of descent and distribution. Notwithstanding the foregoing, the Board or the Committee may, in its discretion, determine that an Option may be exercised by a person other than the Optionee and that an Option may be transferable based on the tax and federal securities law considerations then in effect for such Options. 10. Severance; Death; Disability. An Option shall terminate, and no rights thereunder may be exercised, if the person to whom it is granted ceases to be employed by the Corporation or by a Subsidiary except that: 10.1. If the employment of the Optionee is terminated by any reason other than his or her death or disability, the Optionee may at any time within not more than three months after termination of his or her employment, exercise his or her Option rights but only to the extent they were exercisable by the Optionee on the date of termination of his or her employment; provided, however, that if the employment is terminated by deliberate, willful or gross misconduct as determined by the Committee, all rights under the Option shall terminate and expire upon such termination. 10.2. If the Optionee dies while in the employ of the Corporation or a Subsidiary, or within not more than three months after termination of his or her employment, the Optionee's rights under the Option may be Page 72 exercised at any time within one year following such death by his or her personal representative or by the person or persons to whom such rights under the Option shall pass by will or by the laws of descent and distribution, but only to the extent they were exercisable by the Optionee on the date of death. 10.3. If the employment of the Optionee is terminated because of permanent disability, the Optionee, or his or her legal representative, may at any time within not more than one year after termination of his or her employment, exercise his or her Option rights but only to the extent they were exercisable by the Optionee on the date of termination of his or her employment. 10.4. Notwithstanding anything contained in Sections 10.1, 10.2 and 10.3 to the contrary, no Option rights shall be exercisable by anyone after the expiration of the term of the Option. 10.5. Transfers of employment between the Corporation and a Subsidiary, or between Subsidiaries, will not constitute termination of employment for purposes of any Option granted under this Plan. The Committee may specify in the terms and conditions of an Option whether any authorized leave of absence or absence for military or government service or for any other reasons will constitute a termination of employment for purposes of the Option and the Plan. 11. Rights of Participants. Neither the participant nor the personal representatives, heirs, or legatees of such participant shall be or have any of the rights or privileges of a shareholder of the Corporation in respect of any of the shares issuable upon the exercise of an Option granted under this Plan unless and until certificates representing such shares shall have been issued and delivered to the participant or to such personal representatives, heirs or legatees. 12. Securities Registration. If any law or regulation of the Securities and Exchange Commission or of any other body having jurisdiction shall require Page 73 the Corporation or the participant to take any action in connection with the exercise of an Option, then notwithstanding any contrary provision of an Option agreement or this Plan, the date for exercise of such Option and the delivery of the shares purchased thereunder shall be deferred until the completion of the necessary action. In the event that the Corporation shall deem it necessary, the Corporation may condition the grant or exercise of an Option granted under this Plan upon the receipt of a satisfactory certificate that the Optionee is acquiring the Option or the shares obtained by exercise of the Option for investment purposes and not with the view or intent to resell or otherwise distribute such Option or shares. In such event, the stock certificate evidencing such shares shall bear a legend referring to applicable laws restricting transfer of such shares. In the event that the Corporation shall deem it necessary to register under the Securities Act of 1933, as amended, or any other applicable statute, any Options or any shares with respect to which an Option shall have been granted or exercised, then the participant shall cooperate with the Corporation and take such action as is necessary to permit registration or qualification of such Options or shares. 13. Duration and Amendment. 13.1. There is no express limitation upon the duration of the Plan, except for the requirement of the Code that all ISOs must be granted within ten years from the date the Plan is approved by the shareholders. 13.2. The Board may terminate or may amend the Plan at any time, provided, however, that the Board may not, without approval of the shareholders of the Corporation, (i) increase the maximum number of shares as to which options may be granted under the Plan, (ii) permit the granting of ISO's at less than 100% of Fair Market Value at time of grant, or (iii) change the class of employees eligible to receive Options under the Plan. Page 74 14. Granting of Options to Directors Who are Not Employees. Each person who is not an employee of the Corporation or its Subsidiaries who on and after the date this Plan is approved by shareholders of the Corporation (i) is elected or reelected or (ii) is elected as a Director of the Corporation at any special meeting of holders of Common Stock of the Corporation, shall as of the date of such election, reelection, or annual or special meeting automatically be granted an Option to purchase 1,500 shares of the Corporation's Common Stock at an option price per share equal to 100% of the Fair Market Value of a share on such date. In the case of a special meeting, the action of the holders of shares in electing a Director who is not an employee of the Corporation or its Subsidiaries shall constitute the granting of the Option to such Director, and, in the case of an annual meeting, the action of the holders of shares in electing or reelecting such Director shall constitute the granting of an Option to such Director; and the date when the holders of shares shall take such action shall be the date of grant of the Option. All such Options shall be designated as NQOs and shall be subject to the same terms and provisions as are then in effect with respect to granting of NQOs to salaried officers and key employees of the Corporation, except that the Option shall be exercisable as to all or any part of the shares subject to the Option from the date the Option is granted, and shall expire on the earliest of (i) twelve months after the Optionee ceases to be a director (except by death) (ii) one year after the death of the optionee, or (iii) five years after the date of grant, unless the Board, in its discretion, shall waive or modify the term of the grant. Directors shall always have the right to deliver stock in exercise of Options as provided in Section 8.2. In the event discretionary Options are granted to members of the Committee, such Options shall be granted by the Board. 15. Approval of Shareholders. This Plan expressly is subject to approval of holders of a majority of the outstanding shares of Common Stock of the Corporation, and if it is not so approved on or before one year after the date Page 75 of adoption of this Plan by the Board, the Plan shall not come into effect, and any Options granted pursuant to this Plan shall be deemed cancelled. 16. Conditions of Employment. The granting of an Option to a participant under this Plan who is an employee shall impose no obligation on the Corporation to continue the employment of any participant and shall not lessen or affect the right of the Corporation to terminate the employment of the participant. 17. Other Options. Nothing in the Plan will be construed to limit the authority of the Corporation to exercise its corporate rights and powers, including, by way of illustration and not by way of limitation, the right to grant options for proper corporate purposes otherwise than under the Plan to any employee or any other person, firm, corporation, association, or other entity, or to grant Options to, or assume Options of, any person for the acquisition by purchase, lease, merger, consolidation, or otherwise, of all or any part of the business and assets of any person, firm, corporation, association, or other entity. Adopted by the Board of Directors on December 19, 1996. Approved by Shareholders on March 5, 1997. EX-23 4 Page 76 EXHIBIT 23: CONSENT OF INDEPENDENT ACCOUNTANTS ----------------------------------------------- We hereby consent to the incorporation by reference in the Registration Statements on Form S-8, Numbers 33-39459, 33-61266 and 333-00665 of PPT Vision, Inc. of our report dated November 21, 1997 appearing in this Annual Report on Form 10-K. /s/ Price Waterhouse LLP - ------------------------ PRICE WATERHOUSE, LLP Minneapolis, Minnesota January 26, 1998 EX-27 5
5 1,000 YEAR OCT-31-1997 OCT-31-1997 4,027 15,515 3,723 (30) 1,741 25,202 3,709 (2,163) 29,986 2,315 0 0 0 27,584 (49) 29,986 12,055 12,055 4,894 7,243 (23) 0 (1,124) 1,065 405 660 0 0 0 660 0.12 0.12
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