-----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, SveN8tQK9hABajwwcX9sOUzATWrFacgTpX2L/dCHtCc/RbimoTStoTCxVXGQqQhc 8N4Ki34TZfIEmNao6G6aTg== 0000704460-00-000001.txt : 20000204 0000704460-00-000001.hdr.sgml : 20000204 ACCESSION NUMBER: 0000704460-00-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991031 FILED AS OF DATE: 20000131 DATE AS OF CHANGE: 20000203 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PPT VISION INC CENTRAL INDEX KEY: 0000704460 STANDARD INDUSTRIAL CLASSIFICATION: 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: 518569 BUSINESS ADDRESS: STREET 1: 12988 VALLEY VIEW ROAD 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, 1999 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.) 12988 Valley View Road Eden Prairie, MN 55344 ----------------------------------------------------- (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (612) 996-9500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: (1) Common Stock $.10 par value (2) Preferred Stock Purchase Rights 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. (X) The approximate aggregate market value of the registrant's common stock held by nonaffiliates of the registrant (based on the closing sale price of such stock as reported by the Nasdaq Stock Market) on January 10, 2000 was approximately $13,063,000. The number of shares of common stock, $0.10 par value per share, outstanding as of January 10, 2000 was 5,256,275. Documents Incorporated by Reference: The Company's Proxy Statement for its Annual Meeting of Shareholders to be held March 16, 2000 is incorporated by reference into Part III of this Form 10-K. TABLE OF CONTENTS ----------------- PART I Page ---- Item 1. Business.............................................. 3 Important Factors Regarding Forward-Looking Statements...................... 15 Executive Officers of the Company.................. 18 Item 2. Properties............................................ 19 Item 3. Legal Proceedings..................................... 19 Item 4. Submission of Matters for a Vote of Security Holders........................... 20 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............. 21 Item 6. Selected Financial Data............................... 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 24 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................ 28 Item 8. Financial Statements and Supplementary Data........... 28 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................ 28 PART III Item 10. Directors and Executive Officers of the Registrant.... 29 Item 11. Executive Compensation................................ 29 Item 12. Security Ownership of Certain Beneficial Owners and Management................... 29 Item 13. Certain Relationships and Related Transactions........ 29 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................ 30 Signatures...................................................... 32 Part I This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding the Company's expectations, beliefs, intentions or strategies regarding the future. Forward- looking statements include, without limitation, statements regarding the extent and timing of future revenues and expenses and customer demand. These statements include, but are not limited to, changes in worldwide general economic conditions, cyclicality of capital spending by customers, PPT VISION's ability to keep pace with technological developments and evolving industry standards, worldwide competition, and PPT VISION's ability to protect its existing intellectual property from challenges from third parties and other factors. All forward-looking statements included in this document are based on information available to the Company as of the date hereof, and the Company assumes no obligation to update any such forward-looking statements. It is important to note that the Company's actual results could differ materially from those in such forward-looking statements. The forward-looking statements of the Company are subject to risks and uncertainties. Some of the factors that could cause future results to materially differ from the Company's recent results or those projected in the forward-looking statements are described in the "Important Factors Regarding Forward-Looking Statements" section of this Form 10 - - -K. Item 1. BUSINESS - - ----------------- CORPORATE PROFILE PPT VISION, Inc. ("PPT VISION" or the "Company") designs, manufactures, markets and integrates machine vision-based automated inspection systems for manufacturing applications such as electronic and mechanical assembly verification, verification of printed characters, packaging integrity, surface flaw detection, and gauging and measurement tasks. A machine vision system is a combination of cameras, lighting, and computer hardware and software working together to capture and analyze images of moving parts to determine if the parts match a defined standard. Machine vision-based inspection systems enable manufacturers to realize significant economic gains by increasing the quality of manufactured parts and improving the productivity of manufacturing processes. The Company's vision systems are sold throughout the Americas, Europe and Asia to a broad range of industry categories, including automotive, electronic and semiconductor components, consumer goods, medical devices, pharmaceuticals and plastics. Major manufacturing end users of PPT VISION systems include 3M, AMP, Abbott Labs, Berg Electronics, Daimler-Chrysler, the Delphi Electronic Division of General Motors, Imation, Johnson & Johnson, Kemet, Micron Technology, Molex, Philip Morris, Siemens and United Technologies. WHAT IS MACHINE VISION? 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 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 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 1997 was approximately $1.2 billion, with worldwide levels estimated at approximately $4.0 billion. The AIA expects this market to grow at approximately 16% per year through the year 2002. According to the AIA, the majority 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 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 improve and increase 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 that 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 sampling techniques or human vision inspection techniques as a means of monitoring quality. The Company's machine vision systems enable manufacturers to achieve zero defect production. PPT VISION's family of machine vision systems, which include its proprietary Vision Program ManagerT (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. Many of 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 can be 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 less 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) application specific products such as the PPT861, a high speed, automated in-tray inspection system which provides high speed two-dimensional (2D) inspection and three-dimensional (3D) scanning of a wide range of in-tray semiconductor packages including BGA, CSP and BGA as well as electronic connectors, hard drive components and other 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. 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: * Providing 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. * Extending 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. * Targeting 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. * Providing 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. * Increasing 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. PRODUCTS Product Overview 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. 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 that 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. Using 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 to establish the execution of 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 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 that 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. Hardware Architecture. PPT VISION's machine vision processor includes the Company's proprietary high performance board set with a 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 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. 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. PPT's principal product offerings are discussed below: Passport DSLT and Scout DSLT (Digital Serial Link) Passport DSLT and Scout DSLT (Digital Serial LinkT). The Company introduced its completely digital machine vision systems, the patented Passport DSLT and Scout DSLT, in fiscal 1998. These products offer an integrated network of cameras, lighting, image processors and hubs, which together form a complete machine vision system. The Passport DSLT and Scout DSLT systems are completely digital, which results in much greater accuracy and repeatability than traditional analog systems. These DSL systems feature PPT's Vision Program ManagerT (VPMT)software, a powerful, graphical programming interface that requires no programming expertise and operates in the Microsoftr WindowsT environment. The Passport DSLT and Scout DSLT both incorporate a fully integrated Pentium-based PC, which can be easily added onto a factory network, allowing for a full range of control and monitoring capabilities, and an easy way to import or export process information and images. The DSL systems support a network of up to 16 asynchronously functioning cameras that capture non-interlaced video images at rates up to 4,000 full frames per minute. The Passport DSLT is housed in an industrially rugged enclosure while the Scout DSLT is packaged in a non-industrial style enclosure. To complement the DSL product family, the Company has also developed the DSL6000 digital camera. PassportT 440, PassportT 240, and ScoutT machine vision systems The PassportT 440 is designed to operate with up to four asynchronously functioning cameras for multiple inspection views and complex imaging tasks. The PassportT 240 has all of the basic capabilities of the PassportT 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 ScoutT 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 speed and power similar to that of the PassportT 240. SpeedScan 3DT Sensor. The SpeedScan 3DT Sensor is based on PPT's patented Scanning Moire InterferometryT (SMIT)3D technology. Utilizing a tri-linear CCD sensor and advanced optics, the SpeedScan 3DT Sensor is capable of real-time calculation of 3D topography in a single pass. PPT's SMIT is a patented, unique technology for very high speed, highly accurate 3D scanning. It is an area-scanning technology that gathers height data at rates many times faster than conventional laser- based sensors. SMIT is especially suitable for applications in the semiconductor and electronics industries, such as IC coplanarity (BGA, BGA, QFP), connector coplanarity, solder paste volume and hard drive components. PPT861T, In-Tray 2D and 3D Inspection System PPT introduced, in fiscal 1999, the PPT861T, a high-speed, semi-automated 3D scanning station capable of 2.5 micron resolution. The PPT861T provides the flexibility to scan a wide range of in-tray semiconductor packages including BGA, CSP and BGA, as well as electronic connectors, hard drive components and other applications. Using the Company's patented SMIT 3D technology, the PPT861T delivers precise measurements at greatly enhanced speeds. With the addition of the optional 2D module, the PPT861T provides a comprehensive solution for critical measurement and inspection requirements. The PPT861T operates with a manual tray load/unload and automated, high speed scanning and is ideal for small lot production or high volume applications that require off- line sampling and production verification. All scanning and motion parameters are programmable to allow the inspection of a broad range of component types with varying size and thickness. 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, 1999, the Company had sold 2,951 machine vision systems to over 270 customers since inception. 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, 1999, sales to one customer, Philip Morris Incorporated, represented 27% of net revenues. 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. 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, --------------------- 1999 1998 1997 ---- ---- ---- North America.............................. 74% 62% 78% Europe..................................... 13% 18% 14% Asia-Pacific............................... 12% 18% 8% South America.............................. 1% 2% -- Substantially all of the Company's export sales are negotiated, invoiced and paid in United States dollars. 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: 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. Optics and illumination draw on skills from the disciplines of physics, mechanical engineering and electrical engineering. 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 are 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 $4.5 million, $2.9 million and $2.3 million in the fiscal years ended October 31, 1999, 1998, and 1997, 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. 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 1997, of which the majority 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 RVSI Acuity CiMatrix 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 several foreign and domestic patents which are now pending with respect to several key technologies. The Company owns several issued and pending United States and international patents for various inventions used in machine- vision, automated inspection and illumination systems. The Company believes that the patents it owns 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 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. In July 1999, the Company was served by National Instruments Corporation (NIC) of Austin, Texas, in a patent infringement lawsuit filed in United States District Court for the Western District of Texas. NIC has alleged that the Company's Vision Program Manager software (VPM) infringes certain United States patents held by NIC related to graphical programming concepts. For more detailed information on this lawsuit, see Part I, Item 3 "Legal Proceedings." A number of users of machine-vision technology have received notice of alleged patent infringement from, and/or have been sued by, the Lemelson Medical, Education and Research Foundation Limited Partnership ("Lemelson Foundation") alleging that their use of machine-vision technology in their production processes infringes certain patents issued to Jerome H. Lemelson. Certain of these users have notified the Company that, in the event it is subsequently determined that their use of the Company's products in their production processes infringes any of Mr. Lemelson's patents, they may seek indemnification from the Company for damages or expenses resulting from this matter. The Company believes that it has defenses to such indemnification claims. To date, the Company has received no actual claims for indemnification. The Company cannot predict the outcomes from the claims of alleged infringement made by the Lemelson Foundation or the effect of such outcomes on the operating results of the Company. The Company has obtained United States federal registration for its "PPT", "PPT VISION", "Passport", "Scout", "Passport DSL" and "Scout DSL" 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 12, 2000, the Company had 109 employees, including 49 employees in research and development, 33 in sales and marketing, 19 in manufacturing and 8 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 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, 1999, sales to one customer, Philip Morris Incorporated, represented 27% of net revenues. 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. 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 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 is not aware that any of its products or proprietary rights infringe upon the valid 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. See Item 3, Legal Proceedings. 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, 1999, 1998 and 1997, sales of the Company's products to customers outside North America accounted for approximately 26%, 38% and 22%, 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 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. Utilization of Net Operating Loss. The utilization of the net operating loss carryforward is dependent upon the Company's ability to generate sufficient taxable income during the carryforward period. In fiscal 1999, income tax expense of $1,650,000 was recorded. This income tax expense resulted from the recording of a valuation allowance against previously recorded deferred tax assets due to the uncertainty of future realization. A valuation allowance equal to the deferred tax asset has been recorded. EXECUTIVE OFFICERS OF THE COMPANY The executive officers and other key members of management of the Company are as follows: NAME AGE POSITION - - ----- --- -------- Joseph C. Christenson.......... 41 President, Director Larry G. Paulson............... 48 Vice President of Research and Development, Director Thomas R. Northenscold......... 41 Vice President and General Manager, Vision Systems Division Arye Malek..................... 43 Vice President of Marketing Richard R. Peterson............ 34 Chief Financial Officer David L. Friske................ 56 Vice President of Manufacturing 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. Larry G. Paulson, has been Vice President and Chief Technology Officer since March 1999 and a director of the Company since December 1981. Mr. Paulson was a co-founder of the Company and previously held the position of Vice President of Research and Development. Mr. Paulson is also a Registered Professional Engineer and holds Bachelors and Masters Degrees in Science from the University of Minnesota. Thomas R. Northenscold has been Vice President and General Manager, of the Company's Vision Systems Division since March 1999. Prior to that, he served as Chief Financial Officer of the Company since February 1995. From April 1992 to April 1994, he was Senior Vice President of Operations in the City Directory Division of R.L. Polk and Company, a directory publishing company. 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. 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. Richard R. Peterson has been Chief Financial Officer of the Company since April 1999. From December 1996 to March 1999, Mr. Peterson served as Chief Financial Officer of PREMIS Corporation, a developer of enterprise-wide retail automation systems. From July 1992 through November 1996, Mr. Peterson was Vice President of Finance and Administration of Teltech Resource Network Corporation, an information technology company. From October 1988 through June 1992, Mr. Peterson was at Ernst & Young LLP. Mr. Peterson holds a Bachelor of Science Degree from Mankato State University. David L. Friske has been Vice President of Manufacturing of the Company since March 1999. From February 1984, Mr. Friske served as Director of Manufacturing and Purchasing. Prior to joining the Company, Mr. Friske was employed by Medtronic, Inc. Item 2. PROPERTIES - - ------------------- The Company entered into a ten-year lease in May 1999 for approximately 59,000 square feet of office and manufacturing space in Eden Prairie, Minnesota. The lease commenced on June 1, 1999 at an initial monthly rate of approximately $51,000. The Company has an obligation to occupy additional space with additional lease payments over the term of the lease. The Company also leases space for its regional sales and support offices in Massachusetts, Michigan and North Carolina. Item 3. LEGAL PROCEEDINGS - - ------------------------- In July 1999, the Company was served by National Instruments Corporation (NIC) of Austin, Texas, in a patent infringement lawsuit filed in United States District Court for the Western District of Texas. NIC has alleged that the Company's Vision Program Manger software (VPM) infringes certain United States patents held by NIC related to graphical programming concepts. The Company has filed a counterclaim and requested that the Court declare the NIC patents invalid or determine that the Company does not infringe the NIC patents. The lawsuit is in the initial stages of discovery and a trial has not yet been scheduled in this action. The Company believes that it has meritorious defenses to the lawsuit and intends to defend itself vigorously. However, no assurance can be given as to the outcome of this action. The inability of the Company to prevail in this action, including the loss or impairment of the right to sell the Company's products in the United States, could have a material adverse effect on the Company's future business, financial condition and results of operations. At October 31, 1999, the Company has accrued $500,000 for estimated attorneys' fees to be incurred in the defense of this action. On July 9, 1999 Integrated Electronic Technologies, Inc. (IET) of Cicero, New York, filed a complaint against the Company in the United States District Court for the Northern District of New York (Case No. 99-CV-1067). IET is asserting breach of contract and related claims in connection with the proposed purchase by the Company of certain handling systems to be manufactured by IET. The Company has filed an answer denying all liability and has asserted counterclaims seeking damages from IET. There has been no discovery to date and a trial has not yet been scheduled in the action. The Company believes that it has meritorious defenses to the lawsuit and intends to defend itself vigorously. For further information see Part 1, Item 1 herein "Patents and Proprietary Rights" and "Important Factors Regarding Forward-Looking Statements- Proprietary Technology." Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - - ----------------------------------------------------------- None. PART II ------- Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - - ------------------------------------------------------------------------------ PRICE RANGE OF COMMON STOCK The Company's Common Stock trades on the Nasdaq Stock Market under the symbol "PPTV". The following table sets forth the high and low closing sale prices of the Company's Common Stock on the Nasdaq Stock Market as reported by Nasdaq. HIGH LOW ------ ----- FISCAL YEAR ENDED OCTOBER 31, 1999 First Quarter............................................. $ 6.63 $4.88 Second Quarter............................................ 6.88 4.38 Third Quarter............................................. 5.19 4.38 Fourth Quarter............................................ 5.63 3.13 FISCAL YEAR ENDING OCTOBER 31, 1998 First Quarter............................................. $ 9.75 $6.50 Second Quarter............................................ 9.00 5.56 Third Quarter............................................. 8.62 6.25 Fourth Quarter............................................ 10.38 7.62 On January 12, 2000, there were approximately 682 holders of record of the Company's common stock. This figure does not reflect more than 2,000 beneficial stockholders whose shares are held in nominee names. 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. Item 6. SELECTED FINANCIAL DATA - - -------------------------------- YEAR ENDED OCTOBER 31, ---------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- -------- -------- ---------- INCOME STATEMENT DATA: Net revenues... $11,325,000 $13,512,000 $12,055,000 $12,693,000 $9,750,000 Cost of sales... 5,150,000 5,666,000 4,894,000 5,044,000 4,442,000 ----------- ----------- ----------- ---------- ---------- Gross profit... 6,175,000 7,846,000 7,161,000 7,649,000 5,308,000 Selling expenses.. 4,456,000 4,857,000 3,727,000 2,897,000 2,279,000 General and administrative expenses......... 2,535,000 1,294,000 1,177,000 976,000 851,000 Research and development expenses.......... 4,524,000 2,879,000 2,339,000 1,827,000 1,299,000 Non-recurring charges... 1,481,000 -- -- -- -- ----------- ----------- ----------- ---------- -------- Income (loss) from operations.... (6,821,000) (1,184,000) (82,000) 1,949,000 879,000 Other income, net... 737,000 1,009,000 1,147,000 453,000 61,000 ----------- ----------- ----------- ---------- -------- Income (loss) before taxes. (6,084,000) (175,000) 1,065,000 2,402,000 940,000 Income tax benefit (expense).... (1,650,000) 278,000 (405,000) 1,309,000 407,000 ----------- ----------- ----------- ---------- -------- Net income (loss). $(7,734,000) $ 103,000 $ 660,000 $3,711,000 $1,347,000 =========== =========== =========== ========== ========= Diluted earnings (loss) per share. $ (1.43) $ 0.02 $ 0.12 $ 0.84 $0.37 =========== =========== =========== ========== ========= Common and common equivalent shares outstanding. 5,398,000 5,511,000 5,495,000 4,410,000 3,650,000 =========== =========== =========== ========== ========== OCTOBER 31, ------------------------------------------------------- 1999 1998 1997 1996 1995 ----------- ---------- ---------- --------- --------- (in thousands) BALANCE SHEET DATA: Working capital.... $13,444 $20,495 $22,887 $24,083 $4,131 Total assets....... 21,845 29,575 29,986 28,056 6,098 Shareholders' equity 19,171 27,871 27,535 26,809 5,145 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Comparison of Year Ended October 31, 1999 to Year Ended October 31, 1998 - - ------------------------------------------------------------------------ Net Revenues: Net revenues decreased 16% to $11,325,000 in fiscal 1999, compared to net revenues of $13,512,000 in fiscal 1998. Unit sales of the Company's machine vision systems decreased to 387 in fiscal 1999 versus 510 in fiscal 1998. Net revenues decreased primarily due to declines in the electronics segment as well as new product introduction delays experienced in the first half of fiscal 1999. Gross revenues in fiscal 1999 increased 1% in North America and decreased 44% outside North America. The decline in revenues outside North America was primarily due to lower sales in the Asia/Pacific region. Sales to customers outside North America represented 26% of net revenues in fiscal 1999, compared to 38% in fiscal 1998. Gross Profit: Gross profit decreased 21% to $6,175,000 in fiscal 1999, compared to $7,846,000 in fiscal 1998. Gross profit as a percentage of net revenues for fiscal 1999 decreased to 55%, compared with 58% in fiscal 1998. The decrease in gross profit in absolute dollars in fiscal 1999 is primarily due to the decrease in net revenues. The decrease in gross profit as a percentage of net revenues is mainly a factor of unfavorable manufacturing variances resulting from decreased production volumes and additional costs associated with the introduction of new products. The Company anticipates that the gross profit as a percentage of net revenues may fluctuate from quarter to quarter during fiscal 2000, but should remain at or near the levels achieved in fiscal 1999. Selling Expenses: Selling expenses decreased 8% to $4,456,000 in fiscal 1999, compared to $4,857,000 in fiscal 1998. As a percentage of net revenues, fiscal 1999 selling expenses increased to 39%, compared with 36% in fiscal 1998. The decrease in selling expenses in absolute dollars is primarily the result of lower net revenues in fiscal 1999. Although the Company will limit the rate of growth in selling expenses, it is anticipated that selling expenses may increase somewhat in fiscal 2000 as the Company makes the necessary investments to support strategic initiatives. However, the Company believes that for the whole of fiscal 2000, selling expenses will decrease slightly as a percentage of net revenues compared to fiscal 1999, depending on the level of sales growth. General and Administrative Expenses: General and administrative expenses increased 96% to $2,535,000 in fiscal 1999, compared to $1,294,000 in fiscal 1998. As a percentage of net revenues, general and administrative expenses increased to 22% for fiscal 1999, compared to 10% for fiscal 1998. The increase in expenditures is primarily attributable to legal defense costs related to the Company's lawsuit with National Instruments Corporation, legal costs associated with new patent filings, and increased operating costs associated with the Company's move to a new facility in May 1999. The Company believes that during fiscal 2000, general and administrative expenses will decline in absolute dollars and as a percentage of net revenues compared to fiscal 1999, depending on the level of sales growth. Research and Development Expenses: Research and development expenses increased 57% to $4,524,000 in fiscal 1999, compared to $2,879,000 in fiscal 1998. Research and development expenses as a percentage of net revenues for fiscal 1999 increased to 40%, compared to 21% for fiscal 1998. The increase in expenditures is mainly due to resource commitments required to support new product development programs, including development of our patented Scanning Moire Interferometry (SMIT) 3D technology and our patented DSL digital vision technology. The Company believes that during fiscal 2000, research and development expenses will remain constant compared to fiscal 1999. Non-Recurring Charges: In the fourth quarter of fiscal 1999, the Company recorded a one-time charge of $1,481,000 for the write-down of assets and inventory associated with discontinuing certain new product development initiatives. These non-recurring charges do not affect the on-going development of the Company's patented Scanning Moire Interferometry (SMIT) 3D technology or its patented DSL digital vision technology. Interest income decreased 30% to $701,000 in fiscal 1999, compared to $998,000 in fiscal 1998. The decrease in interest income is primarily due to the decline in balances of cash, cash equivalents and investments. Income Tax Benefit (Expense): In fiscal 1999, income tax expense of $1,650,000 was recorded. This income tax expense resulted from the recording of a valuation allowance against previously recorded deferred tax assets due to the uncertainty of future realization. A valuation allowance equal to the deferred tax asset has been recorded. An income tax benefit of $278,000 was recorded in fiscal 1998. Comparison of Year Ended October 31, 1998 to Year Ended October 31, 1997 - - ------------------------------------------------------------------------ Net Revenues: Net revenues increased 12% to $13,512,000 in fiscal 1998, compared to net revenues of $12,055,000 in fiscal 1997. Unit sales of the Company's machine vision systems increased to 510 in fiscal 1998 versus 482 in fiscal 1997. Net revenues increased primarily due to strong sales outside of North America. Gross revenues in fiscal 1998 decreased 11% in North America and increased 95% outside North America. The decline in revenues in North America was primarily due to lower sales in the electronics segment. The increase in net revenues outside North America is primarily due to strength in the Asia/Pacific region. Sales to customers outside North America represented 38% of net revenues in fiscal 1998, compared to 22% in fiscal 1997. Gross Profit: Gross profit increased 10% to $7,846,000 in fiscal 1998, compared to $7,161,000 in fiscal 1997. Gross profit as a percentage of net revenues for fiscal 1998 decreased to 58%, compared with 59% in fiscal 1997. The increase in gross profit in 1998 is primarily due to the increase in sales. The decrease in gross profit as a percentage of net sales is primarily related to the increase in international sales, which are primarily through distributors and therefore are generally at a lower gross margin. Selling Expenses: Selling expenses increased 30% to $4,857,000 in fiscal 1998, compared to $3,727,000 in fiscal 1997. As a percentage of net revenues, fiscal 1998 selling expenses increased to 36%, compared with 31% in fiscal 1997. The increase in expenditures was primarily the result of investments required to launch the Microelectronics Systems Division as well as the opening of sales and support offices in Michigan and North Carolina. General and Administrative Expenses: General and administrative expenses increased 10% to $1,294,000 in fiscal 1998, compared to $1,177,000 in fiscal 1997. As a percentage of net revenues, general and administrative expenses remained relatively constant at 10% for fiscal 1998, compared to fiscal 1997. The increase in expenditures was primarily attributable to increased expenses associated with operating the Company in anticipation of future growth. Research and Development Expenses: Research and development expenses increased 23% to $2,879,000 in fiscal 1998, compared to $2,339,000 in fiscal 1997. Research and development expenses as a percentage of net revenues for fiscal 1998 increased to 21%, compared to 19% for fiscal 1997. The increase in expenditures was mainly due to resource commitments required to support new product development programs. Interest income decreased 11% to $998,000 in fiscal 1998, compared to $1,124,000 in fiscal 1997. The decrease in interest income was primarily due to the decline in balances of cash, cash equivalents and investments. Income Tax Benefit: In fiscal 1998, an income tax benefit of $278,000 was recorded. This income tax benefit primarily resulted from the recording of $210,000 of tax credits which were mainly associated with research & development activities. Income tax expense was $405,000 in fiscal 1997. LIQUIDITY AND CAPITAL RESOURCES - - ------------------------------- Working capital decreased to $13,444,000 at October 31, 1999 from $20,495,000 at October 31, 1998. The Company financed its operations in fiscal 1999 through internally generated cash flow, existing cash and cash equivalents and sales of investments. Net cash used in operating activities in fiscal 1999 was $3,325,000. Accounts receivable increased $484,000 primarily due to increased product shipments near the end of the fourth quarter of fiscal 1999. Inventories increased $184,000 in fiscal 1999 primarily due to raw material purchases to be used in early fiscal 2000 product shipments. In September of 1997 the Company entered into a license agreement ("1997 License Agreement") with a third party company under which it acquired the exclusive worldwide rights to use a patented 3D scanning technology for applications in the electronics and semiconductor industries. Under the terms of the 1997 License Agreement, the Company paid an initial license fee of $1,500,000 including payments based on the achievement of certain developmental milestones, plus a royalty based on sales. In May of 1998 the Company entered into an Agreement to Assign and License Patent with the same third party company ("1998 Agreement") under which it acquired ownership of the Patent. The 1998 Agreement terminated the previous 1997 License Agreement. Under the terms of the 1998 Agreement, the Company paid a fee of $1,500,000 including a $500,000 fee based on the achievement of certain developmental milestones. During fiscal 1999, the Company paid the remaining balance due under the 1998 Agreement. Net cash provided by investing activities for fiscal 1999 was $4,355,000, generated from the sales and maturities of investments which was partially offset by cash used for the purchase of fixed assets and investment in other long-term assets. The Company used $1,877,000 of cash for the purchase of fixed assets, mainly consisting of computer, lab and manufacturing equipment. The Company used $416,000 of cash for investment in other long-term assets, mainly consisting of a payments made under the terms of the previously mentioned agreements. Investments consist of short-term investment grade securities. Net cash used in financing activities for fiscal 1999 was $881,000, primarily resulting from the repurchase of the Company's common stock which was partially offset by cash generated from the issuance of common stock through the employee stock purchase plan and upon the exercise of common stock options. In September of 1998 the Board of Directors of PPT VISION, Inc. authorized the Company to repurchase up to 750,000 shares of its Common Stock. The Company used $1,249,000 of cash to repurchase 295,500 shares of its Common Stock in fiscal 1999. The Company used $92,000 of cash to repurchase 17,800 shares of its Common Stock in fiscal 1998. The Company entered into a ten-year lease in May 1999 for approximately 59,000 square feet of office and manufacturing space in Eden Prairie, Minnesota. The lease commenced on June 1, 1999 at an initial monthly rate of approximately $51,000. The Company has an obligation to occupy additional space with additional lease payments over the term of the lease. Current assets decreased to $16,118,000 at October 31, 1999 from $22,097,000 at October 31, 1998. Investments decreased to $8,262,000 at October 31, 1999 from $15,009,000 at October 31, 1998. Cash and cash equivalents increased to $2,135,000 at October 31, 1999 from $1,986,000 at October 31, 1998. The Company's current liabilities increased to $2,674,000 at October 31, 1999 from $1,602,000 at October 31, 1998. The current liabilities at October 31, 1999 include reserves totaling $860,000 for legal defense costs related to its lawsuit with National Instruments Corporation and a one-time payment to a third party vendor related to the Company's decision to discontinue certain new product development efforts. The Company believes that its cash flows from operations, existing cash and cash equivalents and investments at October 31, 1999 will be adequate for its working capital and capital resource needs during fiscal 2000. Item 7A. Quantitative and Qualitative Disclosures About Market Risk - - ------------------------------------------------------------------- The Company believes it does not have material exposure to quantitative and qualitative market risks. The carrying amounts reflected in the consolidated balance sheets of cash and cash equivalents, investments, trade receivables and trade payables approximate fair value at October 31, 1999 due to the short maturities of these instruments. Interest Rate Risk The Company maintains investment portfolio holdings of various issuers, types and maturities, primarily U.S. government and agency securities and other short terms, interest-bearing investment grade securities. The Company's cash and investments include cash equivalents, which the Company considers to be investments purchased with original maturities of three months or less. Investments having original maturities in excess of three months are stated at amortized cost, which approximates fair value, and are classified as available for-sale. Given the short maturities and investment grade quality of the portfolio holdings at October 31, 1999, as well as the Company's policy of holding rate sensitive instruments to maturity, a 100 basis point rise in interest rates would not be expected to have a material adverse impact on the fair value of the Company's investment portfolio. As a result, the Company does not currently hedge these interest rate exposures Foreign Currency Exchange Rate Risk. The Company's international sales, which are primarily in Europe, South America, Japan and Southeast Asia, are transacted in U.S. Dollars. As a result, the Company believes it is not is not subject to adverse movements in foreign currency exchange rates. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - - ---------------------------------------------------- See Part IV, Item 14 of this Form 10-K. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - - ------------------------------------------------------------------------ Not applicable. 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 on March 16, 2000 (the "2000 Proxy Statement"), a definitive copy of which will be filed within 120 days of October 31, 1999 and is incorporated herein by reference. Information concerning executive officers and other key members of management is set forth in the Section entitled "Executive Officers and Other Key Members of Management of the Company" in Part I, Item 1 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 section entitled "Executive Compensation and Other Information," in the Company's 2000 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 "Security Ownership of Principal Shareholders and Management" in the Company's 2000 Proxy Statement and is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - - -------------------------------------------------------- Not Applicable. 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..................... 34 Income Statements for the three years ended October 31, 1999, 1998 and 1997.................. 35 Balance Sheets as of October 31, 1999 and 1998........ 36 Statements of Cash Flows for the Years ended October 31, 1999, 1998 and 1997............ 37 Statements of Shareholders' Equity for the Years ended October 31, 1999, 1998 and 1997............ 38 Notes to Financial Statements......................... 39 (2) FINANCIAL STATEMENT SCHEDULES FOR THE THREE YEARS ENDED OCTOBER 31, 1999 VIII. Valuation and Qualifying Accounts.............. 50 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 ------------------- A Form 8-K dated October 13, 1999 was filed with the Securities and Exchange Commission disclosing an amendment to the Company's Preferred Stock Purchase Rights Plan. (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) 4.1..... Preferred Stock Purchase Rights Agreement, as amended (Incorporated by reference to Exhibit 1 to June 17, 1999 Registration Statement on Form 8-A as amended by Exhibit 1 to October 19, 1999 Amendment No. 1 to Registration Statement on Form 8-A/A) 10.1.... 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) 10.2.... 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) 10.3.... 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) 10.4.... 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) 10.5*... PPT VISION, Inc. 1988 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.6 of 1997 Form 10-K) 10.6*... PPT VISION, Inc. 1997 Stock Option Plan (incorporated by reference to Exhibit 10.7 of 1997 Form 10-K) 10.7.... Lease Agreement dated July 17, 1998 for facilities at the Prairie Crossroads Corporate Center, Eden Prairie, Minnesota 10.8.... First Amendment of Lease dated October 16, 1999 for facilities at the Prairie Crossroads Corporate Center, Eden Prairie, Minnesota 21...... The Company has no subsidiaries 23...... Consent of PricewaterhouseCoopers LLP...................... 51 27...... Financial Data Schedule.................................... 52 *Indicates compensatory plan 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 28, 2000 By:/s/Joseph C. Christenson ---------------------------- Joseph C. Christenson (Principal Executive Officer) Date: January 28, 2000 By:/s/Richard R. Peterson ---------------------------- Richard R. Peterson (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 Richard R. Peterson 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 28, 2000 /s/ Joseph C. Christenson ---------------------------- Joseph C. Christenson President, Director (Principal Executive Officer) January 28, 2000 /s/ Richard R. Peterson ---------------------------- Richard R. Peterson (Principal Accounting Officer) Chief Financial Officer January 28, 2000 /s/ Larry G. Paulson ---------------------------- Larry G. Paulson Vice President and Chief Technology Officer, Director January 28, 2000 /s/ Bruce C. Huber ---------------------------- Bruce C. Huber, Director January 28, 2000 /s/ David C. Malmberg ---------------------------- David C. Malmberg, Director January 28, 2000 /s/ Peter R. Peterson ---------------------------- Peter R. Peterson, Director 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, 1999 and 1998, and the results of its operations and cash flows for each of the three fiscal years in the period ended October 31, 1999 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/PricewaterhouseCoopers LLP - - ----------------------------- PricewaterhouseCoopers LLP Minneapolis, MN December 10, 1999 PPT VISION, INC. INCOME STATEMENTS YEAR ENDED OCTOBER 31, ------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Net revenues............................ $11,325,000 $13,512,000 $12,055,000 Cost of sales........................... 5,150,000 5,666,000 4,894,000 ----------- ----------- ----------- Gross profit........................ 6,175,000 7,846,000 7,161,000 ----------- ----------- ----------- Expenses: Selling............................... 4,456,000 4,857,000 3,727,000 General and administrative............ 2,535,000 1,294,000 1,177,000 Research and development.............. 4,524,000 2,879,000 2,339,000 Non-recurring charges................. 1,481,000 -- -- ----------- ----------- ----------- Total expenses...................... 12,996,000 9,030,000 7,243,000 ----------- ----------- ----------- Loss from operations.................... (6,821,000) (1,184,000) (82,000) Interest income......................... 701,000 998,000 1,124,000 Other income, net....................... 36,000 11,000 23,000 ----------- ----------- ----------- Income (loss) before taxes.............. (6,084,000) (175,000) 1,065,000 Income tax benefit (expense)............ (1,650,000) 278,000 (405,000) ----------- ----------- ----------- Net income (loss)................... $(7,734,000) $ 103,000 $ 660,000 =========== =========== =========== Basic earnings (loss) per share....... $ (1.43) $ 0.02 $ 0.12 =========== =========== =========== Diluted earnings (loss) per share..... $ (1.43) $ 0.02 $ 0.12 =========== =========== =========== Common shares outstanding............. 5,398,000 5,425,000 5,376,000 Common and common equivalent shares outstanding.................. 5,398,000 5,511,000 5,495,000 =========== =========== =========== The accompanying notes are an integral part of the financial statements PPT VISION, INC. BALANCE SHEETS OCTOBER 31, ------------------------- 1999 1998 ----------- ----------- ASSETS Current assets Cash and cash equivalents........................ $ 2,135,000 $ 1,986,000 Investments...................................... 8,262,000 15,009,000 Accounts receivable, net......................... 3,325,000 2,841,000 Inventories...................................... 2,191,000 2,007,000 Other current assets............................. 205,000 254,000 ----------- ----------- Total current assets........................... 16,118,000 22,097,000 Fixed assets, net.................................. 2,400,000 2,254,000 Other assets, net.................................. 3,327,000 3,536,000 Deferred income taxes.............................. - 1,688,000 ----------- ----------- Total assets................................... $21,845,000 $29,575,000 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable................................. $ 1,371,000 $ 943,000 Accrued compensation............................. 63,000 39,000 Accrued expenses................................. 1,240,000 320,000 Other short-term liabilities..................... -- 300,000 ----------- ----------- Total current liabilities...................... 2,674,000 1,602,000 Deferred rent...................................... - 102,000 Commitments and contingencies (Notes 9 and 12) Shareholders' equity Common Stock $.10 par value; authorized 10,000,000 shares; issued and outstanding 5,256,275 and 5,440,583.. 526,000 544,000 Capital in excess of par value................... 28,862,000 29,725,000 Accumulated (deficit)............................ (10,141,000) (2,407,000) Accumulated other comprehensive income........... (76,000) 9,000 ----------- ----------- Total shareholders' equity..................... 19,171,000 27,871,000 ----------- ----------- Total liabilities and shareholders' equity..... $21,845,000 $29,575,000 =========== =========== The accompanying notes are an integral part of the financial statements PPT VISION, INC. STATEMENTS OF CASH FLOWS YEAR ENDED OCTOBER 31, -------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Net income (loss).......................$ (7,734,000) $ 103,000 $ 660,000 Adjustment to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization.......... 1,093,000 670,000 422,000 Deferred rent.......................... (102,000) (34,000) (30,000) Deferred income tax benefit............ (586,000) (278,000) 405,000 Deferred income tax valuation allowance 2,274,000 -- -- Loss on disposal of fixed assets and other assets 964,000 -- -- Accrued interest income (loss)......... 27,000 (137,000) (322,000) Realized gain on sales of investments.. (14,000) (4,000) (2,000) Change in assets and liabilities: Accounts receivable.................... (484,000) 852,000 758,000 Inventories............................ (184,000) (266,000) (513,000) Other assets........................... 49,000 (28,000) (55,000) Restricted cash........................ -- -- 135,000 Accounts payable....................... 428,000 (67,000) 256,000 Accrued compensation................... 24,000 (21,000) (2,000) Accrued expenses....................... 920,000 75,000 (20,000) ------------ ------------ ---------- Total adjustments.................... 4,409,000 762,000 1,032,000 ------------ ------------ ----------- Net cash (used in) provided by operating activities............. (3,325,000) 865,000 1,692,000 Cash flows from investing activities: Purchase of fixed assets............... (1,877,000) (1,344,000) (1,095,000) Purchase of investments............... (10,590,000) (23,148,000 (21,353,000) Sales and maturities of investments... 17,238,000 23,853,000 21,248,000 Net investment in other long-term assets..................... (416,000) (2,442,000) (759,000) ------------ ------------ ----------- Net cash provided by (used in) investing activities............. 4,355,000 (3,081,000) (1,959,000) Cash flows from financing activities: Proceeds from issuance of common stock. 368,000 267,000 115,000 Repurchases of common stock............ (1,249,000) (92,000) -- ------------ ------------ ----------- Net cash (used in) provided by financing activities............. (881,000) 175,000 115,000 ------------ ------------ ----------- Net increase (decrease) in cash and cash equivalents....................... 149,000 (2,041,000) (152,000) Cash and cash equivalents at beginning of year................................ 1,986,000 4,027,000 4,179,000 ------------ ------------ ----------- Cash and cash equivalents at end of year $ 2,135,000 $ 1,986,000 $ 4,027,000 ============ ============ ============ Supplemental disclosure of cash flow information: Cash paid during the year for: Income tax.............................$ -- $ 70,000 $ 3,000 Interest............................... -- -- -- The accompanying notes are an integral part of the financial statements PPT VISION, INC. STATEMENTS OF SHAREHOLDERS' EQUITY CAPITAL IN COMMON COMMON EXCESS OF SHARES STOCK PAR VALUE --------- --------- ----------- October 31, 1996. 5,358,422 $536,000 $29,443,000 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 Comprehensive income: Net income....................... Unrealized loss on investments... Total comprehensive income --------- --------- ----------- October 31, 1997. 5,387,355 539,000 29,555,000 Stock issued through the exercise of stock options...... 48,005 5,000 134,000 Stock issued through the employee stock purchase plan... 25,648 2,000 147,000 Stock swapped to exercise Stock options............... (2,625) -- (21,000) Stock Repurchased............. (17,800) (2,000) (90,000) Comprehensive income: Net income................... Unrealized gain on investments... Total comprehensive income --------- --------- ----------- October 31, 1998............. 5,440,583 544,000 29,725,000 Stock issued through the exercise of stock options..... 90,093 10,000 274,000 Stock issued through the employee stock purchase plan... 21,099 2,000 82,000 Stock repurchased.............. (295,500) (30,000) (1,219,000) Comprehensive loss: Net loss....................... Unrealized loss on investments. Total comprehensive loss ---------- --------- ----------- October 31, 1999.............. 5,256,275 $526,000 $28,862,000 ========== ========= =========== Accumulated Other Total Comprehensive Accumulated Shareholders' Income Deficit Equity ------------- ----------- ------------ October 31, 1996 -- $(3,170,000) $26,809,000 Stock issued through the exercise of stock options 79,000 Stock issued through the employee stock purchase plan 36,000 Comprehensive income: Net income 660,000 660,000 Unrealized loss on investments (49,000) (49,000) -------- Total comprehensive income 611,000 ------------- ------------ ------------ October 31, 1997 (49,000) (2,510,000) $27,535,000 Stock issued through the exercise of stock options 139,000 Stock issued through the employee stock purchase plan 149,000 Stock swapped to exercise stock options (21,000) Stock repurchased (92,000) Comprehensive income: Net income 103,000 103,000 Unrealized gain on investments 58,000 58,000 ------- Total comprehensive income 161,000 ------------ ----------- ------------ October 31, 1998 9,000 (2,407,000) $27,871,000 Stock issued through the exercise of stock options 284,000 Stock issued through the employee stock purchase plan 84,000 Stock repurchased (1,249,000) Comprehensive loss: Net loss (7,734,000) (7,734,000) Unrealized loss on investments (85,000) (85,000) ------------- Total comprehensive loss (7,819,000) ---------- ------------- ----------- October 31, 1999 $ (76,000) $(10,141,000) $19,171,000 ========== ============= =========== The accompanying notes are an integral part of the financial statements 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 $74,000 at October 31, 1999, and $29,000 at October 31, 1998. 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, inventories consist of the following: 1999 1998 ---------- ---------- Manufactured and purchased parts............ $1,742,000 $1,648,000 Work-in-process............................. 419,000 339,000 Finished goods.............................. 30,000 20,000 ---------- ---------- Totals.................................. $2,191,000 $2,007,000 ========== ========== 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. OTHER ASSETS Other assets at October 31, consist of the following: 1999 1998 ---------- ---------- Patent and trademark............................. $3,431,000 $3,340,000 Investment in a related party.................... 53,000 53,000 Software development costs, net.................. - 251,000 ---------- ---------- 3,484,000 3,644,000 Less accumulated amortization.................... (157,000) (108,000) ---------- ---------- Total other assets........................... $3,327,000 $3,536,000 ========== ========== The patent and trademark balance of $3,431,000 as of October 31, 1999 includes $3,041,000 which represents the cost to acquire United States Patent No. 5,646,733, ("Scanning Phase Measurement Method and System for an Object at a Vision Station") which was purchased from a third party company in fiscal year 1998. Patent and trademark costs are amortized over five to ten years. No amortization has been recorded on Patent No. 5,646,733 as of October 31, 1999. 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, 1999 and 1998 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." In the fourth quarter of fiscal 1999, the Company, as part of discontinuing certain new product development initiatives, wrote off its previously recorded capitalized software development costs. OTHER SHORT-TERM LIABILITIES In May of 1998 the Company entered into an Agreement to Assign and License Patent, with a third party company under which it acquired ownership of United States Patent No. 5,646,733 ("Scanning Phase Measurement Method and System for an Object at a Vision Station"). This 1998 agreement terminated a previous agreement entered into by the Company and the third party company in September of 1997. Under the terms of the 1998 agreement, the Company agreed to pay a fee of $500,000 based on the achievement of certain developmental milestones. At October 31, 1998 $300,000 of that $500,000 was not paid and comprised the $300,000 short-term liability. During fiscal year 1999 the Company paid the remaining balance due. 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, furniture, fixtures and equipment consisted of the following: 1999 1998 ---------- ---------- Equipment....................................... $5,066,000 $4,536,000 Furniture and fixtures.......................... 864,000 517,000 ---------- ---------- 5,930,000 5,053,000 Less accumulated depreciation................... (3,530,000) (2,799,000) ---------- ---------- Total fixed assets.......................... $2,400,000 $2,254,000 ========== ========== IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the assets. If these assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. 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. EARNINGS PER SHARE Basic earnings per share is computed using only weighted average common shares outstanding. Diluted earnings per share gives effect to all dilutive potential common shares outstanding during the fiscal reporting periods. 1999 1998 1997 ----------- ---------- ---------- Net income (loss) ................... $(7,734,000) $103,000 $660,000 Shares -- Basic earnings (loss) per share......................... 5,398,000 5,425,000 5,376,000 Dilutive effect of common stock equivalents................. -- 86,000 119,000 Shares -- Diluted earnings (loss) per share......................... 5,398,000 5,511,000 5,495,000 Basic earnings (loss) per share...... $(1.43) $0.02 $0.12 Diluted earnings (loss) per share.... $(1.43) $0.02 $0.12 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. 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 OPTIONS The Company follows the disclosure only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" regarding disclosure of proforma information for stock compensation. As permitted by Statement No. 123, the Company measures compensation cost using the methods described in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS As of October 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("Statement 130"). Statement 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's reported net income or shareholders' equity. Statement 130 requires the unrealized gains (losses) related to the Company's investments, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of Statement 130. Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("Statement 131"), was issued in 1997 and is effective for financial statements for both interim and annual periods beginning after December 15, 1997. Statement 131 was issued to establish standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Adoption of this statement did not affect the Company's results of operation or financial position. Upon review of the criteria, management believes that the Company continues to operate as one segment. Note 3: NON-RECURRING CHARGES In the fourth quarter of fiscal 1999, the Company recorded a one-time charge of $1,481,000 for the write-down of assets and inventory associated with discontinuing certain new product development initiatives. At October 31, 1999, the Company has included in accrued liabilities $360,000 of non-recurring charges payable in fiscal 2000. NOTE 4: CUSTOMER INFORMATION SIGNIFICANT CUSTOMER INFORMATION During 1999, 1998 and 1997, revenue from one customer accounted for 27%, 16% and 14% of net revenues respectively. During 1997, revenue from another customer accounted for 14% of net revenues respectively. CUSTOMER GEOGRAPHIC DATA North American and export sales as a percentage of net revenues at October 31, are as follows: 1999 1998 1997 ---- ---- ---- North America......... 74% 62% 78% Europe................ 13% 18% 14% Asia-Pacific.......... 12% 18% 8% South America......... 1% 2% -- NOTE 5: ACCRUED EXPENSES Accrued expenses at October 31, include: 1999 1998 -------- -------- Vacation............................................. $ 19,000 $ 19,000 Employee stock purchase plan payroll deductions...... 82,000 82,000 Sales and use taxes payable.......................... 122,000 110,000 Reserve for non-recurring charges.................... 360,000 -- Accrued litigation costs............................. 500,000 -- Other................................................ 157,000 109,000 ---------- -------- Total............................................ $1,240,000 $320,000 ========== ======== NOTE 6: 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 the fair market value on the date of 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, 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 Granted............................................. 59,150 $ 6.81 Exercised........................................... (48,005) $ 2.89 Forfeited........................................... (9,075) $ 6.91 ----------- --------- Balance at October 31, 1998........................... 523,950 $ 6.15 Granted............................................. 245,550 $ 4.11 Exercised........................................... (95,875) $ 3.24 Forfeited........................................... (26,500) $ 6.79 ----------- --------- Balance at October 31, 1999........................... 647,125 $ 5.78 =========== ========= As of October 31, 1999: Price Range of Outstanding Options Options........................................... $2.33-$12.00 Expiration dates.................................. 2000-2006 Options exercisable............................... 275,942 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: 1999--$2.21, 1998--$3.39 and 1997--$4.23. 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 (loss) and earnings per share for fiscal years 1998 and 1997 would have been adjusted to the pro forma amount indicated below: Fiscal Year Ended October 31, 1999 1998 1997 ---------------------------------- ---------- ---------- ---------- Net income (loss)...As reported... $(7,734,000) $ 103,000 $660,000 Pro forma..... $(8,323,000) $ (606,000) $197,000 Diluted earnings per share..As reported... $ (1.43) $ 0.02 $ 0.12 Pro forma..... $ (1.54) $ (0.11) $ 0.04 The following table summarizes stock options outstanding and exercisable at October 31, 1999. Outstanding Exercisable - - -------------------------------------------------------- -------------------- Weighted Average Weighted Weighted Exercise Contractual Average Average Price Range Options Life Remaining Exercise Price Options Exercise Price - - --------------- ------- -------------- -------------- -------- ------------ $ 2.33 - $ 3.88 206,950 6.55 $ 3.79 11,400 $ 2.51 $ 4.63 - $ 6.84 57,675 6.21 $ 5.11 4,975 $ 5.51 $ 6.88 - $ 6.94 361,150 4.57 $ 6.88 242,317 $ 6.88 $ 7.00 - $12.00 21,350 4.69 $ 8.49 17,250 $ 8.67 ------- -------------- -------------- ------- ------------ 647,125 5.35 $ 5.78 275,942 $ 6.78 The fair value of options granted under the Company's fixed stock option plans during fiscal 1999, 1998 and 1997 was estimated on the dates of grant using the Black-Scholes options-pricing model. The assumptions for the fiscal periods ending October 31, were as follows: Fiscal Year Ended October 31, 1999 1998 1997 --------------------------------- ----------- ----------- ----------- Risk free interest rates......... 6.21% 4.7% - 5.1% 5.6% - 5.9% Expected life.................... 6.0 6.0 6.9 Expected volatility.............. 47% 44% - 53% 54% Expected dividends............... 0% 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. 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. NOTE 7: EMPLOYEE STOCK PURCHASE PLAN In March 1995 shareholders approved the adoption of the 1995 Employee Stock Purchase Plan (the "1995 Plan") that provides for the purchase of up to 225,000 shares of common stock during a 5 year annual offering period beginning June 1, 1995. Under the terms of the 1995 Plan, eligible employees may purchase common stock annually at 85% of the lesser of (1) the fair market value on the first day of the annual offering period or (2) the fair market value on the last day of each annual offering period. The fifth phase of the 1995 Plan began on June 1, 1999 and employees were granted the right to purchase 20,485 shares at $3.93 per share under the Plan. The fourth phase of the 1995 Plan ended on May 31, 1999 and employees purchased 21,473 shares at $3.93 per share under the Plan. The third phase of the 1995 Plan ended on May 31, 1998 and employees purchased 25,648 shares at $5.84 per share under the Plan. Note 8: SHAREHOLDER RIGHTS PLAN On June 2, 1999, the Company adopted a Shareholder Rights Plan (the "Rights Plan") designed to deter coercive or unfair takeover tactics and to prevent a person or a group from gaining control of the Company without offering a fair price to all shareholders. Under the terms of the Rights Plan, a dividend distribution of one Preferred Stock Purchase Right ("Right") for each outstanding share of the Company's common stock was made to holders of record on June 22, 1999. These Rights entitle the holder to purchase one one-hundredth of a share of the Company's Series A Junior Participating Preferred Stock ("Preferred Stock") at an exercise price of $28. The Rights become exercisable (a) 10 days after a public announcement that a person or group has acquired shares representing 20% or more of the outstanding shares of common stock, or (b) 10 business days following commencement of a tender or exchange offer for 20% or more of such outstanding shares of common stock. The Company can redeem the Rights for $0.001 per Right at any time prior to their becoming exercisable. The Rights expire on June 2, 2009, unless redeemed earlier by the Company. Under certain circumstances, if a person or group acquires 20% or more of the Company's common stock, the Rights permit shareholders other than the acquiror to purchase common stock having a market value of twice the exercise price of the Rights. In addition, in the event of certain business combinations, the Rights permit shareholders to purchase the common stock of an acquiror at a 50% discount. Rights held by the acquiror will become null and void in both cases. On October 13, 1999, the Company amended the terms of the Rights Plan to enable a member of the Board of Directors of the Company to purchase up to 30% of the common stock of the Company without being deemed an "Acquiring Person" within the meaning of the Rights Agreement. NOTE 9: OPERATING LEASES The Company leases facilities and equipment under non-cancelable operating lease agreements. Rent expense was $450,000, $239,000, and $188,000 in 1999, 1998, and 1997 respectively. Minimum future rental payments due under non-cancelable operating lease agreements are as follows: 2000............................ 730,000 2001............................ 646,000 2002............................ 613,000 2003............................ 611,000 2004............................ 620,000 Thereafter...................... 2,920,000 ---------- Total....................... $6,140,000 ========== NOTE 10: EMPLOYEE SAVINGS 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 one dollar for each dollar contributed by each Plan participant up to a maximum of $2,000 annually. The Company's contributions under this program were approximately $184,000, $152,000, and $66,000 for the years ended October 31, 1999, 1998 and 1997 respectively. NOTE 11: INCOME TAXES The provision for income taxes differs from the statutory U.S. federal tax rate of 34% applied to earnings before income taxes for the fiscal periods ended October 31, as follows: 1999 1998 1997 ------------ ---------- --------- Expected tax provision at statutory rate... $(2,068,000) $ (59,000) $362,000 State income tax provision, net of federal tax effect............................... (241,000) (7,000) 42,000 Permanent differences...................... 5,000 5,000 11,000 Tax credits and other...................... (408,000) (217,000) (10,000) Increase in valuation allowance............ 4,362,000 ------------ ---------- -------- Total income tax expense (benefit) ........ $ 1,650,000 $(278,000) $405,000 ============ ========== ======== Deferred tax assets (liabilities) are comprised of the following at October 31: YEAR ENDED OCTOBER 31, ------------------------ 1999 1998 ----------- ----------- Depreciation....................................... $ 56,000 $ 55,000 Deferred rent...................................... - 38,000 Other.............................................. 244,000 (147,000) Net operating loss carryforwards................... 3,031,000 1,126,000 Income tax credits................................. 1,031,000 616,000 ----------- ---------- Total deferred tax assets before valuation allowance. 4,362,000 1,688,000 Less valuation allowance........................... (4,362,000) -- ----------- ----------- Net deferred tax asset............................ $ -- $1,688,000 =========== =========== At October 31, 1999, the Company has available net operating loss and tax credit carryforwards for income tax purposes of approximately $8.9 million and $1.0 million, respectively. These carryforwards expire in the years ending October 31, 2001 through October 31, 2019. The utilization of the net operating loss and tax credit carryforwards is dependent upon the Company's ability to generate sufficient taxable income during the carryforward period. Because of the uncertainty of future realization, a valuation allowance equal to the deferred tax asset has been recorded. NOTE 12: CONTINGENCIES In July 1999, the Company was served by National Instruments Corporation ("NIC") of Austin, Texas, in a patent infringement lawsuit filed in United States District Court for the Western District of Texas. NIC has alleged that the Company's Vision Program Manger software ("VPM") infringes certain United States patents held by NIC related to graphical programming concepts. The Company has filed a counterclaim and requested that the Court declare the NIC patents invalid or determine that the Company does not infringe the NIC patents. The lawsuit is in the initial stages of discovery and a trial has not yet been scheduled in this action. The Company believes that it has meritorious defenses to the lawsuit and intends to defend itself vigorously. However, no assurance can be given as to the outcome of this action. The inability of the Company to prevail in this action, including the loss or impairment of the right to sell the Company's products in the United States, could have an adverse effect on the Company's future business, financial condition and results of operations. 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, 1997 $35,000 $95,000 ($100,000) $30,000 Year Ended October 31, 1998 $30,000 $10,000 ($11,000) $29,000 Year Ended October 31, 1999 $29,000 101,000 ($56,000) 74,000 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, 333-00665 and 333-48065 of PPT VISION, Inc. of our report dated December 10, 1999 appearing in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP - - ------------------------------ PricewaterhouseCoopers, LLP Minneapolis, Minnesota January 24, 2000 EX-27 2
5 1000 12-MOS OCT-31-1999 OCT-31-1999 2135 8262 3399 (74) 2191 16118 5930 (3530) 21845 2674 0 0 0 19247 (76) 19171 11325 11325 5150 12996 (36) 0 (701) (6084) (1650) (7734) 0 0 0 (7734) (1.43) (1.43)
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